October 16, 2012: Daily Long Run Graphs

A lot can happen within a year. All of my other long run graphs prepared for this site were year end values, with straight lines connecting the points. This was for good reason because there is no good daily data that includes inflation adjustments as well as dividend and interest reinvestment. Yahoo! Finance provides dividend reinvestment data that I use for the recent performance graphs, but their data does not go far back enough for long run analysis.

However,  I created my own new series using the annual returns as book ends with interpolated price data in between, giving us a look at intra-year performance. The result is a daily series that is adjusted for inflation, interest and dividends.

Above, we can see the total real returns for stocks, gold, government bonds, and cash (T-bills). Because the PP is comprised of these asset classes, I thought it would be useful to show the performance of a blend. This blend is a portfolio that bought equal amounts of each asset class in 1978, and essentially let them ride. As time goes on, the portfolio becomes dominated by its winners.

However, the Permanent Portfolio doesn't just let asset classes ride. The PP uses rebalancing bands to help manage risk. Any asset class dominating the portfolio exposes it to specific macroeconomic risks. Above, you can see how annual rebalancing reduced risk.

This graph is a different way to see what drives the PP. Remember, if you are using annual rebalancing every asset class is brought back to 25% weighting at the start of each year. However, within the year the asset classes weightings fluctuate based on changes in value. If you see the red line for stocks dipping below the black PP line, then you know that equities were a drag on the portfolio, becoming more underweight because of poor performance. The sharp horizontal lines occur once a year because that is when everything is brought back to balance.

Another popular strategy for the PP is to use 15/35% rebalancing bands, only bringing everything back into balance if an asset class exceeds this threshold. Harry Browne endorsed this approach, and I use it myself. I prefer 15/35 because it involves fewer transactions than annual rebalancing. Additionally, letting your winners ride a little bit longer is more tax efficient.

As you can see, the 15/35 rebalancing bands allows for winners and losers to compound further before bringing everything back to parity.

I hope these graphs have helped you understand the PP a little better. I would have loved to go all the way back to 1972, but I was limited by data availability for 30 and 20 year bonds rates. Feel free to contact me with any questions.

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