The Permanent Portfolio, Investing, Finance and Random Thoughts.
Archive for February, 2010
Why I own gold…
Why do people freak out so much when you tell them you own some gold in your portfolio? It’s as if you had just told them you killed a dozen people before lunch. The hyper-ventilation you hear from some when you even mention this topic is just nutty. It usually starts with some juvenile comment involving tinfoil hats. Then they pull out some quote from an economist (usually one that loves inflation to solve all problems) about how useless gold is. They may even hit you with the ol’ “gold is not a form of wealth but just a shiny metal” lecture (ignoring the bulk of human history, and all major central banks, that disagree with them). Then they tell you how “risky” gold is when their own portfolio may be loaded to the hilt with junk bonds, emerging market debt or other complicated investment products. They must think the Nigerian stocks they hold in their Frontier Market fund are a sure thing (assuming they even know what’s in the funds they own).
Well, I own gold and I admit it. I feel comfortable owning gold in my portfolio. I sleep well at night knowing I own gold even though it could drop in value. I understand that in a balanced portfolio gold is a useful tool. I trust gold to protect me in high inflation more than indexed linked bonds (TIPS) ever will.
Gold has no interest or dividends. I admit these things and acknowledge that this is one area that makes gold different than stocks and bonds. However, this does not make gold useless for diversification.
Gold maintains real purchasing power over time and it’s really good at doing this. No other asset on this planet has such a long history. I don’t worry about politicians printing trillions of dollars of gold. This is because politicians can’t print gold. Gold can also be owned directly without any obligations attached to it. These are unique attributes for an asset class when used properly in a portfolio (and properly does not mean 100% gold).
While gold does not have the interest or dividends of stocks and bonds, it has other benefits that can work at certain times to protect a portfolio that does hold stocks and bonds. Gold for instance does very well under high inflation when stocks and bonds do not.
Gold has risks just as stocks and bonds have risks. I understand what these risks are and how they fit in a diversified portfolio. Yet, I do not rely only on gold in a portfolio. I also own stocks and bonds to drive returns when gold is performing poorly. In diversification there is safety which is why I own all these assets and don’t get religious about it. I accept gold’s quirks because I know when it comes time for it to perform it will do so better than all its contemporaries.
The empirical evidence says that owning some gold in a portfolio is not the death sentence academic literature would suggest. In fact, at certain times having gold can be a tremendous help. So, either reality is wrong or the academic theories are. Given a choice between the two, I’ll take reality. That reality is that all portfolios should hold some gold for diversification against stocks and bonds despite what critics state. That’s why I own gold.
Why these assets?
1 year ago
by craigr
in Permanent Portfolio
I’m often asked questions about substituting some asset X for one of the other assets in the Permanent Portfolio. I think this is a bad idea because you could introduce a potentially weaker investment for one of the time-tested assets the portfolio holds.
Now, as a recap we know that the Permanent Portfolio holds four core assets:
1) Stocks in an inexpensive broadly based index fund like the Total Stock Market Wilshire 5000 or Russell 3000
2) US Treasury Long Term Bonds
3) Cash in a US Treasury Money Market fund
4) Gold bullion
So why does the Permanent Portfolio hold these specific assets? Why not some of the new stuff being sold by Wall Street each year? Or some of that other stuff being pawned off as the hottest new fad by some academic and the book they’ve written?
Well, this is primarily because the goal of the portfolio strategy is to grow money when it can and protect that money when it can’t. To do this, the Permanent Portfolio owns a variety of assets which are best in their class for each particular economic condition (prosperity, inflation, deflation and recession) and do not take any risks outside of the area they specialize in. These assets have proven themselves a number of times in the past to do exactly what they say they will do. This lessens the chance that you’ll be surprised by some unforeseen risk.
What is meant by this is that the portfolio holds stocks in a cheap and broadly diversified index fund free and clear with no margin (leverage). Broadly based stock index funds have an excellent track record compared to actively managed funds and do well when prosperity is driving the markets. This means you are only taking market risk with the stocks and not additional risks of being unable to service your margin loan forcing you to liquidate your portfolio for a margin call in an emergency. Nor are you taking on risk that a stock fund manager may have you out of the market when there is a big rally going on forcing you to miss the gains.
For bonds we are taking on interest rate risk by owning long term Treasuries. However we are not taking on credit and call risk present in other bonds. This means if a deflation situation hits we can profit from the rise in Treasury prices but not have to be concerned with the resulting bad economy that could cause non-Treasury bonds to default. Neither do we need to worry about the low interest rates that could make bond issuers recall their bonds and sell new ones that are cheaper for them. It also means that during times of prosperity we have a nice steady income stream from the bond interest to add to our stock gains.
