The Permanent Portfolio, Investing, Finance and Random Thoughts.
Archive for May, 2009
Investing Myths: Do Stocks Always Beat Bonds?
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
by craigr
in Permanent Portfolio
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?
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.
A free lunch?
Since I’m on the subject of criticisms at this point, let me add another thought:
If an investment advisor is suggesting something is a free lunch, you are probably going to end up with food poisoning after eating it.
Sour Grapes…
The Permanent Portfolio allocation sometimes gets criticized for not following standard investing dogma. One critic stated:
Why not wonder why none of the financial authors or academics endorse it?
Because they’re too busy defending their own pet portfolios and theories. I’ve seen plenty of bad advice from financial authors and academics. And the thing is, they will never admit they are wrong no matter how much money they lose for people who listen to them.
In fact, last year I disposed of a pile of investment books that were chock full of bad advice. They were going to the recycler because I felt it better they be turned into toilet paper than have them wreck the hard earned savings of someone who happened to read them.
Fundmentally I’m an index fund investor. Harry Browne’s advice has many aspects to it that differ somewhat with what many people read from other index fund authors and academics:
- He advocates fixed allocation percentages with rebalancing bands instead of altering stock/bond mix as one ages.
- He advocates using gold in the portfolio for inflation protection instead of Treasury Inflation Protected Securities (TIPS).
- He advocates using Treasury Long Term bonds in the portfolio instead of short/intermediate bonds or the Total Bond Market index.
- He advocates only holding US Treasury bonds to avoid credit risk.
- He advocates holding a good amount of funds in cash to buffer during recessions.
However there are similarities with what many index fund authors and academics state:
- He advises using only index funds for the stock allocation.
- He advises to never try to time the markets.
- He advises that the future is unpredictable and you should ignore market prognosticators.
- He advises to “stay the course” and stick to your rebalancing bands no matter what you think may happen in the markets.
- He advises to have an investment plan so you can deal with market uncertainty and not have your money run your life because you are worrying about it all the time.
Overall I’ve never seen anything in Harry Browne’s advice that I would call “bad”. His advice may be conservative, but it’s not going to get someone into big trouble.
When I read posts on the Internet that criticize Harry Browne and the Permanent Portfolio I have to ask why? Because he was right? Because he advocated a portfolio allocation for many years that was basically unchanged? Because he allowed people to invest and earn acceptable returns with low risk? Because gold sometimes outperforms stocks in a diversified portfolio when academic theory says it shouldn’t? Because people who took credit risk on their bonds instead of owning Treasuries weren’t rewarded as they thought they should be? Because a portfolio that equally weights different assets can match the returns of a conventional stock-heavy allocation with significantly less risk and volatility?
Their criticisms basically amount to: “I don’t care that the portfolio allocation works. All I know is that these academics and authors say it shouldn’t, therefore it’s bad.”
Sounds like sour grapes to me.
