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The Best Asset Allocation Ever? The UK Permanent Portfolio

As a financial adviser you get judged on many metrics but chief among them is portfolio performance. Which client would want a financial adviser who routinely looses them money?

Depending on what you read asset allocation determines between 40%-100% of portfolio performance (The CFA institute has a great article on this over here). So whichever way you spin it, it’s pretty important.  Modern Portfolio Theory and the “Efficient Frontier” have left most of us with a sliding scale stock/bond fund split. 80/20 for people under 30 and the reverse for people well into their retirement.

We’ve left individual stock picking to the brave and clueless and yet when events like the financial crisis happen and clients loose 30-40% of their portfolio value in a matter of weeks we wonder if it was wise to put such a large amount of our portfolio in one asset class.

After all in our globalized world equity is equity. Is Lloyds Banking Group really uncorrelated with Credit Agricole. Enter the Permanent Portfolio devised by Harry Browne.

If I told you there was a portfolio that from 1972 to 2011 returned 11.4% annually, only had 3 down years (the worst being 4.8%) and had consistently beaten inflation would that make you sit up straight in your chair? How about the fact that during the worst financial crisis in the last 80 years 2008/2009 the portfolio returned 5.9% and 8.9% respectively while equity rich portfolios plunged.

Sure, past performance is no indication of future performance and I am sure I could back test any crazy portfolio mix to get a 1000% return but when you think about it logically the Permanent Portfolio has strong foundations.  Let’s dig in….

Permanent Portfolio

The portfolio holds an equal mix of UK equity, long dated Gilts, gold and cash. The portfolio is designed to take advantage of all the major cycles of the economy. Equity for prosperity, long dated gilts for deflation, gold for inflation and cash for a recession/depression.

At any one time the economy will be in one of these four phases ensuring at least a quarter of your portfolio is in the ascendency. Conversely, if there is a major stock market crash only 25% of your portfolio is likely to be affected.

What is remarkable about the Permanent Portfolio is its steady performance over the last four decades. It typically beats inflation by 3-4% without wild swings up and down. On a pure return basis it slightly under performs the traditional 80/20 equity bond split by about 0.3-0.6% but with a lot less volatility and down years.

You don’t get huge crashes and large upswings. It is steady and consistent. Despite these facts there are many objections to portfolio make up. Let me cover the three most common.

Question 1 – 25% Gold! Are you nuts?!?!

The premise of the Permanent Portfolio is that nobody knows what is going to happen in the future so you should be equally prepared for each outcome. For all we know a 70’s style economic malaise might be around the corner. Gold was a great asset to hold in the 70’s.

It’s true that gold doesn’t produce any dividends but it has been a store of value used for millennia. Why do you think central banks store billions in their vaults? What is special about gold is that it tends to appreciate in inflationary periods (few assets do that) and you can even use it as legal tender.

Question 2 – Where is the international equity allocation?

The portfolio is designed to meet inflation plus 3+% in your country of residence. If you add international stocks you start being subject to the economic conditions in a far away land in which you do not live. That being said many proponents of the Permanent Portfolio have a second allocation where they include some international stocks to take advantage of emerging markets or the biggest economy in the world (USA).

 Question 3 – How do I construct such a portfolio?

Simply index and leave it be. Here are a few options based on ease and expense.

UK Equity – Vanguard FTSE UK Equity Index Fund

Long Dated Gilts – Vanguard UK Long Duration Gilt Index Fund

Gold – EFT Securities – Physical Gold ETF

Cash – Bank savings account

If you want to learn more (and there is a lot more to learn) I encourage you to pick up a recent book about the Permanent Portfolio or visit the forum. If you still have doubts then read these two amazing forum posts where Modern Portfolio/Efficient Frontier supporters debate with Permanent Portfolio proponents. The posts are here and here. I’ve been studying the portfolio for the last year and I’ve been very impressed with its theoretical foundations and real returns.

3 Elements of a Great Risk Profile Questionnaire

 questionWhat makes a great risk profile questionnaire? With so many opinions and vested interests its challenging to know what to ask your clients. The FSA certainly has their opinion, so do researchers and clients. We have our opinion and it’s not just a laundry list of Pocket Risk’s features. Below we take a look at the questions you must ask your clients and what you should expect from your software. 

1. Give your clients real life examples

It will not surprise you that many people find managing their finances to be a boring task. Financial matters are presented in a dry and abstract manner. This not only runs the risk of boredom but confusion and error. Real life examples in a risk profile questionnaire bring the subject to life and allow you to glean new information. Take the two questions below as an example…

Question A – Would you sell an investment you bought that lost 15% of its value in one year?

Question B – Would you sell a buy-to-let investment property that you bought if it lost 15% of its value in one year?