For our cash we hold only a Treasury Market Fund because they also have no credit risk. But they also eliminate needing to rely on FDIC insurance limits and liquidity issues that could affect non-Treasury securities and money market funds as we experienced in 2008. You will always be able to access your cash if you own Treasury bills in a money market fund because they are the most liquid paper investment on the planet. You never have to worry about a non-Treasury money market fund freezing redemptions because they broke the buck due to their bad investment decisions (also happened in 2008). Nor do you need to worry about your bank going under and wondering how long it will take FDIC to clean up the mess and allow depositors to access their money.
Finally we have gold which can suffer malaise during times of a good market but is the most powerful asset you could possibly own during a period of bad inflation. Gold also functions as an ultimate insurance policy in case something truly awful were to happen to the US Dollar.
These assets were chosen for specific performance reasons because they tend to combine in a way where risks in one are cancelled out by benefits of another. Interest rate risk in bonds are cancelled out by the inflation performance of gold. Gold price declines are cancelled out by stock and bond price gains. Stock market losses can be countered by gold or bond price increases. Etc. Risks are taken where they should be taken and avoided where they should be avoided.
When you substitute a lesser quality asset for one of the rock stars the portfolio already owns you can seriously damage the diversification potential in unpredictable ways. So my advice is to leave the core portfolio alone. The only real exception to this are for foreign users of the portfolio strategy who should be holding their cash, bonds and probably more stock in their home country to be sure their portfolio is in sync with their local economic climate and not tied so close to the US and US dollar.
If you want to add other assets then you can do it by holding them in your variable portfolio for money you can afford to lose. But I think changing around the core assets is not a good idea.
At this point we have about 40 years of data showing the strategy has been working. A full thirty years of that data is actual empirical evidence. This is because this portfolio strategy was conceived in the late 1970s with only minor tweaks into the 1980s and largely unchanged since. The worst loss the portfolio had was about -4-6% in 1981. There are no guarantees going forward of course because the past does not predict the future, but the portfolio theory works as designed so far and has a really solid record of performance and safety. So why do you want to go in and mess around with something that has been shown to work in good markets, inflationary markets, deflationary markets and everything in between?
I say if it ain’t broke, don’t fix it. Keep it simple.
Permanent Portfolio – Back to Basics
1 year ago
by craigr
in Permanent Portfolio
Investing should be dead simple. Dead simple investing means sticking to the basics. This post I’m going back to the basics to help new followers of the Permanent Portfolio get a solid understanding of how the strategy works.
First, I recommend you listen to all of Harry Browne’s investment radio shows. Yes, there are a few dozen of them and it may take some time. But, if you are deciding on this investment strategy for your life savings isn’t it worth it to know all you can about it? I would hope so. I’d also hope you’d think the same thing for any strategy you choose to follow. These shows answer perhaps 99% of any basic question you may have and many you probably never even considered. The shows are an easy to understand course on investing and economics all in one package and you will learn a great deal by listening to them — promise:
Along with the shows above, I also recommend you download the e-book version of Harry Browne’s last investing book Fail-Safe Investing. The e-book is about $10 and is a concise work of Browne’s 40+ years of investment experience and advice. This book is a short read and very easy to understand. It encapsulates Harry Browne’s very simple asset allocation strategy which actually is derived from a very sophisticated understanding of economics. His approach offers a level of diversification and safety not seen in any asset allocation approach I’ve ever run across (and I’ve seen a bunch of them):
If you want a physical book, then you can pick one up below. It is the same as the e-book mostly. However, the e-book is more up to date. In the e-book he recommends using an index fund for your stock exposure and avoiding all active funds as may have been mentioned in the hard copy version which was published in 1998 along with his earlier books:
Fail-Safe Investing Hardcopy Book
Next up you have Browne’s 16 Golden Rules of Financial Safety. If you follow these rules religiously, along with the Permanent Portfolio allocation, you will have a tough time losing your life savings:
16 Golden Rules of Financial Safety
Still want more? You may want to read these articles that I wrote which talk about some more core concepts.
The Permanent Portfolio Allocation
Permanent Portfolio Historical Returns
Between Browne’s radio shows, books and the extra information I wrote you’ll have a thorough understanding of this approach to investing so you can make an educated decision if it is right for you.
