Craig, thanks for doing this interview. I was researching for information about Permanent Portfolio and your blog came up in the search results. I’m glad I found the blog because it really contained a lot of information on Permanent Portfolio. It almost answered my queries, but I do have some questions that I would like to ask you in this interview. There is no doubt that you are an authority on this subject and to begin, can you explain what Permanent Portfolio is all about?

Yes sure. Thanks for having me on, I’m happy to do this interview with you. The Permanent Portfolio was created by a gentleman named Harry Browne and his associates in the late 1970s and it was a way to protect the money they had made as gold speculators. Harry Browne was getting out of the speculation business as he realized it was not a good long term strategy and he wanted to diversify his money. And in the United States at that time, the inflation was very bad because the government had taken off the gold standard and gold prices had gone up quite a bit. So they were looking to spread their money around in case the gold market crashed. They came up with this idea of designing a portfolio that was based on a wide asset diversification based on economic movements. This was fairly unheard of because most people were doing market timing and technical analysis and all sorts of stuff. So the idea of having a portfolio that was very passive, that had no market timing and had a wide variety of assets was very unusual. Also what was unusual for him at the time was he was known as a big gold advocate and all of a sudden he made the Permanent Portfolio and he started saying we should own stock and long-term bonds, both of which did very poorly in relation to inflation and his readers thought he was crazy. It ended up he was right. By the early 1980s the US inflation came under control, and the gold price crashed and stayed low for twenty years. It was the stocks and long-term bonds that he had in the portfolio that really did all the work. So the idea of the Permanent Portfolio is basically to have a completely passive strategy. The portfolio doesn’t time the market, it doesn’t try to guess what the future is going to do and you hold the assets all the time, not knowing what’s going to do best and periodically you look at it to balance it. So basically, it’s a strategy designed to work under all economic conditions, even under extreme market conditions, in order to protect and grow your wealth.

And to elaborate on the Permanent Portfolio, it consists of four asset classes; cash, bonds, stocks as well as gold; and they are all equally weighted at 25% each. By equally allocating to each asset class, we do not try to forecast the future which asset would perform better, am I right to say that?

Yes, that’s correct; it holds equal asset weighting, which is also fairly unusual for a portfolio. A lot of portfolios today, even passive ones, might tell you to overweight stocks or overweight gold or to overweight bonds or this or that. This really assumes that any one of those assets at any time can be better than the others. The problem with this strategy is that you never want to own so much of a particular asset that if it were to drop sharply in value, you’d take a big loss. So owning 25% in each allocation, even if an asset were to drop by 50% tomorrow morning, you’d wake up tomorrow and see the gold or the stock market had dropped in half. That loss will be about a -12.5% to the portfolio, which isn’t great but it’s not a disaster. Now you compare that to other portfolios where, let’s say hold a 100% stocks or 80% stocks or hold 100% gold in goldmining companies, if you start doing stuff like that and if the market goes against you, you can really take a very, very big loss. And so, this portfolio is designed again to grow your money and also to protect you in case of a problem. Now the thing is, with those assets, the stocks, bonds, cash and gold, each one is linked to a state in the economy. Stocks work very well under prosperity, a prosperous economy; bonds work very well under a deflationary economy, they also do alright under prosperity as well; gold tends to do very well under inflationary economy or what we might call negative interest rate environment like what we are getting today; cash is kind of a buffer, it doesn’t really excel under any particular economy except maybe what we call tight money recession, but they serve as an anchor to the portfolio when things are going up and down so that when investors are getting a crazy volatility and getting scared and wanting to leave. So that’s how the assets are basically designed to work.

That’s right. I guess most people, when they look at these portfolio, they’ll say, “oh it’s only 25%” and most people are very used to having a very equity heavy portfolio, which even the Yale endowment fund manager, David Swensen, is pretty weighted to equity. We’ve seen pretty good growth in terms of annual returns for the past twenty years in stocks and since most people believe that stocks is the best performing asset class over the long run, would having just 25% in the portfolio actually slow the growth of our capital?