Mathematically speaking these two questions are asking exactly the same but the answers will vary wildly depending on a client’s opinion about property investment. Real life examples in risk profile questionnaires unearth insights abstract questions cannot. They help you better understand your clients.

2. Give your clients a real choice

Almost all software based risk profile questionnaires give clients a multiple choice option to answer questions. Multiple choice answers are a good thing. They ensure consistency and objectivity when measuring someone’s profile. However, if a questionnaire does not give a wide range of possible answers there is a risk that clients could be shoehorned into a response that doesn’t reflect their true feelings.

Great questionnaires give clients a wide range of possible answers. We recommend five as minimum for most questions but have opted for seven on most of our questions. Any more than seven options and clients will find it difficult to choose as they become overwhelmed with possible responses. Too much choice can be a bad thing.

3. Easy to use 

“Easy to use” is a commonly used phrase to describe software but rarely do the words meet reality. Easy to use can mean many things. Here is what financial you should look out for:

Easy for You – Is it easy to set up and manage? Can you use it and collaborate with colleagues without reading a 10-page manual? If it’s a paid product do they get a free trial?

Easy for Your Clients – Can they complete the questionnaire without having to email you for help? When you discuss the final report with your clients, is it easy fir them to understand?

The software should do its job and get out of the way so you can focus on your business. For this to happen it must be usable.

4. Bonus: Fun

Risk profiling is one of the first touch points clients have with a financial advisory firm. This should be a positive experience and set a tone for the rest of the relationship. It could just be that I am a finance geek but I see no reason why the process cannot be both informative and enjoyable. Once you have ticked all the necessary boxes (such as compliance, usability and robustness) why not shoot for something clients will love to use.

Should Women and Men Have Different Risk Profiling Questions? [UK SURVEY INSIGHTS]

When it comes to risk it’s assumed that men generally like taking more risk than women. Some call it biology others believe it’s simple male bravado. Regardless of the reason these assumptions should be challenged and conclusions drawn based on fact.

Once we have these conclusions we can begin to think about risk profiling from a gender perspective (if the data warrants it). Its naive to assume there are no differences between women and men and perhaps we can give better advice if we recognise these differences. However, before we go down that rabbit hole let’s first find out if there really is any meaningful disparity.

We commissioned AYTM to run a survey of 400 people in the UK from a cross-section of society to find out how they feel about risk. 55% of the respondents were female and 45% were male. Ages ranged from 18-65 and income from £0 to over £320,000.

 Capacity for Loss

To discover people’s capacity for loss we asked them three questions covering their current income, expected future income and how they would react if they suffered losses. Given a series of multiple-choice answers we scored the results from 0-10.


According to our survey women have a slightly lower capacity for loss compared to men. 4.6 vs 4.9 (out of 10). Since capacity for loss is often a product of income (and women on average earn less than men) this is not a surprise.  However, given that the average woman earns 15% less than her male counterpart (for the same job) you might have expected women to average out a bit less at 4.2 (15% off 4.9).

 This is not the case, maybe because women have fewer expenses than men but that’s just conjecture. What is clear from our survey is that there is very little difference between women and men when it comes to their capacity for loss.

 Risk Tolerance

 To discover the differences between women and men when it came to risk tolerance we asked 15 questions drawn from the Pocket Risk questionnaire. Again we had a series of multiple-choice options, which we scored from 0-10.


This time the difference between women and men was clearer. On average women have a lower risk tolerance than men 3.9 to 4.4 (out of 10). Trying to explain why there is this difference is troublesome. The financial advisers I speak to inform me, that men don’t want to appear cowardly when completing risk profiling questionnaires. They answer what they think they should feel rather than what they actually feel. If this is the case then it is reflected in the data.

Need to Risk

 Finally we asked one question on a person’s need to take financial risk. A single question could never be definitive but we added it in to see what we could learn. Again we had a multiple-choice question, which we scored from 0-10.


Women and men scored similarly, 4.4 vs 4.6 (out of 10) with men being slightly ahead. Why do men feel like they need to take more financial risk when on average they live less than women? It could be that they see themselves as the provider of the family and want to take more risk to ensure their families are well taken of in the future. A deeper survey that looks at long term life goals and male psychology might hope to solve this puzzle.

Conclusion: Should Men and Women have Different Risk Profiling Questions?

The survey results are clear. Men have a higher propensity for risk than women. Quite interesting however, the biggest difference is in attitude rather than capacity for loss or need. Therefore, it’s the psychology of men rather than how much money they have or how much risk they need to take that sets them apart from women. It’s all in the brain. So what action can we take with this insight?

Firstly, we can’t start generalising male and female traits. The data above is based on averages and each individual has a different case. I don’t believe we can start asking women and men different questions. However, given the tendency of bravado to appear in men, you should closely examine their answers to ensure they get an accurate reflection of their clients’ true risk profile. Software for all its graces cannot pick up on all the nuances of human communication.