综述

This book talks about several aspects of the permanent portfolio:

The reasons behind it.
Detiled analysis of four components of permanent portfolio
How to implement this portfolio
Taxes issues with this portfolio

结构和细部

What Is the Permanent Portfolio?

25% Stocks
25% Bonds
25% Cash
25% Gold

The 16 Golden Rules of Financial Safety

Your Career Provides Your Wealth
- Investing should be a process of taking part of the earnings from your career and allowing them to grow safely.
Do not Assuem You Can Replace Your Wealth
- Never assume you can earn back money that is lost through bad investments.
Recognize the Difference between Investing and Speculating - Investing is the process of taking a clear strategy and implementing it with discipline and focus with an emphasis on long-term results.
- Speculating is the process of engaging in trading for short-term profits, looking for hot stock tips, day trading, market timing, or other highly risky approaches (and there are many of them).
No One Can Predict the Furture
No One Can Time the Market
Trading System Will Work as Well in the Future as It Did in the Past
Don't Use Leverage
Don't Let Anyone Make Your Decisions
Don't Ever Do Anything You Don't Understand
Don't Depend on Any One Investment, Institution, or Person for Your Safety

Note

Do not put all the money in the ETFs that provided by the same company.
Create a Bulletproof Portfolio for Protection
Speculate Only with Money You Can Afford to Lose
Keep Some Assets Outside the Country in which You Live
Beware of Tax-Avoidance Schemes
Enjoy Yourself with a Budget for Pleasure
Whenever You're in Doubt about a Course of Action, It's Always Better to Err on the Side of Safety

Permanent Portfoloi Performance

According to historical data, the Permanent Portfolio strategy has provided investment returns of 9 to 10 percent a year for the past 40 years.
The most significant difference between the Permanent Portfolio and other approaches is that the Permanent Portfolio gives you real growth and protection of your money.
No large loss. It is very difficult to recover from a large loss.
Nominal Returns: non-inflation adjusted returns
Real Returns: Inflation-adjusted returns
Three measure of a good portfolio:
- A good growth rate
- Avoiding large losses
- Real return matter most.

Simple, Safe and Stable

Three factors of designing a portfolio:
- Simplicity
- Safety
- Stability
Simplicity:
- Complexity kills returns.
- Complexity usually involves hidden fees, unknow risk.
Safety
- Strong diversification
Stability
- A stable portfolio allows an investor to avoid panic when the markets are in turmoil.
Strategy:
- Using passive investing
- Keep costs low
- Use volatile individual assets to reduce overall protfolio volaility
- Expect the unexpected and embrace the idea of market uncertainty.

Investing Based on Economic Conditions

The Illusion of Diversification
The correlation between different assets changes a lot in differnt time periods.

Asset Class	Correlation 1972-2011	Correlation 1972-1979	Correlation 1980-1989	Correlation 1990-1999	Correlation 2000-2009
Stocks/Bond	0.06	0.51	0.32	0.54	-0.83

Strong diversification is not built by looking at asset class correlation data, but rather through an understanding of how certain assets respond to changing economic conditions.

Hard assets ~ are physical objects or property that can be held in one's own possession and retain value independent of what the value of a currency or other paper may be doing.

Hard assets is that they are subject to different market forces than stocks, bonds and other paper assets, and thus they do not share the same risks that can impact paper assets.
Four Economic Conditions
- The Permanent Portfolio approaches diversification by selecting assets that are correlated to the economy and pays no attention to how asset classes are correlated to each other.

Prosperity: Periods of prosperity are characterized by rising productivity and profits, low unemployment, and stable or falling interest rates.
Deflation: Deflation is an economic environment in which some economic shock, such as a credit crisis or market panic, sets off a cycle of declining prices, falling interest rates, and rising currency value.
Recession: The word recession has become a blanket description of any economic condition outside of prosperity.
Inflation: Periods of inflation are the result of too much money circulating in an economy relative to the available supply of goods and services.

Condition	Good Assets	Bad Assets
Prosperity	Stocks/Bonds	Gold
Deflation	Bonds/Cash	Stocks/Gold
Recession	Cash	Stocks/Bond
Inflation	Gold	Bonds/Cash

Gold should not necessarily be thought of as a long-term investment, but as a long-term insurance policy protecting against bad economic events.

