Saturday, March 21, 2015

Book review - The Singapore Permanent Portfolio by Alvin Chow

Alvin from BigFatPurse is very kind to pass me a copy of his newest book, The Singapore Permanent Portfolio. I've always wanted to know more about the Permanent portfolio, so this comes as a godsend. Why is it named the permanent portfolio? I think I'll answer that question at the end of this post.

The permanent portfolio is an investment idea that comes from US in the 70s, but the idea is that you hold 4 different types of assets in equal proportion (25% each) that will allow you to profit no matter what the economic situation is. There's an asset that will thrive in the growth, inflationary, recessionary and deflationary phase of the economy. Think of it as planting 4 different types of crops that will thrive well in the 4 seasons of the year - spring, summer, autumn and winter. When spring comes, crop A will grow exceedingly well, so you harvest it and use the proceeds to grow more of the other crops. When summer comes, it's crop B's turn to grow very well, so you harvest it and use the proceeds to grow more of the other crops.

It's a fascinating idea - one that allows the investor to dissociate human tendency towards greed and fear when it comes to investing. Think of it as a sort of standard portfolio re-balancing process but with a twist.

The idea is easy enough to follow, and the book succinctly illustrates the ideology behind the permanent portfolio. If that's all that the book offers, then you can easily google it from the internet. What this book offers is something that you won't find in any others - applying the investment idea to the Singapore context. So while the idea of a permanent portfolio comes from US, Alvin's book illustrates clearly how to actually apply it in our local context. What are the 4 assets to own in the permanent portfolio? Where to get them? How to do the re-balancing? All these and more are answered in the book.

For a portfolio that can weather all economic situation, producing reasonable returns with low volatility, as well as minimal work, what's not to like about it?

So why is it called the permanent portfolio? What is the thing that is permanent about the portfolio? Knowing that you have to re-balance the portfolio mix perhaps once or twice a year or whenever necessary, the portfolio allocation of the 4 assets is definitely not permanent. It will vary accordingly to the rise and fall of the 4 asset class. Or perhaps the term is coined because you never have to sell any assets completely? I think I have an answer. It's called the permanent portfolio because this portfolio will stay with you regardless of the bigger economic situation. And you have to keep balancing the asset classes to keep it permanently balanced. It's like dynamic equilibrium - everything is moving so that there's a balance.

Maybe you should read about it and think for yourself why the name of this peculiar idea is called the Permanent Portfolio?


Rolf Suey said...

Hi LP,

Sounds formidable... It's time to look for Alvin for his book... Where to buy...

Biggest Fattest purse soonest...

Must support Fellow uni mates...

Createwealth8888 said...

Marketing title? Snake oil title?

E.g. Dr Michael Leong's book entitled “You First $1,000,000 Making It In Stocks”.

In his forum, he mentioned that his Publisher changed his original title which actually reflected his thought and writing to “Your First $1,000,000 Making It In Stocks”.

Book with such title will help to sell.

But, in his book, there is no mention of how he actually make $1m. Guess. In real world, commercial packaging comes first. LOL!

la papillion said...

Hi Rolf,

You can get it at a 15% discount off the retail price of $19.90, if you go to BigFatPurse site and search around :)

Wouldn't take long to read it too. Can easily finish in 1 sitting :)

la papillion said...

Hi bro8888,

Haha, agree! It's all about slick marketing :) First attract people to it, then we will talk about substance :)

SMK said...

i wonder what happened to those people who implemented the Japanese equivalent of the permanent portfolio in 1985?

la papillion said...


Good and critical question! It's answered in the book. The book talks about someone who backtest this on four markets - US, Euro, Jap and Singapore.

It average 3% per year from 1992 to 2012. Sounds shabby right? But it beats losing 4.2% pa for someone who invested in the stock market during the same period.

SMK said...

And that's precisely my point!
Why be so hard headed about it having to be a domestic market?

la papillion said...

Hi smk,

Wah, impressed! You're right! That's a lesson that I missed completely Haha! I still thought, eh, okay what, getting 3% pa while others are taking - 4.2% pa. I've failed to see then u could have participated in foreign markets when my own domestic market sucks!

Thanks for opening my eyes ;)

Anonymous said...

It's on hindsight after 20 years then you know the Japan market sucks. You will never know when you implement the PP in real-time. 3% is still decent. What if the next 20 years the US market sucks - starting from right now? On hindsight, every thing looks so crystal clear.

la papillion said...

Hi anon,

Good feedback!

I think perhaps a global permanent portfolio will do better job. We can exchange the asset class to cover the major global markets :) some parts of the world must be having some bull market somewhere right? Haha

Alvin said...

Thanks for the great discussions!

Here are my thoughts:

1) Permanent Portfolio is designed to hedge your risk in a specific country. And most of the time it is the country you live and work in. Your job security is tied to the economic activity in the country and hence you diversify the risks across the asset classes that can do well when times are bad. All of us assume some form of geographic and political risks naturally.

2) PP must be set up with equal exposure for stocks and bonds. For e.g., You do not want to have Europe stocks and Russia Bonds. It would have been a double whammy for both in recent years as the countries go through different economic conditions.

3) That said, it is indeed less risky if an investor set up an global PP. There is a Vanguard Total World Stock ETF to do it. However, the challenge is setting up a bond component with global exposure. You would probably need to combine a few ETFs to do it. And that adds complexity for rebalancing the PP.

4) Lastly, a global PP is likely to have a lower overall return. But it is definitely less risky as pointed out in your comments that in case the country you bet on is not going to do well in the future. Well, there is a price for everything.