Permanent Portfolio 2012 Results

In 2012 the Permanent Portfolio returned +6.8% (or +6.7% for the Treasury Money Market version) for the year according to Morningstar’s data.

Here is the breakdown of the popular asset classes according to Morningstar. They are rounded to the nearest tenth and may not reflect all dividends yet (I’ll adjust them as they are reported):

S&P 500 +16.0%

Total Stock Market Index +16.4%

EAFE International Index +17.2%

Emerging Market Index +17.3%

Commodities Index +4.7%

Real Estate Investment Trust Index +15.3%

Treasury Inflation Protected (TIPS) Bonds +7.4%

Corporate Bonds +11.7%

International Bonds +4.2%

Total Bond Market +4.0%

Now we’ll list the components of the Permanent Portfolio Allocation with Exchange Traded Funds (ETFs) as our basic benchmark:

25% Vanguard Total Stock Market ETF (Ticker: VTI) +16.4%

25% iShares 1-3 Year Short Term Treasury Bond ETF (Ticker: SHY) +0.3%

25% iShares 20+ Year Long Term Treasury Bond ETF (Ticker: TLT) +3.3%

25% Gold Price appreciation for the year +7.0%

2012 End of Year Result w/Short Term Bonds for Cash: +6.8%

If you used the more conventional Treasury Money Market Fund instead of the Short Term Bonds for the Cash allocation you did the following:

25% Vanguard Total Stock Market ETF (Ticker: VTI) +16.4%

25% iShares Treasury Money Market ETF (Ticker: SHV) +0.0%

25% iShares 20+ Year Long Term Treasury Bond ETF (Ticker: TLT) +3.3%

25% Gold Price appreciation for the year +7.0%

2011 End of Year Result w/Treasury Money Market for Cash: +6.7%

NOTE ON THE CHARTS: The charting site I’m using (www.stockcharts.com) may not be showing all dividends yet which is why some of the final totals are lower. Just use the charts for general trend visualization.

Stocks

Stocks had some decent returns after very volatile ups and downs in the recent past (what else is new?). The total stock market was a little over +16%. At mid-year the gains were almost back to zero and the gurus were buzzing about a new drop coming Any Time Now(™). But the doom soon turned around and over the summer the stocks posted very strong gains. So much for “Sell in May and Go Away” advice often touted. That would have resulted in very bad returns vs. the investor who just choose to ignore the market noise and hold onto stocks as their asset allocation suggested.

Vanguard Total Stock Market ETF 2012

Vanguard Total Stock Market ETF 2012

 

Bonds

U.S. Treasury long term bonds continued to show they still have some energy left with returns between 3-4% for the year. They also were a major contributor to returns mid-year when the stock market was on the rocks. At one point they were up over 12% when the U.S. markets were sputtering along. But despite the experts claims that long term bond rates had “nowhere to go but up”, they stayed pretty much identically where they were in January. Bloomberg reports 30 year bond yields of 2.89% early January of this year and they are now yielding 2.95%. Basically a wash. However during the year we did see a high of 3.48% and low of 2.5%(!) during the Summer. Here’s how the rates moved during the year according to Bloomberg:

Bloomberg Interactive Bond Yields

 

Bloomberg 2012 Long Term Bond Yields

Bloomberg 2012 Long Term Bond Yields

Here’s the movement of the iShares TLT ETF that reflects 20+ year Treasury Bonds for our sample Permanent Portfolio:

Treasury Long Term ETF 2012

Treasury Long Term ETF 2012

 

Of course, with all the bond price shifting we were still able to sit back and collect interest payments along the way which helped push our returns in this asset class above the rate of inflation (barely!). The big news this year about long-term bonds is that the Federal Reserve still remains a major buyer. How long they will keep up their buying to support the bond market is unknown…

Cash

Looks like the Fed was successful once again in keeping interest rates on cash at 0%. This asset was of course very stable, but once you factor in inflation it’s a loser. Real returns here were probably in the -2-3% range once we get final numbers on the CPI from the government for 2012. If you used the short-term bonds in lieu of the Treasury Money Market fund, you received a paltry 0.3% instead of the 0.0% the very short term holders received. Hardly worth writing about, but anything helps at this point. It’s hard to say when the Fed will reverse their destructive policy in this area. For now, savers wishing to keep interest risk at bay with short-term debt are paying a heavy price as inflation takes its share of their savings for around the 4th consecutive year since 2008’s market crash.

