A portfolio for all seasons – Does it make sense?

Abstract

There have been a number of literature and articles which claim that investing does not need to be laborious, and that by maintaining a fixed investment mix in a so-called “Permanent Portfolio”, the portfolio can yield good investment returns in all market situations. Although the authors of the various books and literature advocated investment mixes and offered practical implementation guides which were slightly different from one another, the basic idea remained the same. The basic idea is that instead of trying to time the ups and downs of the markets, an investor can make use of a permanent portfolio and gets excellent returns in a low risk portfolio in almost all market situations. In this paper, we will look at the performance of a permanent portfolio using an Asian stocks component instead (the Hong Kong Hang Seng Index) and evaluate the portfolio performance from a different perspective based on annual, three-year, and five-year returns over the last fifteen years. We also set out to extend the investigation by decreasing the cash component of the portfolio to see if the performance of a permanent portfolio can be further improved. The result of the research indicates that the permanent portfolio significantly outperforms an all-stocks portfolio based on the Hong Kong Hang Seng Index and it makes a good portfolio for investors who want to keep investing simple and non-labor intensive. Besides, a permanent portfolio based on a lower cash component, while the other three components were kept in higher equal proportions, was found to contribute to higher returns and, more importantly, it did not undermine the desirable features of a permanent portfolio.