The Permanent Portfolio, Investing, Finance and Random Thoughts.
Archive for December, 2009
Stock and Bond Only Portfolios: A Flawed Approach
2 years ago
To me, the idea of a portfolio that only holds stocks and bonds is flawed. It has too much risk of loss and too much risk of hitting a pocket of dead air where it effectively doesn’t grow for many years. If I see something is a flawed design I want to fix or get rid of it. I don’t keep using a flawed design hoping that it doesn’t break again when experience has shown, clearly, that it will with the same bad results.
Many stock and bond portfolio strategies have risks that showed up in the past and caused large losses to investors and took years to recover. These approaches encourage people to take on too much risk in stocks and don’t have strong mechanisms to roll with unpredictable economic climates. These designs have experienced severe losses that panicked investors to bail out at the worst possible time (usually at the market bottom). Or they have failed to grow money at a meaningful after-inflation rate for long periods (The 1970s and now the 2000s for example). Sometimes it’s a combination of both. Of course there were good periods when the stock market was rolling ahead and 15% a year returns just seemed so boring after a while. But the inconsistency in the stock/bond only portfolio makes the entire plan seem like a game of chance rather than a winnable long term strategy. (more…)
Direct Bond Ownership vs. Bond Funds
2 years ago
by Craig Rowland
in Investing
A reader asked about why it’s recommended investors own their Long Term Treasury Bonds directly for the Permanent Portfolio allocation vs. using a mutual fund.
Two words: Manager Risk
This is the idea that the people managing your investments can make decisions that hurt performance out of bad luck or recklessness. Remember: Nobody cares more about your money than you do.
The bond allocation for the Permanent Portfolio says that 25% of your money should be in US Treasury Long Term Bonds. These bonds offer low credit risk as the US Government can always tax people to pay creditors or (worst case) print money to cover the payments. That makes them the safest type of bond US investors can own. They are much safer than corporate bonds and municipal bonds.
This matters because you can buy and hold Treasury Bonds directly and not have to worry about the risks other bonds pose. When you own Treasury Bonds directly your money is under your control and you know exactly how it is being used. Further, you save money as you aren’t paying a fund manager a fee to own such low risk bonds for you.
Now, let’s consider bond funds vs. owning bonds directly. Fund managers often have leeway in how money is deployed if you read the fund’s prospectus. This is important for something like the Permanent Portfolio whose strategy relies on the investor to hold US Treasury Long Term Bonds with no credit risk at all times. You don’t want managers in your bond fund moving things around based on what they think the market will do. This can blow the protection of your bond allocation to pieces if they make a wrong call. You also don’t want them swapping out your ultra-safe Treasury Bonds with less safe securities in an attempt to boost returns. This can also get you into big trouble as we’ll explore below.
I Don’t Know
2 years ago
by Craig Rowland
in Investing
Johnny Carson as the Carnac the Magnificent
I know this blog would be more interesting if I commented on the latest market happenings and posted pretty graphs projecting future returns. Perhaps some latest prediction by an investing guru about the state of the world and what it means going forward. Etc. But I won’t do these things because I don’t believe they are productive. To a diversified investor, these activities are at best a waste of time. At worst, these activities can cause investors to make rushed decisions that could lead to large portfolio losses and market underperformance.
Investing should be dead simple. It should not involve complicated machinations inside your portfolio and relying on a bunch of prognostications about what the markets are going to do. Why? Because the markets are not predictable.
I don’t know what future asset prices are going to do. I don’t know if something is overvalued or undervalued. I don’t know what gold is going to do next week. I don’t know what stocks are going to do in a month. I don’t know if bonds are going to crash tomorrow. Nobody is clairvoyant despite how confident about the future they may sound.
Please do not expect anyone to know what is overvalued, what is undervalued, and whether the Permanent Portfolio will blow up next week because of some unexpected event. No one can possibly know. Harry Browne used to say: “Anything can happen, but nothing has to happen.” That pretty much sums up the issue. Most people don’t go to psychics for life advice so why go to market psychics for investing advice?
The future is unpredictable. You do your best to diversify and that’s all you can do. Invest your money passively, keep costs low, keep turnover low, diversify widely, learn from your mistakes, keep things simple, and expect the unexpected. Doing these things makes it easier for you to say “I don’t know” and be happy with your answer.