Well, that’s a good question, you understand my background as a sort of an entrepreneur, I believe in the power of companies to grow and create wealth for the people who own stocks. But as someone who has founded companies, run companies, and seen other companies, I’m also very acutely aware of the risks involved in a business and that sometimes, things don’t go according to plan. With the stock heavy portfolios in particular, I noticed no growth or even negative growth for long periods of time. For instance, I’m talking about the US stock market here as I know you’re in Singapore. During the 1970, the US stock market had basically 0% real returns after inflation. Now sure, you might say, well the stock market returned 8% to 10% in the 1970s. But inflation was 8% a year, so you had no real growth. The 1980s and 1990s were fabulous; stocks had an annual growth around 15% a year. People thought it would go on forever and then the Internet bubble burst in the early 2000s and we had a real estate bubble burst. So over the past ten years in the stock market here in the United States, again you had basically zero or slightly negative growth. For the past forty years of stock market history in the United States, twenty of those in the decade of 1970s and the decade of the 2000s were zero growths. So that means 50% of the time, the stock market was not giving you after inflation returns. Okay, so flip a coin. When the stock market is working well, it’s great, I don’t deny it’s an outstanding way to grow your money, but when it’s not working well, you have to diversity out. So, what I notice when I started looking up the strategy, I used to think the same, 25% is not enough because that’s what all these academic people were telling me and I started looking at the data myself. I never go to the experts, I always want to go look at things myself, it’s always how I look at things, it’s always how I’ve done everything in business, I never go to the experts. So, I went and I looked at it myself and I realized that basically, they’re wrong in that this portfolio in a four way split has generated somewhere around 9.5% compounded growth over the past forty years alone. But more importantly, it was able to generate positive real returns between 3% to 5 % over any rolling ten year period. So that means in the 1970s, the stock portfolio had 0% real growth after inflation, Permanent Portfolios had 3% to 5% the entire time, it did the same 3% to 5% after inflation returns in the 1980s, it did the same thing in the 1990s and it did the same thing in the 2000s. So over a past thirty period, I was able to generate real after inflations for the entire time, whereas stock and bond portfolio was not able to do it in nearly half the time. So that’s why when people say 25% is not enough, I’m always like well, show me your proof and when you go back and you look at the data, it just isn’t true, you should be much more widely diversified. Stock, bonds are fine, but they show a tremendous risk at times. You mention the Yale endowment fund, in 2008 they took a tremendous loss. It lost almost a third of the value of the endowment. Most people can’t lose a third of their life savings and stay in the markets. So another thing I’ll talk about too, is that the Permanent Portfolio by having this four way split, is a very stable portfolio. The worst loss it had up to this point was about -5% in 1981 and in the 2008 market crash, it was basically flat for the year, it didn’t lose anything. What I find for most people, they need to avoid big losses, because as soon as they get those big losses, they’re going to abandon the strategy at the worst possible time, right at the market bottom when they shouldn’t be doing anything. And again linking my experience as an entrepreneur, I’m used to taking high risk and so I have a certain mentality that most people don’t have. I’m the guy who’s buying stocks during market panics. I don’t want buy when everyone is talking about them and what I find in the Permanent Portfolio is that it forces peoples’ mentality, because when the stock markets crash, you’re always going to have another asset going up in value and you can use that money in order to rebalance. So it’s kind of a long answer to your question but I don’t believe in the idea that you should own a lot of stocks. If you look at non-US markets, the Japanese market for instance, has not generated returns for Japanese stock investors since 1989. So I’d caution people not to load up on a lot of stocks, you should look beyond US markets and also consider a time in the US market when the stock market did not do well and just acknowledge that sometimes this happens. And I’d be very, very careful about concentrating bets, I don’t concentrate my bets in any asset, that’s the advice I give to people, don’t make concentrated bets on anything because you might be wrong.

