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Mark Hulbert

April 24, 2018, 12:17 p.m. EDT

In search of the perfect hedge for your retirement investments

How well does the Permanent Portfolio do in different market environments?

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By Mark Hulbert, MarketWatch

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Will the future be like the past?

If the future lives up to the last 30 years, therefore, you will be able to do better than PRPFX, with no more risk, by investing in stocks or bonds and mixing those assets with the proper level of cash or margin.

But will the future be like the past? That is the $64,000 question. When Harry Browne came up with the idea of a permanent portfolio, bonds were coming off a several-decade period of devastatingly poor performance. Inflation-adjusted losses produced by the bond market were being referred to as the biggest destruction of wealth in recorded history.

The stock market was coming off a period of performance that was nearly as dismal. The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.03%  was above the 1,000 level in January 1973 and then fell below it and stayed below until 1982. On an inflation-adjusted basis, stocks performed even more poorly. Gold, in contrast, was a stellar performer in the 1970s.

In other words, the 1970s were almost a mirror opposite of what the subsequent 30 years looked like. But we would have had no way of knowing that then. Nor do we know today what the next 30 years will be like. It does seem clear that bonds will not do as well in subsequent decades, given today’s low interest rates. And stocks also will be facing some stiff headwinds owing to their current overvaluation.

The more fundamental point, however, is that no one knows for sure. The PRPFX is a response to that uncertainty.

Biggest drawdowns

Another test of a low-risk strategy like the PRPFX is measuring its biggest 12-month loss. Its biggest came at the end of the financial crisis, when it was 18.6% lower than where it had stood one year previously. (I calculated drawdowns using month-end values.) Though this 12-month drawdown is worse than for bonds (minus 4.3%), it is markedly better than gold’s (minus 27.8%) and a lot better than stock’s (minus 43.3%). But beating stocks and gold is little consolation if your retirement finances are dependent on not suffering that kind of a loss.

However, the picture painted by five-year holding periods is a lot better. The worst five-year stretch for the PRPFX over the last three decades was one in which it was essentially flat (an annualized loss of just 0.2%), versus a 6.1% annualized loss for gold and 8.3% for stocks. (Bonds’ worst 5-year stretch since 1986 was one in which it produced an annualized gain of 1.2%.)

If we expand our time horizon to 10 years, PRPFX looks even better. Its lowest 10 year annualized return was a gain of 3.2% annualized, better even than bonds’ 2.7% annualized gain. Gold’s worst 10-year return since 1986, in contrast, was minus 2.6% annualized; for stocks minus 5.0%.

These results provide support for the claim made on the PRPFX website that it should be judged over the long term.

The bottom line? If the next 30 years are like the last 30, then there would be no point in considering PRPFX in your retirement portfolio. But a compelling case can be made that, given the profound uncertainty about what the future will bring, retirees should at least consider the fund.

For more information, including descriptions of the Hulbert Sentiment Indices, go to The Hulbert Financial Digest or email mark@hulbertratings.com .

US : Dow Jones Global
+8.77 +0.03%
Volume: 498.89M
May 20, 2022 5:03p

Mark Hulbert has been tracking the advice of more than 160 financial newsletters since 1980.

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