Archive for July, 2009
Permanent Portfolio Questions from the Early Retirement Forum
Jul 23rd
Over at the Early Retirement Forums, a thread was started on the Permanent Portfolio. I posted a long response to several questions at the time and thought I’d reproduce the reply here as it answers questions I also receive at this site and at the Diehards investing forum.
Common questions are:
How do I backtest gold prices before 1970?
I’m worried about inflation and don’t want to rebalance out of my gold which has done well. Why is this a bad idea?
This portfolio looks like it’s for Doomsday scenarios only. Why should I use it?
What’s the story on the Permanent Portfolio Fund (PRPFX)?
What’s the story on Harry Browne’s simplification of the portfolio idea later?
Why is the Permanent Portfolio allocation different from other asset allocation approaches?
The US is going to default on their debt so I want to own other currencies instead. Is this a good idea?
The portfolio idea is getting a lot of attention. Is that a sign it’s going to blow up soon?
I answer these questions below:
Permanent Portfolio – UK Style
Jul 20th
An article in the Motley Fool UK edition looks at the Permanent Portfolio from the British perspective. Instead of US Treasuries the author used UK Gilts (UK Treasury Bonds) and found that the portfolio worked just as well for UK residents as it does for US citizens:
So, for the period from 1972 to 2008 the Permanent Portfolio method delivered the same compound annual growth rate (CAGR) as the equity portfolio but with none of the eye-watering falls. This assumes of course that you rebalanced your portfolio to 25% in each asset at the end of each year.
In fact, this method only experienced two minor down years in 1994 and 2001. In times of major crises, such as the early ’70s and the last two years, gold has proved to be far more effective than fixed interest at boosting returns and maintaining wealth.
I get questions from time to time about implementing the portfolio ideas for non-US residents. But I readily admit my exposure to overseas investing options are limited. However, Browne’s advice generally was to use asset classes based on where you live. Meaning cash in your local currency, bonds from your own government and stocks focused on your home country. Gold is country neutral and should be stored securely (preferably outside of where you live for geographic diversification – although this is not always possible). This author’s research seems to suggest Browne’s advice works as advised at least for UK residents.
What’s most interesting is seeing how his chart of returns for the UK compares to those of a US investor. Notice how the returns fluctuate in relation to the activity of the British economy as it moves separately from that of the US economy (UK stocks may be doing quite well, but US doing poorly. Bonds may be doing great in the US, but poorly in the UK. Etc.). Also notice how the portfolio has typically been able to exceed inflation and provide real returns through some really rough patches for the British Pound.
This is the main reason why non-US residents want to concentrate more on where they live. Their local economy could be booming while the US is in a bust or vice versa. If you live overseas and invest too heavily in US bonds, US Stocks, US Dollars, etc. you could find that the movement of the portfolio is not matching the conditions you are experiencing locally.
Just some food for thought for all of those out there wondering whether the portfolio ideas may apply to non-US investors.
Salsa Bomb
Jul 15th
I took a trip recently and had to deal with airport security which is always a pleasurable experience and just gets more pleasurable each year.
On the trip out I had a 6 oz. tube of toothpaste taken. Presumably it was too much for my dental care needs. Yet, five 2 oz. tubes of bug repellant (10 oz. total) were perfectly fine and were left alone.
On the trip back I had two 133 ml bottles of Salsa that were over the 100 ml limit for carry on and had to be checked (or taken by the TSA for them to enjoy later?). I suspect they are major ingredients in a Salsa bomb or something. I asked the TSA thug this time what would happen if I had three 100 ml bottles in the bag instead of two 133 ml bottles. She said that would be fine.
“So,” I said, “carrying 300 ml of liquid in three 100 ml bottles is OK, yet carrying 266 ml of liquid in two 133 ml bottles is bad. Does that make any sense?” The mindless goon just shrugged her shoulders in that “I’m just following orders” kind of way.
Now, I’ve been involved in the physical and computer security field for over 20 years. These security precautions being imposed by the TSA are a complete and total joke. They aren’t for security, but to intimidate and train American citizens to put up with this petty tyranny and control in their lives. The rules don’t make sense because they’re not designed to make sense. They are designed to show people who’s in control. That’s it.
Most airports have thousands of employees making minimum wage that are easily open to bribery to smuggle in any manner of weapon or bomb onto a plane if desired. From store clerks, maintenance crews, fueling crews, baggage handlers and even TSA agents themselves. Disarming the passengers and forcing them to go through humiliating security procedures is not only ineffective, but likely makes everyone on the plane less safe.
In fact, the most dangerous place in the world is an airplane. You’re confined in an aluminum tube, surrounded by flammable liquid, being pushed through the air by fire breathing engines miles in the sky and hoping the pilots can find the tiny air strip a few thousand miles away during all weather conditions. Yet, that’s the safe part.
The unsafe part is knowing that all it takes is one guy who conned the system and got a weapon onto the plane. In that situation, everyone on the aircraft is toast because they have limited ways to defend themselves.
Lastly, how pathetic must our foreign policy be that we anger people so badly that we need to restrict, down to ounces, how much liquid material people carry on a plane? Further, if the difference between a plane being terrorized is measured in ounces of liquid, what is the reality that airport security can even prevent such an attack even if they wanted to do so?
The terrorism bogey man has served our government very well. How sad.