Yes, that’s right. I like the way that you talk about the Permanent Portfolio by limiting loses. Indeed, most people would not have a sold out their portfolio if it did not drop too much. When they try to time the stock, they always buy and sell at the wrong time. How about gold, we know that it is a negative yielding asset and most people will not even consider it as a traditional asset class like stocks and bonds to be included in the portfolio. By having 25% in gold, are we losing a lot of negative yield in this instance?

Gold is an interesting asset because when I first read about the Permanent Portfolio, when I saw 25% gold, I thought Harry Browne was nuts and I almost disregarded the whole thing. But I was researching everything at the time and I said nothing is off the table, I’m going to consider everyone’s argument even if I disagree with it right now. I went and looked at the data myself, about putting gold in my portfolio, and I found that a stock and bond portfolio should always hold some type of hard asset. Now, when I say hard, it’s something tangible, the Permanent Portfolio uses gold; other people might say it’s commodities and other people might say it’s real estate. Basically it’s something you want to own that is detached from the currency of the country where you live. This is because paper currencies are very, very unstable. They appear stable but they’re really not. What’s going on in Europe right now, the euro is a perfect example, it’s a very major currency and they’re having a lot of problems. It can blow up any day or it may not, but we don’t know. So I always tell people by owning a hard asset, you are taking a portion of your life saving and you’re setting it aside in a way that is immune from political antics. So when we look at 25% gold and people say that’s too much, my answer is I’ve got 75% invested in these other things. I acknowledge that over time, gold is basically going to match the rate of inflation at a small cost of storage. But, I will also say that there are times in the market where it is so volatile on the upside just like the 1970s where gold performed very well against stocks and bonds. People might write it off when gold had fallen in price all through the 1980s and 1990s, while stocks had gone up way in price. With the Permanent Portfolio though you would be selling stocks and buying gold when nobody wanted it. People thought the late 1990s and early 2000s if you bought gold you were a fool. What happened is that gold went from three hundred an ounce to sixteen hundred today. People can say all they want that gold didn’t do anything in the portfolio, but when I look at data, I don’t care about your opinion, I don’t care about anyone’s opinion, I look at the data and having gold in your portfolio works. Gold works under emergencies too. If you have a currency emergency people are going to be running towards the door looking for gold, they’re not going to want stocks and bonds. I’ve seen this happen in other countries as well that have had currency emergencies. So again, it’s hedging. You always want to hedge everything and not take too much of a gamble. Gold is an insurance against the other 75% of your portfolio, but at the same time your 75% in your portfolio is a hedge if gold is going down, so you want a balance for everything.

Well said and the point about always do your homework, always check and not trust anybody out there is important. We do not know their true agendas in promoting anything. And by rebalancing the portfolio, it forces a person to always be a contrarian to the general market, to buy low and sell high.

That’s right yes, and so the Permanent Portfolio is a simple allocation, 25% of each, when one of your assets gets up to 35% in value, you sell it down and you balance everything back to 25%. If an asset were to fall to15% or less, then you sell profits from your other assets and you buy the asset to make up for the 25% level with everything else. So it’s forcing you to do this mechanically, as taking your emotions out of it and if you follow the strategy you’re going to be fine. If I look at the 1970s for instance when gold was going through the roof, nobody wanted stocks and long term bonds because they’d done so badly. You would have taken profits from gold and buy stocks and bonds. At that time, long term bonds were yielding over 10% a year. Can you imagine a bond in the US paying 10% a year for thirty years? But nobody wanted bonds. The same thing with stocks, it was about to be begin, the biggest bull market in US history. You were buying stocks at a big discount and you made off like a bandit. Now during 1980s and 1990s, the bonds and the stocks had done very well and the internet bubble was growing. The stock market was at an all time high, there were books saying Dow would reach 30,000, whatever it was. You would have sold those stocks and bought gold at an all time low price like three hundred an ounce! Then in 2008 my long term bonds went up 35% in value during crash so I sold them down and I bought stocks at a decade low price. So it really beats this market-timing thing. Market timing doesn’t work, I’ve never seen it work for anybody, I don’t care how often that they say it does, you just need to get out of this mode of trying time market to predict the future. The6 Permanent Portfolio forces you to do that.

