American or European Permanent Portfolio?

Since 1999, the American permanent portfolio did not have one negative year and averaged 6.9% per year, while the European permanent portfolio had 3 negative years and averaged only 5.4% per year. However, for a European, the European permanent portfolio did give more stable as well as higher returns than the American permanent portfolio.

The results of the American permanent portfolio in U.S. dollars are excellent. While there has been a dotcom and credit crisis passing by, the portfolio did not return one negative year and gave a 10 year total return of 95%, averaging 6.9% per year (Table 1). An American, with an American permanent portfolio, had very stable and respectable yields and can be satisfied.

Table 1: American Permanent Portfolio Returns 1999-2008

Source: Craig's Crawlingroad.com

But suppose that you invested in an American permanent portfolio as a European from a Eurozone country, how were your results then? Well, obviously you do your conversion to euros to see what your true return was from your American permanent portfolio.

In 1999, the stock market was in booming times. America took the world on an internet ecstasy ride and the world looked suspicious at the brand new euro currency that conservative Europe had introduced earlier that year. The dollar rose 17% in value in one year. The American permanent portfolio returned 4.2% but because the dollar was worth so much more, you earned as a European 21.9% with your American PP (PP = Permanent Portfolio).

At the start of the dotcom crises in 2000, the US stock market takes a hit of -10.6%, but an American had a respectable 3,2% with his permanent portfolio. The dollar continued to rise in value for the year and thus as a European you had 10.9% with the American PP. The same happens in 2001. The US stock market takes a hit of -11%, the American PP still returns a decent +0.9%, but you get 6,6% because the dollar goes, for the 3th year in a row, up. You start to think that you were a genius taking an American PP instead of a European PP but your luck is about to turn soar.

In 2002, the third year into the crisis the US stock market is again slammed to the ground, this time with -21%, but now the dollar also drops seriously in value. The U.S. permanent portfolio did again a great job for an American, protecting his capital in difficult times, and was up an admirable +7% for the year. However, because the dollar drops in value by -15% you were, as a European, deep in red ink. Instead of having +7% for the year like the American, you have a loss of -9.4% with your American PP .

In 2003, the first year of early recovery after the dotcom crisis, the American had a satisfactory 14%. But because the dollar drops again in value by -17%, you are having with your American PP a loss of -5.9% in Euro terms. The same happens again in 2004. The dotcom crisis is now fully behind us and an American again has a decent return of 6.6%. But as the dollar drops another -7%, you are having a loss of -1.3% for the year.

In 2005, after 3 years of negative yields you finally get payback time. The dollar rises 16% in value. The American has a much stronger currency as well as a return of 8% with his PP and you have with the American PP 25.7% in euro terms, a jackpot!

But 2006 and 2007 turn out to be losers again. While real estate and stock markets are peaking out, the American is still protected with solid returns of +11% and +12%, but your returns are -0.9% and a meager +0.6%. In 2008, during the biggest credit crisis in 80 years, you get your sweet revenge and you have instead of +1.8% for an American, +7.8% in euros thanks to the dollar that is going up again.

After your 10 year roller coaster experience you notice that your capital did not grow by 95% like an American experienced. Instead it only grew by 64% in euros. Because on average the dollar lost -1,7% per year in value, your average return is not 6,9% per year but only 5,1% per year.

Here a table that compares returns for the American PP in euro versus the European PP:

Table 2: American versus European permanent portfolio

in euro, 1999-2008

The American permanent portfolio, expressed in euro, was much more volatile than the European permanent portfolio. Converted to euros the American PP gave very high yields of more than 20% (1999, 2005), but also years with more than 5% loss (2002, 2003). Even less desirable, in good times you sometimes have red ink at the end of the year (2003, 2004, 2006), while in bad times you get exceptional positive returns (2001, 2008).

Euphoric returns in times of crisis and depressing yields during periods of prosperity. Not good for your sleep. In other words, the permanent portfolio is not working as it should if your assets are invested in other parts of the world.

It is not very important that the European PP turns out to have higher total returns in Euro than the American PP. This only depends on the exchange rate and can change very quickly. What is important is that an American PP gives you very different returns as a European citizen than as an American citizen. Instead of having no negative years you end up with 4 negative years with losses as high as -9.7%. The European permanent portfolio kept your purchasing power more stable with only 3 negative years and a maximum loss of -1,6%.

As the inventor of the permanent portfolio Harry Browne said, you want to have the assets from your own country, where the same currency is used, so that the stable returns from your permanent portfolio are not destroyed by exchange rate fluctuations.