Just A Flesh Wound


Despite some tense moments, the leveraged permanent portfolio has held up pretty well through the recent market turmoil. With the announcement of unlimited Fed liquidity support, I added a decent chunk of gold exposure back to the portfolio. This was another discretionary decision. However, the rationale was consistent with the philosophy underlying this strategy. At the time, I believed that the Fed’s policy interventions would do much to end liquidation behavior and, hopefully, reduce correlations across equities, bonds and gold.

Today, the portfolio is:

~29% S&P 500 Futures

~18% ex-US Developed Market Equity

~17% ex-US Emerging Market Small Cap Equity

~26% Gold

~19% Laddered Treasury Bond Futures

~5% Cash

(~110% notional exposure)

Over the standard 1-year lookback period, this puts me just below the 12% volatility threshold that would trigger adding more cash. So, in the absence of the resumption of indiscriminate liquidation behavior in financial markets, this will be my allocation through the next rebalance check.

Year-to-date, performance is a bit worse than a standard 60/40 allocation. This is consistent with the behavior that a backtest of this type of strategy exhibited during the depths of the financial crisis (another period when “all correlations went to 1”). Note that in the below chart, the Morningstar Large Cap index has replaced the S&P 500. For some reason, S&P 500 returns are slow to pull through this tool now. The differences between the two indexes should be minimal, however.


Source: Demonetized calculations

Of course, my implementation of this strategy uses a global equity allocation. A fully-invested US-only variant (50/50 NTSX/GLD) would have finished March down only 7% or so year-to-date.

I’ve written before that there are endless variations of this kind of strategy. Personally, I am (perhaps irrationally) biased toward longer lookback periods and a more globally diversified equity allocation. However, I would not argue that those are necessarily optimal. Indeed, I am leaning more and more toward my friend @breakingthemark‘s compelling case for shorter lookback periods and more frequent rebalancing checks.

Nonetheless, I am pleased with how this strategy has performed since I first implemented it. The balance of upside participation with downside protection has been excellent. In addition to its standalone performance, it was able to serve as a source of liquidity when markets became especially dislocated in March, which I used to add to the aggressive, discretionary sleeve of my overall allocation.

I would never argue that this is a “perfect” investment strategy (there is no such thing). However, I think its recent behavior validates it as a very straightforward, DIY solution that even small investors can easily implement. I have no idea what the future may bring in terms of financial market performance. But I am very excited to see how the leveraged permanent portfolio holds up.