11/20 Permanent Portfolio Rebalance

November was a relatively quiet month for the leveraged permanent portfolio (at least on a relative basis). It was a tremendous month for equities, and the portfolio will tend to lag the equity markets when they rally sharply. There will need to be a rebalance this month as gold is a bit underweight after November’s moves.

After running this strategy for a little over a year, in pretty varied market conditions, I am going to make a change and abandon the 12% volatility threshold for triggering moves to cash. This has always been an arbitrary threshold, and it is only intended to safeguard against one specific risk: panic liquidation that sends all correlations to one.

We got a taste of this in March at the nadir of the Covid drawdown. But the volatility threshold didn’t help much. It only triggered adjustments after the fact. In the future I may manage this risk on a discretionary basis instead. TBD.

Updated allocation:

30% S&P 500

20% Laddered Treasury Futures

34% Gold

30% ex-US equity

~114% notional exposure

Again, on a relative basis, overall performance has lost ground to US equities recently. Nonetheless, it remains plenty attractive on an absolute basis. Since late 2018, a static allocation version of this strategy has handily outpaced SPY, with a 60/40-like drawdown and volatility profile. As I’ve written many times, I would not necessarily expect the strategy to outpace a 100% equity portfolio over very long time periods. But I think it will remain competitive. On a risk-adjusted basis, on the other hand, I don’t think there will be any comparison. The leveraged permanent portfolio will dominate 100% equity portfolios on a risk-adjusted basis.

Source: Demonetized calculations; Performance vs. Morningstar Large Cap Index

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