And probably when people are laughing at you, you are making a right decision.

Usually you are. It’s one of these things where everyone says they’re contrarian, but it’s very hard to act. So that’s why if you stick to rebalancing, you just tell yourself mentally, well I’ve hit 35.1% on gold, it’s time for me to sell it and buy the stocks or bonds. Now, you might not personally like stocks, you might personally not like bonds, but you’ve got to do it, because it’s usually the right thing to do. I don’t know why people get wound up about this, I love buying stuff on sale. So, the Permanent Portfolio forces me to buy stuff on sale and it’s really a great thing to do. So it forces you to be contrarian and it’s the way the strategy works.

And from your past experience how have you been rebalancing your portfolio?

I think it may be once every two or three years. That’s important for someone who has a taxable account, you don’t want to touch your portfolio often because every time you do, you’re going to have a capital gains tax. I don’t know what the situation is in Singapore (Alvin: there is no capital gain tax in Singapore). In the US, if you’re doing a lot of transactions you’re typically going to have a lot of taxes with it, so a portfolio that has low turnover is going to be much more tax efficient. More money gets to stay invested and compound. I had to rebalance in 2008, and maybe I’ve had another one in 2010. Last year I had zero transactions in my portfolio and that’s typical. I’d go to my accountant and I’ll do all my taxes and he sees I had no selling transactions. That’s unusual for him to see with his clients because most people constantly buy and sell. The truth is the less you touch the portfolio, the better you’re going to do.

Yes. I believe most people are convinced about the advantages of a Permanent Portfolio at the moment and to help the readers, what are the available financial instruments to construct their own Permanent Portfolios?

Well, the easiest ones are these all-in-one funds. So, there’s actually a Permanent Portfolio fund listed on NASDAQ (PRPFX) where they try to do everything for you. They’re a slight variant on the traditional portfolio, but if you want something simple and you’re willing to pay a little higher expense ratio that might be what you want to do. I prefer that people own the assets themselves because you eliminate something called manager risks – the managers behind the fund could do something that puts your money in jeopardy. The next step is, you could just do all exchange traded funds, you can own a Vanguard total stock market fund for a US investor; you can own the iShares long term treasury bond funds (TLT). I didn’t talk about this, the bonds in the Permanent Portfolio are US treasuries or the bonds of your government wherever you live, like if you’re in Singapore. And for the cash, very short term T-bills. Again, it should be issued in the place you live. Gold should preferably be physical gold bullion and not gold mining companies. You can store the gold yourself or store it outside the country where you live as an additional emergency measure. That would generally be what I recommend. You could even go one step beyond that to own the treasury bonds directly. That’s even better because you eliminate the manager risk. You can use a bond desk at your brokerage, tell them that you want to own Treasury bonds between twenty-five to thirty years maturity and just buy them and it will sit in your account, there is no expense ratio. Interest is distributed twice a year and you don’t have to touch them. When they get to twenty years maturity, you sell them and you buy new bonds so it’s a very simple process. You should buy gold bullion too but if that’s too much of a hassle then consider an ETF but just recognize ETF is for convenience and not for safety.

Yes, definitely. The other question is that for someone without sufficient capital, it’s very difficult to just sell part of a piece of gold bullion. So I guess most people could start with the gold ETF.

They could start with gold ETF or their first gold coin. They can park the rebalance money in cash until they can go for the second gold coin and work up from there. But you’re right, if someone was in the situation where they didn’t have a lot of capital, they can consider going to the ETF and then move up to physical gold.

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