Stocks

Indexs criteria:
- Have an expense ratio below $0.5\%$ a year.
- Passively managed
- $100%$ invested in stocks at all times
International stock exposure is not that important to U.S. investors, in part because the U.S. stock market includes companies already responsible for about half of the world's economic output.

Bonds

A bond is a loan. The borrower makes periodic interest payments over a certain amount of time before returning the initial loan to the lender.
The only bonds that are appropriate for the Permanent Portfolio are 25- to 30-year U.S. Treasury long-term bonds.
Interest rates rise --> Bound prices fall
Interest rates fall --> Bound prices rise
Permanent Portfolio perfer long term bonds because:
- They have no default risk
- Their long maturity provides maximum volatility to profit from periods of deflation.
- They are nominal (fixed rate) bonds, meaning they do not have inflation adjustments built-in.
The important point is that investors want average bond maturity in the portfolio to be greater than 20 years.
Three ways of buying bonds:
- At auction from the Treasury
- On the secondary market
- Through a bond fund
At auction or on secondary markets
- Open an account at Treasury Direct (www.treasurydirect.gov) to make the purchase.
- Or use your mutual fund company or broker to make the purchase.
Risks for non-Treasury Bonds:
- Default risk: investor won't get paid back.
- Credit Risk
- Call Risk
- Currency Risk
- Political Risk
- Tax Risk
- Bond Fund Mangager Risks
Bonds to Avoid for Permanent Portfolio
- TIPS
- Municaipal Bonds
- Mortgages
- Corporate Bonds
- Junk Bonds
- International Bonds
Gains from bonds
- Interest payments
- Capital gains when interest rate declines

Cash

Cash is designed to act as a stabilizer to the portfolio.
Permanent portfolio holds its cash in ultra-safe U.S Treasury Bill (T-bills) with maturity of 12 months or less.
The goal with the Permanent Portfolio's cash is to make sure that it is always there when you need it.
The criteria for the Permanent Portfolio's cash are:
- Be very liquid (can be bought and sold instantly at any time).
- Have no interest rate risk.
- Have no default, credit, call, currency, counterparty, or other common types of fixed income risk.
T-bill is a perfect cash investment.
Treasury Money Market Funds
- Only owns 100 percent U.S. Treasury bills.
- Has a low expense ratio (preferably below 0.20 percent a year.)
- Is passively managed to track the market, rather than being actively managed to try to beat the market.
Recommended Funds:
- iShares Short Treasury ETF (Ticker: SHV)
- Fidelity Treasury Money Market (Ticker: FDLXX)
- SPDR Treasury Bill ETF (Ticker: BIL)
- Gabelli U.S. Treasury Money Market (Ticker: GABXX)
Cash Risks:
- Default Risk
- Credit Risk
- Currency and Political Risk
- Counterparty Risk:the party you give your money to won't be able to give it back when you ask for it.
- Call Risk
- Tax Risk
Cash to avoid:
- Chasing yield with non-treasury funds
- Bank Certificates of Deposit
- Municipal Bonds
- Corporate Debt
- International Funds
- Shaky Banks

Gold

Gold does best under high-inflation scenarios.
Owning gold
- Physical gold bullion
- Buying gold from a gold dealer
  - AJPM Precious Metals
  - American Precious Metal Exchange
  - Colorado Gold
  - Canlifornia Numismatic Investments
  - Kitco Metal, Inc
- Buying gold from a bank
- Buying gold from a gold fund
The best gold to hold directly are one-Troy-ounce bullion coins. Bullion coins are either 100 percent gold, or a gold/copper alloy that contain the same amount of gold mixed with copper to make it more durable (pure gold is soft and easily scratched).
Cautions
- Do not buy gold coins on E-Bay
- Do not buy/sell on Craigslist
- Do not store gold at a dealer
- Storing gold in a back safe deposit box and carry insurance on the contents.
Holding the gold
- Create gold custody accounts in Everbank
- Allocated account: holds gold in your name of a specific lot of coins or bars.
- Unallocated account: stores an amount of gold for many customers in which you have a claim
- Allocated gold storage should be the first choice for the gold within your Permanent Portfolio even though the fees are slightly higher than for unallocated storage.
Gold funds
- Risks: You have a lot of people and papers between you and the asset, which can be a problem in an emergency.
- It's not recommended that you use a gold fund for 100 percent of your gold holdings.
Assets to Avoid
- Storing Gold in an IRA
- Swiss Frances
- Commodities
- Gold Mining Companies
- Collectible Coins
- One-ounce buillion bars
- Pre-1933 Coins
- Silver
- Fake Gold

