By Mr. Propwise
In this article I interview Alvin Chow, author of the recently published title, The Singapore Permanent Portfolio. We delve into the details of the Permanent Portfolio framework, a tested and simple way to invest with lower volatility, and how property investing fits into it.
What is the basic idea of the Permanent Portfolio?
There are four economic cycles and different asset classes perform well in some and poorly in the rest. Hence, Harry Browne devised a portfolio that is equally exposed to these economic conditions. For example, stocks tend to do well during periods of economic growth, commodities (including properties) during inflation, bonds during deflation, and cash during a tight-money recession.
Instead of guessing which cycle the economy would move into, which most people do not get right, the portfolio is divided equally among stocks, commodities, bonds and cash, at a 25% weightage each.
As the economic cycle changes and each asset class performs different, the proportion will move away from this equal 25% weightage. So for example the weight of stocks may increase to 35% if stocks go up and that of bonds falls to 15%.
This would be an opportune time to sell some stocks, which had gone up in price, and buy some bonds, which had gone down in price. Over a period of time, the Permanent Portfolio investor brings each asset class to a 25% weight again. In doing so, the investor locks in the profit and redistributes the risk evenly by not over exposing the portfolio to a particular economic cycle.
Tell us about yourself Alvin, and what motivated you to write this book
I am passionate about investments and have been researching many strategies and approaches about how I can invest and grow my money. I tested many strategies with my own money and I found that each strategy has its strengths and weaknesses. What mattered was to sticking to an approach that suited my personality and objectives. Over the years, I have documented my investment journey on BigFatPurse.com and in 2014, I started educating the public about investing.
Through my encounters with different strategies, I have not found something as unique as the Permanent Portfolio. It is the only strategy that focuses on limiting the downside. We’ve all heard of the cliché: “take care of the downside and the upside will take care of itself.” In reality, I doubt most investors think about the potential losses during a fast rising stock or property market. Blinded by greed, they invest at high prices and because they never expect to lose money, any significant drop in their portfolio would result them in panic selling.
I believe most investors are unable to overcome the greed and fear in investing and having a strategy that has a low volatility will allow them to sleep well at night and not make foolish investment decisions. However, not many people are aware about the Permanent Portfolio and no salesmen will promote it because there is negligible money to be made from it. Hence, I decided to share about it in public talks and write a book to increase the awareness.
What are the most common mistakes people make when they invest?
Most investment mistakes are behavioral in nature. Besides the herding instinct of buying high and selling low mentioned previously, I think one of the major issues is overconfidence.
Overconfident investors believe they can do better than the professionals and hence they manage their own money. There is nothing wrong with that line of thought but it requires honesty to determine where one really stands in the competitive financial markets. Who are you competing with? Do you have an edge over the others? How well are you doing investing by yourself? Most investors do not track their investment performance and they continue to invest in denial, even though they may be losing money in the long run.
The behavioral explanation is that they are actually seeking pleasure from the investment markets and they can afford to lose.
What sort of investor is the Permanent Portfolio suitable for?
Investors who have a low tolerance for large paper losses yet want to invest their money by themselves.
Permanent Portfolio investors must also be patient because this is a long term strategy and not expect to see returns within days, weeks or months. As a rule of thumb, they should commit to the Permanent Portfolio for at least 10 years.
Investors should also understand that it is the overall portfolio returns and volatility that matter. They should not focus on one asset class and get affected by its volatility. I had a few readers who sounded their concerns when gold price came crashing down in 2013 despite their Permanent Portfolio having less than 10% paper losses. Investors should learn to look at the forest and not the trees.
What percentage of assets should an investor devote to the Permanent Portfolio?
This is dependent on individuals. Harry Browne, the creator of the Permanent Portfolio, suggested to keep one’s retirement nest egg in it and whatever excess can be put to more speculative investments. Since this is a long term investment strategy, it makes sense to use it for the purpose of retirement planning.
Each Singaporean would already have his or her CPF contributing some retirement income and one doesn’t need to build a nest egg from scratch. One should determine the amount of income that is needed during the retirement years and work out how much more to top up over and above what CPF can provide. And using a 4% drawdown of the Permanent Portfolio per year during retirement, how much capital does one need to set up the Permanent Portfolio now, projecting a slightly conservative return of 5 to 6 percent per year during the investment lifetime.
As there are a few variables we have to deal with, it is a different situation for each individual.
How difficult is it to set up and maintain the Permanent Portfolio?
Permanent Portfolio beginners would need to pick up some knowledge about Exchange Traded Funds (ETF) and the characteristics of each asset class. For Singapore investors, my book The Singapore Permanent Portfolio would come in handy. In addition, one of the instruments of the Permanent Portfolio is the Gold ETF and investors need to pass the Customer Knowledge Assessment before he orhcan invest in it.
Trade execution is very simple. An individual would be able to set up his Permanent Portfolio with just one stock brokerage account that facilitates the access to the SGX counters.
How does property investing fit into the Permanent Portfolio concept given it is not one of the four asset classes? Does it discourage investing in property?
Property is taken out of the Permanent Portfolio due to two reasons, in my opinion – it is important to state that these are not Harry Browne’s thinking. First, the quantum of a property is large and it is almost impossible to sell part of a house to rebalance the portfolio. Second, gold is valuable in small quantities and is portable. This means that wealth can be carried more easily than any other types of assets. If a country becomes chaotic due to severe internal problems or even war; properties, together with stocks and bonds, would be very poor investments, while gold would be a very precious and sound asset to have in those times.
Despite singing the praises of the Permanent Portfolio, I do not discourage property investing.
How would you compare the relative attractiveness of investing in the Permanent Portfolio versus investing in property?
Even though the historical return of Singapore property has averaged about 6% per year, the advantage of property investing is the ability to borrow large sums of money at relatively low interest rates which can boost the returns.
A five times leverage would increase the average returns as high as 30% per year. But there is no free lunch. Properties have cycles and one may need to hold it for many years at depressed prices before the economic cycle favors properties again.
I am not sure if most investors have that patience and the tolerance to do so. Otherwise, forgoing higher gains for something more stable like Permanent Portfolio would make sense for some investors.
By Mr. Propwise, the founder of Singapore property blog www.propwise.sg, which aims to help people make better real estate buying, selling, renting and investing decisions.