The Permanent Portfolio, Investing, Finance and Random Thoughts.
Archive for October, 2009
Porn and the Permanent Portfolio
2 years ago
You can learn things from the most unlikely sources. When people ask me what it was that got me to start following the Permanent Portfolio I respond with one word: Porn.
Yes, porn. I relate to you the story below that kicked me into gear to re-assess my portfolio strategy and risks I was taking several years ago. This is what got me to discover and start using the Permanent Portfolio allocation strategy.
I was buying some used welding gear off of Craigslist in late 2006(??) and go to this guy’s shop to look at what he had. We strike up a conversation and he tells me that he produces Adult Films but was getting out of the business (his shop had lots of light rigging and camera gear so I had no reason to doubt him). “Why are you doing that?” I ask. Because you’d think that making adult films is probably quite lucrative. I don’t know this, just a suspicion. He replies “I’m going into Real Estate!” He then spends the next 30 minutes telling me about flipping houses, second mortgages, zero down loans, etc. I just sit there and nod my head, buy the stuff he had for sale, and leave.
This bugged me because everyone was talking about Real Estate then and now I meet a porn producer going into it? It was just too much. On the way home I call my wife and say: “Honey, we’re going to sell everything we own relating to real estate. REITs, mortgage bonds, anything holding mortgages, etc. I’m then going to re-evaluate our portfolio from the ground up.”
I’m not a market timer, but that’s what I did. I call it a “Shoe Shine Boy” moment. A phrase I use that relates to a story where a famous investor (Joe Kennedy I’ve been told) was getting his shoes shined in 1929 and the shine boy kept giving him hot stock tips. He immediately went back to his office and sold all his stocks to avoid the big crash later that year. He figured that when the shine boy is giving you stock advice it’s time to get the heck out.
I sold everything that had real estate in it. I also sold all bond funds that had any type of credit risk. I had been an indexer for some years at that point so I knew I wanted an indexing strategy as active stock management just doesn’t work. Yet, I never felt comfortable with the claims of many about how you could own a bunch of stock index funds and take credit risk with bonds and have diversification. It was time I looked into the matter myself without any prejudices.
I looked at all the options and researched everything with a fresh take towards risk and uncertainty. Nothing was off the table no matter how it conflicted with what I’ve read before. Eventually, I ended up with the Permanent Portfolio after loads of research and scrutinizing of the approach.
The biggest thing about this experience is not that it helped me avoid a bad loss (which really was just sheer luck). It’s that it made me seriously explore what risks I was taking with my portfolio and how those risks were being counter-balanced with other assets I own. You can’t invest without risk. But it’s important to be sure you know what risks you are taking and how they can affect your life savings if they ever show up. It took a porn producer to get me to go back and evaluate these things. Life is strange.
Reader Question: How to invest new funds?
2 years ago
by Craig Rowland
in Investing
A reader writes:
Thank you for your very useful and informative website. I have read the Harry Browne book and we already own the PRPFX mutual fund. I am now interested in replicating this strategy on my own with other money in order to diversify the holding of our assets. Your site has helped give a lot of practical information for doing such.
What comes to mind are the following questions regarding depositing and withdrawing money from the portfolio:
1) After it is all set up and initial money is invested, when you add more money do you automatically split the money up into the 4 parts equally, or do you use that as an opportunity to rebalance the portfolio and increase the value of an asset class that is currently low? I have been trying to determine if this matters or not either way.
[craigr] I’d put the money into the lagging asset. It’s usually at a better price and I like buying things on sale because you get more for each dollar. Also helps save on taxes because you rebalance less later.
2) Likewise, when you take money out of the portfolio, do you remove it just from the current top performer or from all 4 asset classes equally? I realize the permanent portfolio strategy is not meant for frequent withdrawals, but nonetheless, I would like to know the correct strategy for when I need to do so.
[craigr] I take money from the “cash” allocation and replenish it once a year personally. That way I can let the other assets grow if they are so inclined. Cash is the least likely to appreciate of all the assets. This also has less turnover costs as your “cash” will probably be in a money market fund that works with smaller withdrawals without additional costs and extra bookkeeping (like tracking gains and losses).
It seems that using a deposit or withdrawal as an opportunity to somewhat rebalance the portfolio would be the way to go, after all, if you buy more of the low asset it then automatically decreases the percentage of the higher asset. But, I would like to hear your thoughts on this from your experience and analysis.
[craigr] I think you’re looking at this the right way. Buy your lowest performing asset first. If you don’t want to do this constantly, then put the money in your “cash” and then once a year make a bulk purchase into your assets that are lagging to save on transaction costs if you pay them. This is not a problem with open-ended mutual funds (as index mutual funds won’t charge you purchase fees most of the time). But this is an issue with ETFs as you pay a broker fee for buying/selling.
Thanks for writing and I hope that helps.
Black Monday Anniversary
2 years ago
by Craig Rowland
in Investing
A poster on the Diehards forum remarks that today is the 80th Anniversary of Black Monday 1929 – The Great Stock Crash that touched off the Great Depression. In this very interesting video you can hear first hand accounts of the events that led up to the crash:
