3Q23 Permanent Portfolio Update

Yikes! There’s no denying it. It’s been a tough stretch (see performance data here). The TL;DR is we are dismally failing the “Why Not Just Put It All In SPY?” Test at the moment. But since I haven’t posted on the portfolio in a while, this is a good opportunity to take a deeper dive into recent performance.


What Happened Here?

The current numbers are pretty shit. Not “I put it all on PTON in 2020” shit. But definitely not good. A few things contributed to this. Some of them bother me more than others.

The S&P 500 has been an incredible performer. This doesn’t bother me at all. In fact, I benefit from it since S&P 500 futures are part of the portfolio. It just makes for an ugly comp.

Interest rate hikes whacked the portfolio. Drawdown hasn’t been much worse than my comps in this rising rate period. Especially considering this is a levered portfolio. The portfolio just hasn’t caught the sharp rebounds the S&P 500 delivered. A muted 2021 was the major point of divergence. To a lesser extent, this repeated in 2022. I am optimistic higher expected returns in fixed income will benefit the portfolio in the longer term. But getting here was painful.

On the other hand, this was an excellent stress test. The theoretical underpinning of this strategy is leveraging uncorrelated assets. When the correlations of those assets go up, and the price direction of the assets is down… well… that is not a recipe for great short-term performance. The gold allocation is supposed to help with this. And it did. At least to an extent. Gold was essentially flat in 2022 in US dollar terms. Many asset classes drew down double digits. Gold did better than zero in terms of most other currencies. But I’m a US dollar-based investor. So I’ve just got to suck that up.

Dumb Mistakes. This is one burns me up. Almost everything I’ve done to fiddle with the allocation at the margins has destroyed value. When I made adjustments based on trend metrics, I missed some of the COVID rebound. When I sprinkled in some satellite strategies, those strategies didn’t deliver. I should have kept it simple. I knew this. I’ve written about it! But I was in a terrible frame of mind for much of the past two years. This showed up in the portfolio, which became bloated, sloppy and confused. (note to self: revisit this in a future post)

What To Do About It?

For the most part, there’s not much to change here. I remain confident in the basic principles underpinning the strategy. What I’m doing is simplifying things. When I left my job, I cleared all the flotsam and jetsam out of the portfolio. I replaced most of it with NTSI, which is the developed international equity version of the core NTSX holding. I also consolidated some into my EM equity allocation (I am an incorrigible EM equity bagholder). Keep it simple, stupid! The result is essentially a 60/30/30 portfolio.

Allocation as of 10/18/2023

4Q22 Permanent Portfolio Update

It was a lousy year for the strategy. Check out the detailed stats here. Tl;dr: -19.75% in 2022, versus -16.32% for a global 60/40 and -18.17% for SPY. Not the end of the word by any means, but the last two years have been a far cry from the salad days of 2019 and 2020.

The portfolio behaved much better in 4Q22 as correlations across stocks, bonds and gold came down and risk assets rallied. I was pleased with 4Q22. No victory laps, though. It remained a bad year overall.

Current allocation:

Gross exposure is a smidge on the low side today. If the gold weight goes much higher, I’ll sell some and add back to NTSX to bring the gross up a bit. A new addition to the allocation is a Global Long/Short Value fund. I’ve been nibbling more and more at the value equity style as it has come back into favor.

The Big(ger) Picture

2022 was not a fun year. In fact, it highlighted the strategy’s most significant vulnerability: unstable correlations. The theoretical basis for this strategy is leveraging assets that tend to exhibit low correlations. If those correlations increase, and returns to the underlying assets are positive, the portfolio outperforms expectations. If correlations increase, and returns are negative, it underperforms.

This risk is the reason I limit the amount of leverage I will apply to the portfolio, even though more benign environments will always argue for higher levels of gross exposure (sometimes significantly higher). It is not worth the risk of ruin in my view.

There other are ways to manage this risk. They have their own pros and cons. Broadly speaking, these are different types of tactical overlay. Trend following, tactical asset allocation views and the like. While I will do some discretionary style tilting in this portfolio, more dramatic forms of discretionary tactical allocation are not something I intend to pursue here. This is meant to function as a simple portfolio core. I invest in a speculative portfolio alongside this. The galaxy brain investment ideas belong in that sleeve (in an ironic twist of fate, the public equity portion of that sleeve was -6.20% in 2022–significantly better performance than the leveraged permanent portfolio but still down for the year).

