USA Permanent Portfolio with 1-Year Rebalancing Backtest Results
[Quant Investing] Permanent Portfolio (US Stocks) Rebalancing Backtest
In a previous post, we analyzed the basic performance of the Permanent Portfolio devised by investor Harry Browne. In this article, we will conduct an in-depth analysis of the results of applying a 1-year rebalancing cycle to this strategy. We will specifically examine with data how consistent rebalancing affects the rate of return (CAGR) and Maximum Drawdown (MDD).
Permanent Portfolio (US Stocks) 1-Year Rebalancing Backtest Results
1. The Importance of Rebalancing
Rebalancing is the process of returning a portfolio's asset allocation to its original target weights when the value of a specific asset has risen or fallen. The Permanent Portfolio is a strategy that invests 25% each in stocks, long-term bonds, gold, and cash-like assets. Over time, the allocation changes based on the performance of each asset. Rebalancing is an essential process to return this changed ratio to 25:25:25:25.
This process is more than just adjusting weights; it plays a critical role in helping the portfolio maintain its original target risk level. Rebalancing, in particular, has the effect of selling overvalued assets and buying undervalued assets, which contributes to increasing returns and reducing volatility in the long run.
2. Backtest Conditions and Assumptions
This backtest was conducted using the same 10 years of data from August 1, 2015 to August 1, 2025 as the previous post. The initial investment was set at 10 million KRW, and for calculation convenience, the unit values of each asset were also assumed to be in KRW to compare the performance of each portfolio.
In this analysis, we applied a once-a-year rebalancing, where the weights of the four assets (SPY, TLT, GLD, SHY) in the Permanent Portfolio were adjusted back to 25% on August 1st of each year. For comparison, we also compared it to a 'Buy & Hold' strategy, which does not rebalance.
ETFs Used in the Backtest
- Stocks (25%): S&P 500 Index Tracking ETF (SPY)
- Long-Term Bonds (25%): US 20-Year+ Treasury Bond ETF (TLT)
- Gold (25%): Gold Price Tracking ETF (GLD)
- Cash-Like Assets (25%): Short-Term Treasury Bond ETF (SHY)
- The backtest is based on historical data and does not guarantee future performance.
- Taxes and transaction costs were assumed to be '0' for calculation convenience.
3. Backtest Results Comparison and Analysis
The table below shows the 10-year Permanent Portfolio backtest results. It compares the performance of the rebalanced portfolio with the non-rebalanced portfolio.
▲ Permanent Portfolio 10-Year Returns Graph Before and After Rebalancing
| Category | Rebalanced Portfolio | Non-Rebalanced Portfolio |
|---|---|---|
| Final Amount (KRW) | 18,719,431 | 21,374,219 |
| Total Return | 87.19% | 113.74% |
| CAGR | 6.47% | 7.89% |
| Maximum Drawdown (MDD) | -17.75% | -19.41% |
The most striking result of the backtest is that the final amount and return of the rebalanced portfolio were lower than the non-rebalanced portfolio. The rebalanced portfolio recorded a final amount of approximately 2.65 million KRW less than the non-rebalanced portfolio. On the other hand, the risk indicator, Maximum Drawdown (MDD), was -17.75%, a slight improvement over the non-rebalanced portfolio's -19.41%.
This result shows that in the Permanent Portfolio strategy, rebalancing does not always act as an 'Alpha' to increase returns. Instead, it plays a greater role in 'risk management' by reducing volatility at the expense of returns depending on market conditions. Especially during a bull market like the one in this backtest period, where certain assets like stocks (SPY) and gold (GLD) rose significantly, rebalancing can have the effect of cashing in on some of the gains, resulting in relatively lower returns.
4. Conclusion and Implications
This backtest confirms that periodic rebalancing in the Permanent Portfolio strategy does not always mean maximizing returns. The true power of rebalancing lies not in boosting returns but in maintaining the portfolio's balance and maximizing the investor's psychological stability by reducing volatility, even in unpredictable market conditions. This result was the same as the one for rebalancing a Permanent Portfolio with Korean stocks.
For investors who prioritize long-term, stable asset growth without being significantly shaken by market volatility, rather than chasing high returns, the Permanent Portfolio with consistent rebalancing remains a valid and wise choice.
▶Go to the Permanent Portfolio (Korean) Rebalancing article
Key Summary:
In the Permanent Portfolio strategy, 1-year rebalancing is a powerful risk management tool that can sacrifice some returns but effectively reduces Maximum Drawdown (MDD). This is the most reliable way to achieve consistently stable results in unpredictable markets.
The content of this blog is for reference only for investment decisions, and investment decisions should be made under the individual's own judgment and responsibility. Under no circumstances can the information on this blog be used as legal evidence for the outcome of an investment.
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