 

Short Term 1-3 Year Treasury ETF 2012

Short Term 1-3 Year Treasury ETF 2012

Despite the low yields, I again caution investors not to chase after yield by seeking out higher risk holdings for their cash. If the markets panic again these higher risk offerings are likely to dish out large losses. I recommend you keeping your cash in the safest Treasury issues available to you. Even though this portion of the portfolio is yielding 0%, the other portions of the portfolio are making up the slack so you are still growing your money but keeping risk in check. Remember to not look at assets in isolation and don’t take risks with your short-term reserves for a measly percent or two in potential return, it’s just not worth it!

Gold

Gold turned in around 7%. However, just like stocks and bonds, it was a fairly volatile 7% return! Mid-year it went negative perhaps making people think that finally the gold bull market was about to end, but mid-summer it gained power along with stocks appreciating sharply when long-term bonds were falling. Maybe the gold bull is finally going away in 2013? Hard to say, but I’ll continue to hold gold as a hedge against very uncertain markets which can happen at any moment.

(I’m using the actual gold price from www.goldprice.org as the gold ETFs are showing figures that are not near correct right now)

 

Gold Price 2012

Gold Price 2012

Conclusions

With this year over it’s interesting to look at all that happened. We had a very contentious election. We also had threats of a “fiscal cliff” hanging over the heads as U.S. tax rates are likely going to snap up sharply. Finally, we had the usually mess of what is going on in Europe with the Euro and how that will mix into everything. Here’s how all the assets looked mixed together (The gold line reflects the ETF price, not actual gold appreciation which is a little more for 2012 than currently shown at www.stockcharts.com):

Permanent Portfolio ETFs 2012

Permanent Portfolio ETFs 2012

 

Overall the portfolio still managed to beat out inflation by the usual target amount of +3-6% with low volatility. Sure, a stock heavy allocation beat it. But mid-year that stock heavy portfolio was looking pretty bad. I’m happy again with the smooth low-volatility performance of the Permanent Portfolio for 2012. I’m sitting back and relaxing as we cruise into the unknown of 2013 and wondering what surprises it too may hold for investors.

Thanks for reading and have a great new year!

 

Craig Rowland

I own the place.

  • frugal

    Hi,

    With Bonds+Gold bear-market the Stocks will balance the portfolio to be positive?

    Thanks

  • Bruce

    The corporate bond alternative that you suggest in your book (VWETX) performed much better than TLT this year. 11.77% return in ’12 according to the Vanguard site. I’ve been using it for my bond allocation and am much happier with it.

  • howard

    seems like the TLT performance is not correct, may be more like 2.3% ?

  • http://www.crawlingroad.com Craig Rowland

    Bruce,

    Corporate bonds are OK, but have credit risk if we got something really bad happen again like 2008. So they are OK if you do not want to own Treasury bonds, but they do have more risk. They should generally pay more in good markets though as you point out.

    Howard,

    Morningstar is still showing the figure I listed so could be it changes some when distributions are all accounted. I’ll check on it again in a week or so to see if things are updated.

  • http://www.crawlingroad.com Craig Rowland


    frugal:

    Hi,
    With Bonds+Gold bear-market the Stocks will balance the portfolio to be positive?
    Thanks

    There are no promises, but generally one asset is usually doing OK while others are in the doghouse.

  • howard

    TLT price performance is: 2.63%
    TLT NAV performance is: 3.25% according to morningstar.

    We can only get the price performance because that is what we buy and sold at ?

  • http://None Justin

    How would a Canadian implement this portfolio with the different currencies and all?

    How would I start using the Perm Portfolio? Should I scale in or just take the jump and convert my porfolio to the PP allocation?

    Thanks!

    – Justin