Do Dividend Aristocrats + The Permanent Portfolio Make the Perfect Match? - Sure Dividend Sure Dividend

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Do Dividend Aristocrats + The Permanent Portfolio Make the Perfect Match?

Published 7/14/14

Author’s note:  This is one of my most favorite articles I’ve written.  The strategy outlined in this article offers investors solid total returns and very high levels of safety.

Former Libertarian presidential candidate Harry Browne created the Permanent Portfolio.  The portfolio consists of 4 equally weighted assets:

Note:  The Permanent Portfolio book covers the portfolio in great detail.

The Permanent Portfolio’s high percentage of gold and short term treasuries is immediately noticeable.   Each item in the portfolio is meant to do well in different economic regimes.  The 4 economic regimes the Permanent Portfolio considers are:

The portfolio equally weights its investment for each economic regime.  So how has the Permanent Portfolio done?  It has performed extremely well over the last 4+ decades.  Since 1972, the portfolio has had a CAGR of 9.3% per year, with a standard deviation of only 8%.


Source:  Crawling Road Permanent Portfolio Historical Returns

Cash & Leverage

The cash/short-term treasuries portion of the Permanent Portfolio can be viewed not as a separate asset class, but as negative leverage.  If you borrow money to invest in stocks, you are leveraging your portfolio.  Similarly, if you only invest a fraction of your available money in stocks, you have reduced your leverage.  The Permanent Portfolio is really 3 risky assets (stocks, long-term government bonds, gold) leveraged to .75 instead of fully invested.

If one invested equally in stocks, long-term US bonds, and gold for the same period (1972 through 2013), your portfolio would have a CAGR of 10% with a standard deviation of 10.3%.


Source:  Crawling Road Permanent Portfolio Historical Returns

Dividend Aristocrats Improve Permanent Portfolio Performance

Dividend Aristocrats have historically outperformed the stock market.  Replacing the stock market portion of the Permanent Portfolio with Dividend Aristocrats significantly improves both portfolio return and volatility.


Risk Adjusted Weights

The equal weights of the Permanent Portfolio do not spread risk among assets in an optimal manner.  By weighting each asset class of the Unlevered Dividend Aristocrat Permanent Portfolio by inverse volatility as opposed to equal weighting, we can further improve upon the Permanent Portfolio while still adhering to the portfolio’s underlying principles.

Gold has historically had a higher standard deviation than long-term government bonds and Dividend Aristocrats.  The Dividend Aristocrats index has been about as volatile as long-term government bonds.  Adjusting for volatility, the Unlevered Dividend Aristocrat Permanent Portfolio has the following weights:

Adjusting the weights of each asset class in the Permanent Portfolio for volatility slightly increases return while slightly reducing volatility.


Final Thoughts

The Permanent Portfolio works by spreading risk across uncorrelated asset classes and harvesting correlation gains by rebalancing annually.  The portfolio has historically done very well.  Replacing the total stock market section of the permanent portfolio with Dividend Aristocrats and adjusting asset class weights for volatility has historically improved the Permanent Portfolio’s return while reducing risk.

The Permanent Portfolio is an excellent option for risk averse investors and retired investors who need to make solid returns on their investments while avoiding large drawdowns.  Large draw downs are significantly worse for investors who are already cashing in their portfolio on a regular basis as it forces you to ‘sell low’.

Special thanks to Ploutos for his excellent article on Dividend Aristocrat Investing (no affiliation).

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