12/20 Permanent Portfolio Update

I am changing the name of these posts going forward since I expect to be rebalancing much less frequently and keeping the allocation relatively static. Here is the current allocation:

This is about 117% gross exposure. Going forward, I’d expect these weights to remain pretty similar, with NTSX a little overweight relative to gold and ex-US equity just for leverage purposes. I will likely be due for a small gold-to-ex US equity rebalance soon. Performance versus US large cap:

Source: Demonetized Calculations

You can see a longer-term snapshot of how this allocation would have performed here. This period favors the leveraged permanent portfolio versus a 100% equity allocation, given that it begins with a market drawdown and includes the Covid drawdown. Over time, I would expect the performance gap to narrow significantly, with a 100% equity allocation making up substantial ground in benign market environments (see the latter half of 2020 for a taste). However, I would also expect the leveraged permanent portfolio to continue to dominate a 100% equity allocation on a risk-adjusted basis.

I have written many times that I favor a portfolio that uses the leveraged permanent portfolio as a stable core to support a smaller, but much more aggressive sleeve of concentrated investments. The power of this approach was on full display in 2020 as I was able to trim from the leveraged permanent portfolio near the nadir of the Covid drawdown to buy certain individual equities at extremely attractive levels. The result was a 57% IRR in that more aggressive sleeve.

Overall, 2020 offered a magnificent stress test of the leveraged permanent portfolio concept, given the magnitude of equity market moves both up and down. The portfolio passed this test with flying colors. Performance remained robust across both mini-regimes, within an extremely simple package that required no market forecasting whatsoever. Decent drawdown performance allowed me to play offense when market sentiment was at its worst and I still captured the vast majority of the equity market rebound.

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