Implementing the Permanent Portfolio

Use at least two brokerages
Use different fund providers
Four Levels of Protection
- Level 1(Basic): All ETFs and mutual funds for stocks, bonds, cash and gold.
- Level 2(Good): ETF for stocks, cash and most gold. Bonds and some gold owned directly.
- Level 3(Better): ETFs for stocks and cash. Bonds owned directly. Gold stored in country securely.
- Level 4(Best): ETFs and mutual funds for stocks and cash. Bonds owned directly. Gold split between in country and overseas storage for geographic diversification
Do not do dollar cost average

Portfolio Rebalancing and Maintenance

Two purpose of rebalancing
- Control risk
- Capture additional returns
Rebalancing bands:
- higher than 35% or lower than 15%

Taxes and Investing

Interest income ~ Interest is what you earn on your money by lending it: to a company through a bond, for example, or to a bank when you buy a CD.

Dividends ~ A share of profits that you get as a part owner of a company when you purchase its stock

Capital Gain ~ You sell an asset for a profit.

Simplicity is often the best tax strategy
Paying the smallest allowable amount of taxes should be the goal of all investors.
Types of Taxable Events
- Interest Taxes
- Dividend Taxes
- Capital Taxes
- Collectible Gain Taxes
Capital Gains
- Long term (more than 1 year) has lower tax rate
- Short term (less than 1 year) has normal tax rate
401K Plans
- A brokerage window allows a 401(k) participant to bypass the plan's normal investment lineup and instead access a much wider range of investment options, almost as if the 401(k) plan account was an investment account with a brokerage company.
Tax-loss Harvesting
- If you have a loss in an asset, you can sell the asset and recognize the loss for tax purposes.

Institutional Diversification

Institutional diversification simply means dividing your money among several funds, brokerages, banks, and other institutions to diversify against risks from the people and organizations holding and managing your assets.
At leat two brokerages and fund providers.

Geographic Diversification

Geographic diversification means simply holding some of your wealth outside of the country where you live.
Physical gold is the best asset to keep in a foreign account.
Ground rules:
- Only deal with first-world countries with stable governments and legal systems that provide strong protections of private property.
- Avoid dealing with institutions where accountability rules are opaque or unclear.
- Try to do business in legal jurisdictions that support financial privacy.
- Always follow all legal disclosure requirements.
Types of Geographic Diversification
- Online Gold Storage Services
  - Unallocated Accounts
  - Allocated Accounts
  - Segregated Storage Account(Best choice)
- Foreign Sage Deposit Box
New Zealand
- Small country, isolate from the world
- The New Zealand Mint
  - Account Types: Allocated gold or safe deposit boxes.
  - Account Minimums: None.
  - Account Costs:
    - 1 percent per year for allocated gold storage
    - Minimum $30 charge per year
    - $200 per year for small safe deposit box and $250 for large
    - Discounts for very large quantity (over $500,000 USD) are available
    - Their commissions on gold purchases are higher than industry norms
  - Accepts U.S. Customers? Yes
  - Accepts Non-U.S. Customers? Yes
  - Requirements to open an account:
    - Two forms of ID (passport, etc.)
    - Confirmation of address
    - Agreement with New Zealand Mint's terms and conditions

For other countries, please see the Chapter 15

The variable Portfolio

The Variable Portfolio is for speculation. Only money you can afford to lose should be allocated to it.

评价

This is a well written book. The analysis is simple but complete. However, I think this book misses an important part: the comparison between other portfolio choices, such as all weather.

和我的关系

What I learned from this book:

Diversity is not always going to work. The correlation betweeen different assets varies a lot over the time.
We should design our portfolio based on the understanding of the economic conditions.
Some actionable suggestions on implementing permanent portfolio.

Flyaway is the owner of this blog.

「The Permanent Portflio 」读书笔记

综述