I have a complicated relationship with trend following. When I began this experiment, I used a trend and volatility targeting overlay. Ironically, in hindsight, I gave it up out of frustration after the 2020 COVID drawdown recovery. My approach was too slow adding back exposure. It has cost me a couple hundred basis points of annualized performance versus a static approach.

Obviously, the path the markets took in 2022 was quite different than 2020. Trend would have likely worked much better in 2022. Not so sure about the volatility targeting element, as the year was more of a grind down than a sharp selloff. Regardless, I think I have a behavioral preference for a static allocation. So I’m going to suck up the drawdown and soldier on with this static approach. I don’t want to repeatedly whipsaw myself tinkering with overlays.

Something I might consider is splitting some of the gold allocation across other liquid alternative strategies. Managed futures would be the leading candidate I think. I haven’t made up my mind about this though.

Ultimately, the purpose of this strategy is to harvest risk premia over long periods of time across assets that tend to exhibit low correlations. In that sense, I don’t believe anything is irrevocably broken here. It’s just been a bad run the last couple years.

07/1 Permanent Portfolio Update

The portfolio returned -6.64% in June. This compares somewhat favorably with most equity indexes. It trailed a simple global 60/40 mix, however.

Summary report with comparison statistics is available here.

Current exposures:

Not much to add by way of additional commentary for June. The gold weight has run down a bit but not quite to the level where I think it warrants a rebalance.

6/1 Permanent Portfolio Update

Late again this month due to some personal travel and an unexpected sinus infection. See here for the usual performance report. May was another uninspired month for the portfolio with a -0.95% loss versus modest gains for comparables. The portfolio definitely protected better than these benchmarks during June’s most volatile days. However, in the grand scheme of things it didn’t make that much of a difference.

Current allocation:

Note that this is as of the 06/24/22 close. June’s drawdown is reflected in these numbers. The most notable impact here is that gold’s weight increased a couple points versus the rest of the allocation, which had the overall effect of reducing gross exposure. You will notice a couple of new line items here also: an ex-US DM Value fund and a US Small Cap Value ETF.

Due to the quirks of my personal cash flow, I’ve had excess cash to invest during this period of market turbulence. One of the things I like to do to promote mental flexibility is add incrementally to strategies/assets that might benefit from a sustained regime change, if it seems a regime change could be underway (since we can only know for certain in hindsight). Different market regimes have different rules in terms of what will and won’t work. From a behavioral perspective, conditioning and reconditioning one’s self to the rules of a new regime is no mean feat. It takes time. It takes real dollars. Only real dollars will generate acute enough pleasure and pain responses to make the conditioning stick.

The role of a diversified portfolio core isn’t to outperform at any given point in time. The diversified core’s role is to be resilient and adaptive enough to keep you in the game across many different regimes. Also, if desired, to provide the capital base to take some big swings in the satellite portion of the portfolio. I don’t think I’ve ever come close to “cracking” the best way of integrating market feedback into a portfolio, but I know it’s something I want to continue to work on over time.

By Any Other Name

A: If we call things like long-biased equity long/short funds and private equity equities instead of alternatives, it will look to these people like they are 90% invested in equities.

B: But they ARE invested 90% in equities.

One of the more dangerous things you can do in the markets is engage in self-deception. This is particularly true from a risk management perspective. A hill that I will die on is that much of what we call “alternative” investments are just equity investments by another name.

Nowhere is this more obvious than private equity. In what “bucket” of an asset allocation would you put a thinly traded, leveraged microcap stock that is no-bid for an extended period? There is no debate. It is an equity security. The economic risk exposures of the security are equity risks. Now, this is not a particularly liquid equity. But it is an equity security nonetheless.

Likewise, on the other end of the spectrum, a “defined outcome” S&P tracker with an options overlay is an equity strategy, exposed to equity risk. The addition of a mark-to-market volatility mitigating hedge does not transmute this into some kind of alternative strategy. It is just watered-down equity risk (with watered-down equity returns to match).

I have written about this kind of smoke and mirrors before.

Just because you have exposure to a bunch of different colored slices in a pie chart does not mean you have exposure to a bunch of differentiated sources of risk and return.

