The Bulletproof Portfolio: Buy, Hold and Grow

The Permanent Portfolio

The term Permanent Portfolio was first coined by Harry Browne in his book entitled
Fail-Safe Investing. In order for safe and steady investing, he illustrated that the
portfolio should provide diversification; be simple and not require a lot of
maintenance and allow one to grow and protect his money.
Brownes Permanent Portfolio (PP) investment strategy develops an allocation plan
based on the economic cycle analysis which separates into 4 cycles namely: Growth,
Inflation, Deflation and Recession.
At any time, the economy will be in one of these phases transitioning from one to
another. The PP is a passive investment style that does not attempt to predict when
these phases occur. Instead, it holds specifically chosen asset classes that respond
well to these cycles no matter when they happen or for how long. The chosen assets
include:

25% Stocks (S&P 500 Index Fund): To capture the full market
returns available and provide a strong return during times of prosperity.
25% Long Term Bonds (US 30 Year Bonds): As long term bond
prices will increase rapidly in value during deflation.
25% Gold (Physical Gold Bullion): To provide strong protection
against a falling currency during inflation.
25% Cash (Treasury Money Market Fund): As no particular asset
class is going to do well in a recession, cash in a Treasury Money Market
Fund acts as a buffer for losses while the markets adjust during these
relatively short times of underperformance.

This model also readjust the asset classes back to 25% after each year to ensure that
regardless of the economic situation, the portfolio would be protected against major
losses.
Our Hypothesis
The PP seems legitimate and hedges against different economies cycles. We
replicated the analysis in Singapores context and altered certain factors to attempt
reducing the portfolios diversifiable risk to a minimum and to maximize returns.
We re-created the PP with the Straits Times Index (STI) - Equities for Growth, 10Year Government Bond (3.75 Coupon) Bonds for Deflation, Gold Gold for
Inflation and 1-year Interbank Rates Cash for Recession, and refined the analysis
by including dividend payouts by SPDR STI ETF each year and back-tested the theory
for 10 years. We then altered some factors and devised alternative strategies to
analyze their effects on our returns.
Our Analysis*

Our base PP used for comparison yields $2,000,343, up by 100.03% from the $1
Million initial investment. This supports the authors analysis that the PP works in
providing substantial real returns.
Strategy 1: Maintain the PP, but add REITs (5: STI, Bonds, Gold, Cash, REITs)
Since Real Estate Investment Trusts (REITs) are also considered low beta stocks and
have high dividend payouts, we included FTSE REIT into the PP. Cash dividend
payouts are added to Cash and readjusted at the end of the year to 20%.
Our results yield 109.59% ($2.09 Million), a 9.57% increase from our base PP. This
shows that it is possible to create a further diversified portfolio with 5 asset classes
which offers lower risk but higher returns than the PP.
Strategy 2: Remove Cash (3: STI, Bonds, Gold)
The general idea of investing is to beat inflation and keeping ones money in the bank
with miserable interest rates however is no way close to protecting the value of his
money.
Hence, we took out Cash and split the initial investment among the other 3 asset
classes. Dividends yield from STI and Bonds are reinvested into the 3 asset classes at
the end of the year. The results yield positive, with a total portfolio growth of 135.47%
($2.3 Million).
Strategy 3: Maintain PP, remove Cash, add REITs (4: STI, Bonds, Gold, REITs)
We found earlier that removing Cash and adding REITs in each situation,
independently, increased the returns of our portfolio. Hence, we decided to do both.
The analysis returns a 136.25% ($2.36 Million), the highest of all permutations we
have considered. This suggests that replacing cash with REITs in the PP may reap
higher rates. However, as we lack information to compare the exact beta of REITs with
that of Cash, the relative riskiness of this option is questionable.
Since we have mined all the data for analysis, we decided to analyze the returns of
the investors who really want to sleep and do not readjust their portfolios at the end
of each year. We found that by just leaving the portfolio untouched, one could yield a
90.83% ($1.9 Million) with a compounded annual rate of returns of 6.67%.
Summary
Portfolio
Permanent Portfolio (PP) - Singapore
Permanent Portfolio with REITs
Permanent Portfolio without Cash
Permanent Portfolio without Cash + REITs
Permanent Portfolio without 25% Readjustments
The Bulletproof Portfolio

Return
s
100.03
%
109.59
%
135.37
%
136.25
%
90.83%

Join the Ms Teh Hooi Ling, Mr Sean Seah and NTU-IIC Research and Education team as
we venture into exploring different variations to the Permanent Portfolio.
Date: 26th September (Thursday)
Time: 1845 2130
Venue: LT 4
Secure your seat now: http://goo.gl/0OgGwf
*Visit (WEBSITE) to view the authors full analysis.