Fail-Safe Investing

I get asked from time to time about what asset class in the Permanent Portfolio is going to do best. Usually this is in the context of someone wanting to start investing in the Permanent Portfolio but they don’t want to buy the stocks or the bonds or the cash or the gold because they feel one or all of them are too expensive.

Well, here is a snippet from Harry Browne’s investment radio show on October, 24th, 2004 where he answers the same question from a listener about not wanting to buy Asset X because it’s too expensive (in this case stocks and bonds). Harry Browne lays out his experience on the matter in this five minute long clip:

Harry Browne – Which Asset Will Do Best

It’s now 2010 and this show was recorded in 2004. Let’s see what happened if the caller just took their money and dumped it into the 4×25 Permanent Portfolio split instead of trying to guess what the market would do:

2004-2009 annualized return of each individual asset class (rounded to nearest tenth from Simba’s Spreadsheet*):

Stocks: 2.5%

Bonds: 5.8%

Cash: 2.5%

Gold: 17.5%

Annualized return for 4 x 25 split portfolio: +7.5-7.8% (depending on bond index used)

We know gold did well after the fact but don’t know how it will do going forward. Back in 2004 it was a rare bird who was telling people to buy gold and many analysts still liked stocks as they were recovering from the 2000-2002 crash. Indeed, from 2004-2007 stocks were up about 10% a year. In fact, investors who thought stocks were a bad bet in 2004 were probably feeling pretty left out by 2007 after seeing them go up so much in price. They likely were tempted to move their money into stocks at that point – just in time to catch the downswing. Then, we have 2008 where bonds went up over 30% in a single year due to the market panic and handily beat stocks over this 2004-2009 time period as well. On top of all this, consider that the nearly 8% annualized return also included the horrible 2008 performance for stocks and poor 2009 performance for the bonds. If we go year by year in fact, returns for these assets will be all over the map from double digit boom years to double digit down years. Yet, there was still a reasonable profit made.

This illustrates why investors should always keep a balanced and diversified portfolio and not try to guess what the markets are going to do. In this case, the listener above would have pulled down about 8% a year doing pretty much nothing but holding a diversified portfolio and they would have rode through the 2008 crash without  any damage. This would have been a far safer portfolio than making a concentrated investment in a single asset like gold or stocks regardless of how the actual bet turned out over the past – A bet that could blow up just as easily going forward.

Harry Browne’s archived shows contain lots of wisdom and knowledge like the above that have proven to be solid and dependable. I advise those looking to implement the Permanent Portfolio strategy to take the time to listen to Harry Browne’s radio shows as well as buying his book Fail-Safe Investing. I don’t make any money from this and it’s less than 10 bucks. This is an outstanding way to educate yourself on the approach and see if it is something that will work for you. Even better, his shows are timeless and you’ll probably hear people calling or writing in with many of the same questions you have. It’s entertaining and educational to listen to what people were saying and worrying about six years ago and how little it’s changed. Moreover, it helps reinforce the idea that the future is not predictable and investors should use strategies like the Permanent Portfolio that embraces this uncertainty so they can grow their money safely.

* I use historical data to disprove investment concepts as history cannot show you what returns will be going forward. I’d advise anyone using backtested data to not fall into the trap of building optimized portfolios that worked in the past. The past does not repeat and highly optimized and data-mined assets that outperformed before may not do so in the future.

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