The Permanent Portfolio, Investing, Finance and Random Thoughts.
Archive for year 2008
How Long to Recover from Losses?
3 years ago
by Craig Rowland
in Investing
Risk and reward go hand in hand. The more reward you expect, the more risk you are taking. This has always been true and always will be true.
But with risk comes the possibility of losses and avoiding large losses in a portfolio can be just as important as reaching for big gains. The way the math works, large losses do a disproportionate amount of damage to a portfolio (e.g. a 50% loss means you need to earn 100% just to get back where you started).
If you are curious about what kind of returns you need to recover from a serious portfolio loss I recommend you consult this handy table:
This is just some food for thought about consequences of investing risk. Understanding risk is a critical component to developing an investment strategy you can stick with when markets aren’t going your way.
Time to Rebalance?
3 years ago
Economist Robert Higgs comments in the following piece about the prospect of inflation in 2009 and beyond:
The Fed versus the Banks: Who Will Blink First?
I have never been inclined toward touting doomsday financial scenarios. I raise the possibility now only because, as I consider the situation portrayed in the graph of excess reserves linked above, I am unable to foresee how the Fed and the Treasury can navigate through these treacherous waters – waters that their own previous actions have whipped to a foam – without creating terrible financial and economic harm. If the dollar survives the ministrations of Bernanke, Paulson, Bush, and the Obama gang, its survival will be something of a miracle.
Earlier in 2008 inflation fears were the bogeyman. Oil was at $150 a barrel (it’s now $40). Gold hit $1000 an ounce (it’s now in the $800′s). And the Dollar was at record lows against the Euro and other world currencies (it recovered greatly). The markets were sure that inflation was coming on strong.
Ahhh, but Fall 2008 came and so did the popping of the Real Estate bubble. This caused a massive destruction of paper wealth that rippled through the financial markets taking out many large banks. By December, Long Term bonds (a powerful deflation shield) swapped places with gold, commodities and other inflation hedges for being the winning asset of the year. The US Dollar shot up in value at a rate never seen against the Euro. Deflation was on everyone’s mind and Long Term bonds proved their mettle as they powered ahead with 30-40% gains. This boost erased almost all market losses in the Permanent Portfolio strategy during the October/November stock crash.
Who would have thought that we’d start 2008 with the prospect of inflation only to end the year with our illustrious central bankers scrambling to prevent an all out deflation? The markets are like that though. Moody. Random. Unpredictable.
But what should we do now?
The Variable Portfolio
3 years ago
Harry Browne advised that you should invest the money you can’t afford to lose in the Permanent Portfolio strategy. This strategy, as discussed in his books and on this site, provides stable returns with low volatility year after year with enough diversification to protect against large losses of capital. It’s boring, yet profitable.
But what if you think you can beat the market? What if you want the excitement of stock trading? Suppose you have some money you can afford to lose? What to do? Simple: You want a Variable Portfolio.
The Variable Portfolio is for speculation and is done with money you can afford to lose. This is money that if you were to wake up tomorrow to find it gone it wouldn’t affect your retirement plans, children’s college savings, home down payment, etc. It’s money that you’re willing to gamble on losing or striking it big.
