The Permanent Portfolio...Revised
My choice of investments: SPDR Gold Shares ETF (GLD), SPDR Dow Jones Industrial Average ETF (DIA), Vanguard REIT ETF (VNQ), US Aerospace and Defense ETF (ITA), and DJ-UBS Commodity ETN (DJP).
Equal allocations to the Nasdaq 100 Index ETF (QQQ), MSCI Emerging Market ETF (EEM), DJ Real Estate ETF (IYR), Barclay’s 20+ Year Treasury Bond ETF (TLT), and SPDR Gold Shares ETF (GLD).
My suggestion would be for a five-asset combination with all assets equally weighted. This would consist of commodities, gold, real estate, stocks and bonds. 20% in the PowerShares DB Commodity ETF (DBC), 20% in the SPDR Gold Shares ETF (GLD), 10% in the SPDR DJ International Real Estate ETF (RWX), 10% in the Vanguard REIT ETF (VNQ), 20% in the Vanguard Total World Stock ETF (VT) and 20% in the PIMCO 25 Yr Zero Coupon US ETF (ZROZ).
Because of globalization and the desire for maximum diversification, I would suggest a global approach. Obviously commodities and gold are global assets, so this means selecting stock and real estate ETF’s that are global in nature. For stocks this is simple, all one needs is Vanguard’s VT which represents world stocks. For real estate, one could use VNQ for United States REITS and RWX for world REITS excluding the United States.
The last asset, bonds, is a bit more interesting. Instead of using plain vanilla 10-year Treasuries, I would suggest Pimco’s 25 year zero coupon US Treasuries ETF — ZROZ. First, this is the only asset [in my recommended portfolio] that is US-centric…Second, I consider this the most important asset of the group. It has the highest negative correlation to the other assets and therefore acts as a hedge. Also, the interesting thing is the high volatility of the stripped zero coupon bonds leads to lower volatility and draw down of the overall portfolio. If you were to use a regular bond fund with lower volatility then the overall volatility and draw down of the equally weighted five-asset portfolio would rise.
A suggested portfolio for the next 10 years, allowing yearly, or sooner if necessary, tweaking:
15% in Gold & Silver
20% in diversified, foreign & domestic high current income fund (MIN)
60% in mutual funds and/or stocks in health-related and commodity sectors: General — (DLHAX), Biotech — (FBIOX, FBDIX), Medical delivery & equipment (FSHCX, FSMEX, SHSCX), Healthcare REITS — (HCN, NHI), Energy & Natural resources — (SSGDX, FSENX, FSESX, FRNRX), Gold & precious metals — (FKRCX, FSAGX), Agriculture ETF — (MOO)
5% in aggressive or speculative stocks with chances for high returns. This is the section that keeps it from getting boring, makes it exciting and maintains your anticipation that something exceptional could happen. With some good luck, this section could make you more money than all of the above.
How about these five?
1) “Buy a House!” With inflation around the corner, the point is to keep away from cash, especially the USD. So the tangible asset of a home will be just fine. Rent it out. Do leverage with a mortgage, because the real principle amount borrowed will become smaller and smaller (making repayment a breeze) as inflation erodes the borrowed dollar value. Even if the interest rate eventually will rise, rent will keep up with inflation and should cover the mortgage payments. Oh and don’t forget to factor in property taxes on the cost side.
OK and if the rules are to list a public security or index, then Vanguard’s REIT “VNQ” should do.
2) Precious metal: silver “SLV” iShares Silver Trust. Why silver and not gold? Perhaps silver has more upside potential than gold (then again, perhaps the silver market really is rigged and we outsiders have no chance at this game?). And although arguments in favor of gold are irrefutable (I’m a DR disciple, after all), the rumors of fake gold bullion in circulation are scary: the gold-plated tungsten bars that masquerade as 400-ounce “Good Delivery” gold bars. Even “GLD” can’t assure that the gold bars backing their ETF really are genuine. Heck, perhaps all gold in Fort Knox is fake!
3) Energy: Vanguard’s ‘VGENX’. This is an essential component of our portfolio, whether we’re bullish (peak oil) or bearish (worldwide economic recession) on energy, our homes need to be heated and our wheels need to keep turning.
4) Agriculture, PowerShares DB Agriculture “DBA” because the world’s growing population needs to be fed;
5) Australian $ bond Currency bond other than USD, EUR or CHF. I like Australia’s healthy economy, 19% of which is mining-related and feeds Asian demand.
Lastly, Ian writes:
As I am a survivalist, I put the greater emphasis on surviving, than on getting rich, and that may be evident in my choice of investments below.
50% grazing land in a low-population-density region. I’d choose grazing land over farmland as there is a reasonably high possibility of very high costs for diesel and fertilizer [in the future], which would adversely impact more so on farming than on grazing. I would also have a good supply of stock (i.e. preserved food etc) kept there, on location.
30% Gold. This is the store of wealth. It’s the bridge that gets us from here to there. I’d keep small denominations that could be used for trading purposes. 10-gram and 25-gram pieces would be my choice.
10% silver. My reason is similar to that for gold. It also diversifies the precious metal portfolio. Again, I’d keep small denominations suitable for trading. 25-gram and 50-gram would be my choice.
10% Cash. Mostly in interest bearing deposits that I can easily and quickly get at. I’d spread it between three different banks in order to spread risk in the event of a bank crash. I’d also keep some cash on hand (about $10,000) at all times as well.
Cash is what is needed in an emergency — and that’s what it’s for.
Well, that’s how I’d do it. Basically it’s a case of, prepare for the worst.
Your Fellow Reckoners,
for The Daily Reckoning