We think it’s a good idea to have the rock of financial independence under the feet quickly and safely, instead of going on riskier roads that might take longer than one thinks.
The portfolio we have used to reach financial independence, as certainly many have guessed, is the permanent portfolio.
The permanent portfolio has been declared dead again and again, it's slow, archaic, contains funny assets like gold (!) and cash (!!), it's overly conservative, pessimistic, neurotic, and what-not.
For some, this portfolio is like a monster that no-one really manages to kill off. For us, it's like the well-kept secret that made it possible for us to take the leap to the journey to financial independence.
Money doesn't care if it comes from one allocation or the other. And the portfolio, like a rusty ukrainian tractor, soldiers on with astonishing reliability.
Even Achilles had troubles with that turtle.
(Part of painting by Francois-Leon Benouville, 1847)
The portfolio even enjoys and profits from volatility and bad weather. Antifragile, schmantifragile.
Once upon a time, a very very long time ago, like 2012 or something, there was a blog called the crawling road, by Craig Rowland.
He went deep into the details, and has written a good book on the Permanent Portfolio. It's written with a US perspective, but we still recommend it, and we hope this can illuminate some of the ideas and also the global appeal of this asset allocation.
The asset classes in the permanent portfolio are:
- Gold
- Cash
- Stocks
- Bonds
The basic, radically counter-intuitive yet surprisingly simple idea of the permanent portfolio is to put together four asset classes that behave differently from each other.
As Fortune sails with her horn of plenty on the seas of the world economy, these asset classes perform differently, and as one is doing poorly, another asset class will be in the limelight.
We needed time to think it through and understand some of the portfolios intricacies. Slowly some of the beauty dawned upon us.
Gold & Bonds
Gold was hard for us to grasp in the beginning. But let's not be fooled that one asset is necessarily better than another.
Since we started, gold has performed exactly as well as US stocks. We would never have believed that when we started.
Gold coin Septimius Severus, AD 193-211.
Euro bonds are not far behind either.
Long-term bonds are a strange animal that do not behave as the treasury pleases.
But frankly, cash?
Cash, as an asset, is a game of perspectives.
Cash can grow explosively with several 100 percent over a few months or half a year.
Of course the newspapers don't call it growth when it comes to cash. They look on the stocks, and call it a crash instead. Fear gets more clicks.
Seing big happy headlines about the sudden increase in purchase power of anyone with money in the savings account is unusual, to say the least. So we were not used to the opposite perspective. We had to learn to look on cash the other way around.
During a year, the same amount of cash can allow us to buy 2-3 or 5 times as much of another asset class, most notoriously stocks.
And sometimes all other asset classes will, for a short period of time, be on sales by a factor of 2, 5 or even 7 or 8.
There's a reason why it is called a credit crunch. It's all about the perspective.
Truly: let's not assume what tomorrow brings
Why so much of each asset class? Well, first each asset class needs to carry the weight of the portfolio when that asset is going well. A 1/4 allocation on each asset class means that there is enough weight to carry the portfolio at all times. And the other thing is to truly embrace that we do not know about tomorrow. Then it’s a good strategy to be roughly agnostic about what the future will bring, and bet equally on what will happen tomorrow.
For us, the best comparison is perhaps with some kind of strange type of noise reduction. If one adds uncorrelated time series on top of each other, one is very likely to decrease the amplitude (volatility) of the time series.
Less noise, more signal.
How to do it
We've set up our permanent portfolio according to the following, using standard mutual funds and ETF:s.
- Stocks 25% (8% US Large Cap, 9% Domestic Total Stock Market, 8% Domestic Small Cap)
- Long Term Bonds 25% (8% US Treasury, 17% Euro Government Bonds, all 25 years+ to maturity)
- Cash 25% (treasury bills, bank accounts and short term max 3 months fixed income, all in local currency)
- Gold 25% (several Gold ETF:s with physical gold that tracks the gold price 1-1)
As you see we've chosen to have US and EURO exposure in all variants of our portfolio, but that can easily be tweaked, even if we found, surprisingly, that increasing exposure to exchange rates in roughly these proportions actually, and very counterintuitively, increases safety and returns.
This is a portfolio that thrives on volatility.
Rebalancing
The last thing to mention with the permanent portfolio is rebalancing.
Rebalancing the permanent portfolio means that we always have something the market wants that we can sell. Oh, the market is short on cash? We've got cash aplenty. Valuations of stocks are high? Let us buy some of that sweet gold that the market has forgotten to value. And on it goes, selling on high and buying on lows, between the asset classes, every year.
We rebalance back to the 25-25-25-25 allocation split if things get more than 10 percent units off, or otherwise annually and that's also when we invest the cash we accumulated during the year.
This strange mix was our secret sauce, the well-kept brew that would safely yet quickly and in as many scenarios as possible bring us to financial independence.
Let's sum up
The permanent portfolio, we felt, had the ...
1) ... potential to protect us from the really bad scenarios and
2) ... help us achieve financial independence also in a bleak scenario, while
3) ... doing just as good as classic portfolios during average times.
That was our sweet spot to bring us to financial independence.
Our Crawling Road
Lucilius has achieved financial independence with exactly this portfolio. By the whims of Fortune it took the same time as it would have done if we went for a broad stock market portfolio.
But that was just luck, which perhaps also illustrates why one shouldn’t rely on an average scenario when making a decision. And even being 6-12 or even 18 months behind the stock market would be a price he would be willing to pay to lessen the risk of a really bad or bleak scenario.
The annual average return, including inflation ťhis time, was almost spot on the average expected return of 8 percent during that period.
Antinous is now half-way there.
We wanted to show our thinking behind this lesser-known and very conservative option. We think the permanent portfolio has merit, especially if one discovers financial independence a few years into one's working-life, and finds oneself with some money, motivation to aim for financial independence with a combination of safety and speed, but without a strategy that seemed to give a fair price for ones appetite for risk.
This was our crawling road to financial independence, and, dear reader, this is what works for us, and what we did.
Something else might work for you.
Take care!
//antinous&lucilius
Where to go now?
- If you haven't read our reasoning why we went with a permanent portfolio during our accumulation phase, then read the beginning of this two-part article here: A well-kept secret: A Portfolio for Accumulation (part 1/2)
- Since 2019, we have made some changes to our portfolio, and given it a new nick-name: The Pathfinder Portfolio.
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