If that’s still not enough then you can read articles with the “permanent portfolio” tag on this site:
Permanent Portfolio Tagged Articles
Between the radio shows, Browne’s books and the FAQs you will know just about all there is to be known about implementing the Permanent Portfolio strategy. These basics will provide a solid foundation to grow and protect your money.
Gear Review – Fenix LD01 Flashlight (also Swiss Army Hercules and Swedish Firesteel)
2 years ago
Like most nerds, I like having some type of pocket tool kit on my person at all times. Whether a Swiss Army Knife or Leatherman, it comes in handy so often that I just can’t imagine traveling anywhere without one. But suppose you have to disassemble your car or defuse a bomb MacGuyver style in total darkness? You need some light and you need the light detached from your tool kit so you can see what you’re doing while using the tool itself.
Squeeze Lights Run Out of Juice
For many years I carried a Photon squeeze light
The Fenix Has Landed
While only weighing slightly more than the smaller squeeze lights, the Fenix offered far greater output and operating time with multiple brightness modes. Further, it was also easier to hold and the aluminum housing is very tough. While I’ve never had a problem with wet weather with the squeeze lights, the Fenix LD01 feels much more solid and weather resistant with a smooth rotating switch action and sealed compartment for the AAA battery. I’ve used it in many weather conditions to include pouring rain without any problems.The LD01 features a powerful 80 Lumens output on the highest setting. The light output is easily as strong as a much larger conventional lightbulb flashlight. I’ve lit up objects 100+ feet away without any problem. On the lowest setting the light is comparable to the squeeze lights but the beam is better focused and more usable thanks to the built in reflector. There is also a medium setting which is a nice compromise in brightness vs. battery life. The light settings are quickly adjusted by turning the front bezel. When turned on initially it will default to medium power, the second twist gives you low power and the last twist gives you high power. Twisting a final time turns the light off. There are no buttons on the light and the entire system is controlled by twisting the head. This is also how you replace the battery. It’s a rugged and simple design and stays off when in your pocket and stays on when you want it to be on. The kit also includes a pocket clip, attachment ring and spare O-ring in case the included one wears out.
In terms of battery life, on the highest setting the manufacturer claims a one hour burn time with a single AAA battery, 3.5 hours on the medium setting and 11 hours on the lowest setting. I’ve not run a battery out yet despite having used mine for many hours already. Because the light uses a standard AAA battery, you can find replacements in stores that may not stock button batteries or specialty photo cells that other lights may use.
The light itself is about 3″ long and 1/2″ in diameter. Here it is in comparison with a standard sqeeze light, the little brother Fenix E01
The LD01 packs a lot of light in a small package.
I had some photos of just how strong this light is, but honestly the images just can’t capture it well and it is so bright that it was causing the camera to underexpose. 
Let’s just say that a full size 3 D-Cell traditional bulb flashlight is about 80 lumens and weights over 30 oz. This light that fits in your pocket and weighs perhaps two ounces is just as bright. Of course there are some lights that are brighter, but for the size this one is really hard to beat. I own several Fenix lights now and have never had one fail me after some pretty rough use (as opposed to some others which failed soon after I bought them).
The little brother Fenix E01
Knife in the Photo
For those that are curious, the knife in the photo is the larger Swiss Army Atlas model with a locking blade, pliers and saw. I don’t think they make it any more and the Swiss Army Hercules
model (the Swiss are on some strongman theme here) seems to be a close replacement (it has added scissors which are always handy). These models of knives are longer than the standard sized Swiss Army knives, but I do a lot of hiking and having a longer usable saw and knife blade is a great feature for cutting branches and other field tasks. The saw on this knife beats the snot out of those cheesy cable saws that always break after about five minutes worth of use. It also works better than many other pocket knife saws I’ve used and can cut branches up to 4″ or so and even 2x4s with little effort (and no, I don’t endorse going around hacking branches off of trees when out in the woods). The locking blade gives the knife extra safety against ham handed accidents that could close it on your own fingers. For what it’s worth, I’ve owned many original Victorinox Swiss Army brand knives through the years and have never had any of them break on me after some hard use (something I can’t say about most of the clones).
A Great Firestarter
The orange thing on the knife is a Swedish Firesteel Mini
A Great Piece of Kit
But back to the flashlight. Fenix is a relatively new manufacturer, but they are making some really good products and the LD01 is a great piece of kit. It puts out an amazing amount of light in a small package that fits in your pocket. I think it’s a great value for the quality and function and can easily replace much bigger units for a fraction of the weight.