As I wrote in that post, I am NOT telling you that you shouldn’t be invested 90% in equities. That is a whole other debate. I am telling you to own your shots. Commit.

For most allocators and private investors, I suspect fiddling with phony-alternative, pseudo-equity strategies is akin to the golfer who is afraid to commit to an approach shot because of some windage. He is afraid of the wind so he clubs down. But because that club selection is driven by anxiety, he doesn’t hit as firm a shot as he normally would have. So he misses short and lands in a greenside bunker.

Don’t miss short! Get it past the hole!

There is an insidious thing that happens when you do not call things by their proper names. Things-as-they-are are gradually replaced with abstractions. This is what is happening with obvious absurdities such as private equity being pitched as “higher returns with less volatility.” From an economic risk perspective, the whole idea is nonsense. But as an abstraction bolstered by “statistics,” it is true.

Of course, I can reduce the volatility of my public equity portfolio, too. I will just mark it once a year, to my proprietary fair value estimates. My down capture will look great versus the S&P. My numbers will be audited and everything. Beautiful!

It is in periods of extreme dislocation that things behave as they are. This is when it becomes obvious that your long-biased equity hedge funds actually capture a decent amount of downside; and your high yield bonds behave a lot more like equities than you thought they would; and that bright hedgie who did a really good job of getting his net down at the start of the selloff keeps it flat into a massive rally… sorry… I digress…

The most egregious portfolio failures, in terms of both missed return targets and poor risk management, result from a failure (or even outright refusal) to see things as they are.

You can call your pie chart slices whatever you want. They can display all the colors of the rainbow. It does not change the underlying nature of the things they represent.

Silver Linings

The nice thing about big selloffs is that the lower the market goes today, the higher your future returns go for tomorrow. We have 4Q19 Fed Z.1 data now, which means I can try to roundabout ballpark S&P 500 returns for the next 10 years. As of 12/31/19 this estimate was 2.43%. After making some (very) rough adjustments for recent market moves, it has increased to 7.66% today.


With interest rates as low as they are, and the possibility of negative rates looming on the horizon, I think a 700+ bps equity risk premium probably merits some buying, somewhere. DON’T GO ALL-IN. It is very possible things get worse before they get better. My own strategy has been to focus on the shares of companies that seem inordinately dislocated based on poor liquidity conditions. This is particularly evident in small cap stocks. In the US, these stocks had drawn down approximately 50% prior to the last couple days’ bounce.

Pulling the trigger on these things is not a trivial thing to do. It is uncomfortable knowing that you could be catching falling knives. I am not arguing that people are stupid for being cautious here.

I am, however, arguing that if you have liquidity (also far from trivial), and are willing to be a provider of liquidity in a dislocated market, there are spots where you can be compensated quite well for doing so. In small cap land, there are stocks trading at double-digit discounts to announced, all-cash takeout offers. This makes very little economic sense. Is Google going to bail on its FitBit acquisition because of the coronavirus? Probably not.

Admittedly, my truest investing self is “bottom-feeding contrarian.”

Right now, I think it makes sense more than ever to put money to work in a concentrated, “lottery ticket” portfolio alongside a more conservative core.

Grim Tidings

Sources: Federal Reserve Z.1 Data & Demonetized Calculations

I have updated the (corrected) S&P 500 expected return model for the recent 3Q19 Z.1 data release. The good news: it shows a modest increase in the forward 10-year return estimate, to 4.18%. The bad news: this is almost certainly lower today given how US equities have rallied over the last quarter. (12/19/19 EDIT: I hacked together an estimate as of today and it’s about 3.03%)

Now, I don’t think this model is at all useful as a market timing tool. But it is definitely arguing for lower forward-looking return expectations. This is partly why I’ve implemented the leveraged permanent portfolio with a significant portion of my net personal net worth. Make no mistake: there will come a day to be all-in on equities again. You’ll know it because people will be screaming bloody murder and trumpeting the death of buy-and-hold like they did from 2009 to 2012. (Remember this when your friends and/or financial advisor are pitching you on expensive liquid alternatives some day)

I’ve mentioned before that one of the weaknesses of this model is that it isn’t macro-aware. It doesn’t “know” anything about credit or interest rates. The underlying intuition is simply that as an increasing proportion of assets are “financed” by equity, expected equity returns decrease. In a world of very low or even negative interest rates, it’s possible we’ll see a structural shift in investor preferences for equities. In a regime where interest rates stay very low for a very long time, it makes sense for equity valuations to remain elevated. One should not underestimate the persuasive power of No Good Alternatives (I have been guilty of this, personally). Recall that we tried the whole “normalize interest rates” thing in 2018. We didn’t even get to 3% on Fed funds before the Fed backed off.

