Part IV: An Investment Strategy Resistant to Market Crashes
Outsourcing implementation, adding crypto and other customizations of Permanent Portfolio
So far we have seen what the Permanent Portfolio (PP) is (part 1), and how to implement it (part 2, and part 3). This is the 4th and final part of this DIY personal finance series. We will be covering:
⏩ Outsourcing the implementation of PP to a basket instrument
⏩ Customizing PP to add some risk to the portfolio
⏩ How to add high-risk instruments like crypto and derivatives to PP
Let us jump right in.
It would be so much better if we could outsource rebalancing, investing, and exiting to a basket instrument. You put money in this basket and it takes care of allocation and rebalancing for you.
There is one basket by Smallcase that claims, albeit incorrectly, to follow the Permanent Portfolio strategy (aka ‘All-Weather Investing’). It only invests in gold, equity, and cash, and skips Govt bonds. This does not provide protection against a period of economic recession which, as explained in Part 1 of this series, is one of the 4 economic conditions that will prevail at any given time.
Moreover, Liquid ETF is not a good instrument to invest in.
If you know of any other basket/avenue which does this, let me know. For now, surprisingly, there seems to be none.
Customizing the Permanent Portfolio
The strategy has a strong premise while also being simple which would mean a large number of investors would find it attractive. However, there is no one size fits all. This is just as true for personal finance as it is for anything else in life. Each of us has different risk appetites and time horizons; each of us has our own inclinations and outlook. You can customize this portfolio to accommodate your personal preferences. There is no need to stick to the original portfolio down to the last detail. Below are some factors based on which you can create your own fork of the Permanent Portfolio (PP).
1. ⚠ Risk Appetite ⚠
Risk and returns are proportional to each other. The more risk you take, the more returns you can expect (a risky expectation nonetheless). I can afford to take on more risk since I am in my early 20s and have a stable job.
If you too have a high appetite for risk, here are a few things you can do:
1.1 Increase Equity Exposure
India is expected to be the 2nd fastest emerging economy after China. It is also considered to be a potential superpower. That is why I decided to bump my equity exposure up to 30% from the originally proposed 25%.
It is a good idea to hold some offshore assets that can act as a cushion when there is financial distress in the local economy. Note that in today’s globalized economy, offshore markets are correlated with the Indian market but there is a fair amount of decoupling for us to capitalize on.
I am specifically bullish on the tech companies from US so I allocated 10% of PP to US equity.
PP has not caught up with the times. There is no provision for digital assets like NFTs and Cryptocurrencies. On the other hand, I really wanted to have some exposure to these digital assets because who the hell wants to miss the hype train?
One way to add crypto to your portfolio is to treat Bitcoin as digital gold (which it is). Consequently, the 25% Gold exposure would include Bitcoin too. You can decide how much of the 25% should be BTCs but tread with caution.
Cryptocurrencies are extremely high risk. The market is unregulated and volatile af. Your government can ban these assets any time (like China).
Only invest money that you are willing to lose.
There are other ways to include cryptocurrencies and other moonshots. More on that below.
The PP seems very restrictive. You cannot play with stocks, derivatives, crypto, and other high-risk instruments or bet on moonshots.
But if you think about it, PP sets you free. It gives you a solid, stable, and reliable base on top of which you can place your more risky bets. Even if those bets fail, PP has your back.
Objectively speaking, the PP is not safe — it comprises of volatile instruments like gold, equity and government bonds. It is only safe:
⏩ if you rebalance diligently, and
⏩ over a long enough time period (10+ years)
Let us look at two strategies that leverage the stability of PP to bet on moonshots.
2.1 Barbell Strategy
Imagine your portfolio to be like a barbell. On one end you have safe instruments and on the other end, you have high-risk instruments. Nothing in between.
You can have 50% of your portfolio as PP (one end of the barbell) and you can play with the rest 50% on other risky instruments (the other end of the barbell) like angel investing, crypto, NFTs, derivatives, etc.
💡What are Derivatives?💡
It is a financial instrument which derives its value/price from the underlying assets. The most common types of derivatives are futures, options, forwards and swaps. They are the most volatile and risky instruments to play with (after crypto, obviously). Read more here.
2.2 Satellite Strategy
Think of your portfolio as a planet that has tiny moons revolving around it — a core and few satellites. Your core should make up for 80%-90% of your portfolio while your satellites make up the rest 20%-10%.
Since 80% is the core, it should be in a stable and reliable instrument. Who can do better than PP when it comes to stability? With PP as the core, your portfolio can have tiny high-risk bets as satellites.
The exposure to moonshots is lesser here compared to the barbell strategy. So those who want to be a bit conservative can go for this. I myself use this strategy as the barbell one is way beyond my risk appetite.
In case you are wondering, no, I do not have any angel investments in my portfolio. I am poor. But here is my portfolio:
Those are the different ways in which you can customize PP and use it to make room for other risky instruments instead of feeling shackled by it. The world is your playground. Feel free to customize it as you wish but be mindful of the trade-offs you are making.
Remember, absolutely nothing is absolute and everything is a trade-off.
By Demonetized Blog
Blog | 8 minute read | Tags: Personal Finance
Both the satellite and barbell strategies I outlined above are inspired by this article. A great read if you want to know about customizing the PP.
By Taylor Pearson
Blog | 19 minute read | Tags: Personal Finance
The Permanent Portfolio, for all its claims of being a robust, all-weather portfolio, has its downsides. The portfolio was coined by Harry Browne in the 1960s. But things have changed since then. There are a lot more investment avenues than what was available back then.
That is why Taylor & his team at Mutiny Fund modernized the Permanent Portfolio. They call it the Cockroach Portfolio:
Cockroaches aren’t cuddly, but they do two things well that we also want out of our portfolios: they’re really hard to kill and they compound fast.
The blog covers the issues with PP, redefines the 4-quadrants (inflation, deflation, boom, bust), and leverages modern investment instruments like futures, options, ensembles, arbitrage, and crypto. I do not think it is possible for retail investors to replicate that portfolio unless they are doing it as their full-time job. But if you want to nerd out, I highly recommend that you check it out.