The Permanent Portfolio, Investing, Finance and Random Thoughts.
Archive for May, 2009
Investing Myths: Do Stocks Always Beat Bonds?
2 years ago
by Craig Rowland
in Investing
There are many myths about investing. One of the most popular myths is that “Stocks always beat bonds.” Therefore, the thinking goes, investors should overweight stocks in their investment portfolio if they want to generate higher returns.
Well, as Harry Browne would have said: “The best kept secret in the investing world: Almost nothing turns out as expected.”
When I was restructuring my investments several years ago and considering the Permanent Portfolio I did quite a bit of my own research. And you know what I found? Stocks in fact do not always beat bonds. Or, I should say, they don’t always beat bonds on your particular time table.
Sure, perhaps if you look back 200 years you can make a case that stocks have a better chance of beating bonds. After all, there is more risk so theoretically there is more reward. But individual investors don’t have a 200 year time horizon. Most don’t have even a 50 year time horizon. For many people their investment horizon before they need that money for retirement purposes is more like 20 to 40 years. When you look at time slices of the market from this perspective it is clear that stocks can in fact lose to bonds in total returns.
Permanent Portfolio Excel Spreadsheet Data
2 years ago
Scott Sutton, a friend of mine, was researching the Permanent Portfolio and wanted to use his own historical data instead of relying on data others have used. He went and researched first-hand the data from Ibbotson and other sources and compiled his own spreadsheet.
Scott broke the data out from periods of 1972-2008, 1978-2008, 1982-2008, 1990-2008 and 2000-2008. This covers a wide range of economic conditions from inflation, prosperity, recession and even some deflation/disinflation.
Scott has been kind enough to share his results with me and now I’m making it available to you.
Please keep in mind that past performance is no guarantee of future results. But, I think what Scott’s data re-confirms is that the Permanent Portfolio allocation has provided a conservative growth with wide enough diversification to have prevented any serious losses through a variety of good and bad economic climates.
Finally, Scott’s data largely matches up with my own findings on the portfolio performance and is nice to have another independently researched source.
Thank you Scott!
Download: Permanent_Portfolio
Does Gold Preserve Purchasing Power?
2 years ago
One of the more controversial holdings of the Permanent Portfolio is Gold. Once you understand what gold can and cannot do you may understand a little better why the Permanent Portfolio holds some of it in the allocation.
Gold is a preserver of wealth that is compact and historically viewed as valuable. It’s not an investment in a traditional sense. If you want growth of your capital you should rely on stock investing and bonds. If you want preservation of capital, then gold can help by protecting you from high inflation or other unexpected events.
Gold in a portfolio is a way to take money off the investment gambling table and putting it away so you can’t lose it easily. Further, a couple attributes of gold that are unique is that it is impervious to political shenanigans which can affect a paper currency and it can be owned in a way so that it is nobody’s paper promise to you. As one gold dealer said: “Nobody ever went to the poor house buying gold.”
These are distinct features that stocks, bonds and cash do not have and is why it is important to hold some gold as part of any investment portfolio. Gold by itself will not grow your wealth, but it has an uncanny ability to protect what you do have when your other investments aren’t doing well.
In terms of protecting from inflation, gold is hard to beat and has a very long track record of preserving purchasing power. Let’s look at some historic prices to see how this works.