There are, of course, many possible futures. The three I think most about:

The Great Jihad. This is a situation where the transition back to a multi-polar world order, combined with domestic political divisions, results in wars and violent revolutions. Scary, but not worth thinking about all that much from an investment POV. In this future just focus on staying alive. Don’t sweat the markets. In fact, you might as well go all-in, because you’ll be scooping up assets at steep discounts.

Muddle Through. Here everything just kind of works out. Rates and returns stay low, but policymakers effect a “soft landing” and everything works out. In a world where economies can be run with mechanical precision, this can probably be engineered just fine. That’s not the world we live in, however. We live in a world where economic reality must be made politically palatable. Politically, we seem to be headed to a world that is more hostile toward trade, and where there is strong pushback against policymaking elites. I therefore assign a relatively low probability to muddling through.

Stagflation. This is a situation where we have lower economic growth but higher inflation. This is quite frightening from a financial perspective as you have to invest very differently from what is now conventional wisdom to come through stagflation okay. Avoid bonds and cash, as well as equities without pricing power. Real assets are pretty much the only game in town here. Maybe some alts. Personally, I believe we are close to stagflation today. I am one of those loony Inflation Truthers who believes “real” inflation (as experienced by real people in their daily lives) is higher than the CPI numbers trumpeted in the news, because CPI is restrained by things like hedonic adjustments for the improving quality of goods. But I’ll leave the details for macro wonks to fight over.

You will note that I have omitted an inflationary boom from the list. The reason for this is that developed world demographics do not appear to support much of an inflationary boom. What could change this? Well, obviously population growth could suddenly increase. Or, we could start encouraging lots of immigration (not going to happen in the current political climate–and this can’t work for every country in the world simultaneously, anyway). I don’t think either of those things is particularly likely. But, there is always technology. Historically, it has not been great positioning to be short human ingenuity. Maybe Elon gets us to Mars or somewhere else in the solar system and we start colonizing other planets. Who knows.

So anyway, what’s an investor to do?


I am more and more convinced that the average person or institution’s asset allocation should be managed with a trend following and/or volatility targeting overlay (note that this stuff can also work as a risk management tool in more idiosyncratic portfolios). The point here is not to market time (that is impossible to do profitably as far as I’m concerned). The point is to detect regime changes, and to make sure you end up more or less on the right side of them.

Do not be the guy who is short equities for 10 years into a bull market.

Do not be the gal who goes all-in on equities at the top.

Do not be a permabear, or a permabull.

Be biased toward being long, and biased toward bullishness, but with some sense of proportionality and a framework for risk management. As a saver, or an institution that is more or less a saver, you don’t have to catch every market move to make money. You just have to be roundabout, directionally correct about the relationships between economic growth, inflation and valuations.

Identify the regime you’re in. Then make sure you own the right stuff.

Don’t overthink it.

It’s Worse Than I Thought

Over the last couple days I’ve had the pleasure of corresponding with David Merkel of The Aleph Blog over differences in our S&P 500 expected returns modes. (Mine was much higher than his). Upon comparing models, I discovered I’d made a huge mistake. I’d essentially included only corporate debt in my calculation, excluding a huge swath of government liabilities from the total figure.

After adjusting my numbers to correct for this, and updating the model, I get a 3.74% expected return for the next 10 years. This is consistent with David’s 3.61% estimate. The small difference that remains is likely down to some minor differences in the time periods we used to estimate our models, as well as the type of S&P 500 return we use in the calculation (I believe David uses the price return and then adjusts for dividends, whereas I simply regress the S&P 500 total return against the “allocation” data).

