Time for change: The Pathfinder Portfolio

 How permanent is a Permanent Portfolio?

Antinous contemplating change 

Stick to the strategy. That is a good motto. Meddling with a portfolio is a dangerous thing. More than anything, meddling means that we are likely to shoot ourselves in the foot.

Perhaps we are about to do something that we will regret. But hey! stock prices are back on 2016 levels. 

And two more observations for us:

1) Cash. We have the advantage of having quite a lot of cash, as we have been sitting on a conservative permanent portfolio (which we thought was the best strategy for our accumulation phase, up until now) 

2) Stable. This dip has also shown us that we are more emotionally more stable than we perhaps thought. We observed the stock market plunge with a detached curiosity, and not the panic and white nights we feared.

Conclusions: We think we can somewhat increase the risk in our portfolio. But we still want a good price on the risk we take on.  

Enter The Pathfinder Portfolio
We had, as early as back in 2018, started to think of possible portfolios that would increase risk and return in a very, for us, bullet-proof manner. 

The basic idea is to change our portfolio allocation to this:

• 50% stock allocation 
• (details: 16% US Large Cap, 16% Domestic Large Cap Value, 17% Domestic Small Cap) 
• 25% long-term bonds 
• (details: 8% US Long Term 25y+, 17% Euro Long Term 25y+)
• 25% Gold 
• (details: in different Gold ETF:s)

Try this allocation out in your preferred financial alchemy lab yourself, and marvel at the properties. 

After our own trillion different simulations, our conclusion is that this allocation keep some of the most attractive characteristics of the permanent portfolio.

Some niceties
The average return with this portfolio can be expected to be up roughly 2% up from the permanent portfolio, so close to 10% in nominal terms. 

We're at a point where we've reached basic levels of financial independence, or Low Earth Orbite as we call it, and this return is a very good deal for the risk with the bleak and bad scenarios here.

Especially when opportunity presents itself.

Since 1970, the max drawdown time was around 5 years. This would be an acceptable drawdown time for us. It would mean that our accumulation phase would take around 1 year longer than we planned to reach the financial orbit we are aiming for, compared to the average scenario. For us today, this would be nothing we couldn't live with. 

Risk (volatility) is a nasty thing, and we rather use it to our advantage than fear it. 

It was around this point in our investigations that Antinous baptized our new portfolio the Pathfinder Portfolio, in an attempt to put a name on how this portfolio can help us finding our way to our version of freedom.

An often forgotten property
Another good property of our new portfolio is that it has a very attractive perpetual withdrawal rate (around 6%), due to it's reasonable volatility, and - like the permanent portfolio - ability to survive setbacks and - with another property it lends from the stock market - recover quickly. 

Together with the start date sensitivity which is pretty low, we think this is a kind of portfolio that we can stick with for a long time. The still low start date sensitivity means that we will not have to sit and try to time the allocation weights or worry if we need to take some money of the table when the financial climate seems good or bad. 

We also don't have to think about balancing out of the portfolio or "decrease risk" as we get older or leave the 9-5 life, as the withdrawal rate is already super-duper-attractive.

So, like the permanent portfolio, this portfolio has the sweet, sweet property of being, well, permanent.

Cue good sleep. 

Why not go all in on the stock market?
The total stock market - dividends included - can have drawdown times of more than 10 years. For us, that would seriously thwart our accumulation phase. 

So we rather "pay" with missed opportunity to keep us more safe from the darker periods of the stock market.

The perpetual withdrawal rate of the total stock market is also 4.5% for the same 50 year period. That is actually 1.5 percentage units LOWER than our Pathfinder portfolio. Yet another testament to the dangers of volatility. 1.5% difference is significant.  It would have a very real impact on our future budget, in the range of 1000€ a month.

Let's see how this portfolio works out and if and how we do the transition.

Take care,

//antinous&lucilius

Where to go from here?

• Read our thoughts on why to go with permanent-portfolio-type strategy here: A well-kept secret: A Portfolio for Accumulation (part 1/2)
• How did our portfolio do during the plunge in 2020? Our Portfolio During Tumultuous Times. 

NB. I hope we'll get to dive into an in-depth article on the ideas and reasoning behind this portfolio, and what we think around the concept of a fair price of risk.

Our Portfolio During Tumultuous Times

How did our portfolio fare during the corona crisis?

Sometimes one has to wrestle with the unexpected

The first question is of course to ask what kind of vessel we sit in. We were sitting in a very stable one, in the shape of our permanent portfolio. 

How did it go in February-March 2020?

Like everyone we've been though some interesting weeks.

We suspected that corporate short term bonds could get into trouble, as have happened repeatedly before when cash and risk appetite dries up. We didn't have to much cash in corporate bonds, but this time we were lucky and managed to sell them off quickly.

Lesson Learned 1: Only cash is cash. And when the knives are falling, cash is indeed king.

Another thing we noted was that we didn't get nervous at all. Either we are just very nivilated. Or we trust all the tons and tons of simulations we've done on the permanent portfolio that we have. 

When the dust started to settle, we were down with 11% from the peak. So basically well within the bounds that we expected - bearing in mind that our simulations were on year basis, and this was intra-year.

Lessons Learned 2: We might be more risk tolerant than expected.

What were your thoughts during the worst drop in almost a hundred years?

We're leaving Low Earth Orbit

Where are we in our journey?

The Method Works, as Jean Baptiste Grenouille noted in Grasse.

Lucilius is now safely past Low Earth Orbit, and since a few months he can count himself as robustly financially independent according to the 4% rule. 

Antinous is quickly picking up speed. He's soldering on, and he's armed with side hustles, and will touch Low Earth Orbit before the year's end. 

Even if we know the maths behind it, it's still surprising for us that this actually works. And that we now enter more into a period of building margin, rather than aiming for the lowest level of financial independence.

The shift in mood is large as well. 

Our take on work is that it should feel adventurous and fun. We've changed jobs when it didn't feel like we could put enough of our hearts in it. 

But now, with the first level of Financial Independence behind us, it is as if a new level of adventure, with an unusual calm and perspective is taking over.

Let's see what this will bring us.