Source: Federal Reserve Z.1 Data / Demonetized calculations / Corrections from David Merkel

Previously I’d been referring to my results as “A World of Meh.” I think I’m now comfortable revising that down to “A World of Bleh.” (“Meh” is kind of like an indifferent shrug, while with a “bleh” you are maybe throwing up in your mouth a bit)

I’ll give David the last word here, since I think his take on all this is a nice summary of the quandary investors face these days:

Not knowing what inflation or deflation will be like, it would be difficult to tell whether the bond or stock would be riskier, even if I expected 3.39% from each on average. Given the large debts of our world, I lean to deflation, favoring the bond in this case.

Still, it’s a tough call because with forecast returns being so low, many entities will perversely go for the stocks because it gives them some chance of hitting their overly high return targets. If this is the case, there could be some more room to run for now, but with nasty falls after that. The stock market is a weighing machine ultimately, and it is impossible to change the total returns of the economy. Even if an entity takes more risk, the economy as a whole’s risk profile doesn’t change in the long run.

In the short run it can be different if strongly capitalized entities are taking less risk and and weakly capitalized entities are taking more risk — that’s usually bearish. Vice-versa is usually bullish.

Anyway, give this some thought. Maybe things have to be crazier to put in the top. At least in this situation, bonds and stocks are telling the same story, unlike 1987 or 2000, where bonds were more attractive. Now, alternatives are few.

2Q19 Expected Returns Update

2Q19 Fed Z1 data is out so I have updated my little S&P 500 expected returns model. The model and its origins have been discussed rather extensively here on the blog so I am not going to belabor its strengths and weaknesses going forward. From a long-term forward return perspective, the message remains: “meh.” As of June 30 it was predicting a 7.81% annualized return for the next decade.

Source: Fed Z.1 Data; Demonetized Calculations

It is interesting to note that the model disagrees with the dire prognostications of much of the investment world regarding forward-looking S&P 500 returns. Many shops out there are predicting low single digit or even negative returns over the next 7-10 years. These folks correctly called the tech bubble in the late 1990s but missed the post-crisis rebound. The model, meanwhile, caught both.

Given the output from the model, and the investment opportunity set more broadly, I’d bet with the model when setting expectations for the next 10 years.

What I think those shops are missing, and what the model captures, is the TINA Effect.

For many investors There Is No Alternative to owning equities.

Given that global interest rates remain very low, investors need to maintain high levels of equity exposure to hit their return hurdles. In the US, for whatever reason, the aggregate equity allocation typically bounces around in the 30% – 40% range. Unless something occurs to dramatically and permanently shift that range lower, I suspect forward returns will end up being a bit better than many people are predicting these days.

Not great. But not dire, either.


09/19 Permanent Portfolio Rebalance

Today marks the second rebalance of my leveraged permanent portfolio with its volatility (12% target) and trend following overlays. I thought it might be fun to do brief posts on the monthly rebalances going forward, partly to keep myself honest and partly to record for posterity what it “feels like” to be invested this way.

Perhaps unsurprisingly, the portfolio is now below its risk target, with a trailing volatility of only 5.16%. So the cash position created at the last rebalance will now go back to work in ex-US equity (most segments of ex-US equity appear to have poked back above their 200-day moving averages). In fact, I need to be fully invested now and will STILL be below my risk target.

The new target portfolio looks like this:


When the leverage employed within NTSX is taken into account, you end up with:

28% S&P 500

19% Laddered Treasuries

32% Gold

4% EM Large Cap

4% EAFE Small Cap

14% EM Small Cap

15% EAFE Large Cap

~116% notional exposure, just shy of 1.2x leverage

Note that the weights of the portfolio as implemented will differ modestly from this “ideal” due to transactional frictions and such. For example, in an ideal world I would reallocate the two small Vanguard positions across the whole portfolio rather than overweight ex-US equity. However, I recently rolled this account over to a new platform and am trying to be mindful of transaction costs. And anyway, if you’ve read this blog for any length of time you’re no doubt familiar with my view that, in the grand scheme of things, these little overweights and underweights don’t materially impact portfolio performance.

Here is updated performance versus the S&P 500 for context as of pixel time:


Despite being so short, it’s an interesting period to look at live performance for the strategy (net of fees and transaction costs) as it exhibits precisely the type of behavior you would expect from backtests of both leveraged and unleveraged permanent portfolios. The portfolio protects well during periods of broad market stress but lags during sharp rallies. Additionally, it’s worth noting that gold has had an exceptional run during this brief period, which is a complete coincidence.