Investing, economics, finance and random thoughts.
craigr
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Homepage: http://www.crawlingroad.com
Posts by craigr
The Variable Portfolio
Dec 27th
Harry Browne advised that you should invest the money you can’t afford to lose in the Permanent Portfolio strategy. This strategy, as discussed in his books and on this site, provides stable returns with low volatility year after year with enough diversification to protect against large losses of capital. It’s boring, yet profitable.
But what if you think you can beat the market? What if you want the excitement of stock trading? Suppose you have some money you can afford to lose? What to do? Simple: You want a Variable Portfolio.
The Variable Portfolio is for speculation and is done with money you can afford to lose. This is money that if you were to wake up tomorrow to find it gone it wouldn’t affect your retirement plans, children’s college savings, home down payment, etc. It’s money that you’re willing to gamble on losing or striking it big.
Permanent Portfolio Historical Returns
Dec 22nd
Let’s get to the meat of any investment strategy: How well does it actually work?
In a prior post we talked about the Permanent Portfolio allocation which is:
25% – Stocks (in a broad based stock index fund like the S&P 500)
25% – Long Term Treasury Bonds
25% – Gold Bullion
25% – Cash (in a Treasury Money Market Fund)
This allocation will provide protection when the economy shifts through the cycles of prosperity, inflation, deflation and recession.
Now, some may be thinking that this allocation sounds very different than what they’ve seen elsewhere. For instance, the idea of owning gold is scoffed at by some investment advisors because it has no dividends or interest. Long Term Bonds? Many will tell you that they’re too risky due to rising interest rates. How about Cash? Isn’t holding a bunch of cash missing out on the hot stock market action? And, only 25% in stocks? Well everyone knows that stocks always beat every other investment so surely you want more than 25%, right? Right!?
Not exactly.
Terry Coxon Discusses the Possibility of High Inflation
Dec 21st
Terry Coxon, co-creator of the Permanent Portfolio, discusses the possibility of high inflation as the US economy stagnates. Is it possible? Sure. The Fed is biased towards creating inflation because that’s what they were designed to do. Their worst fear is deflation because their tools are so limited. In my opinion, they will continue to try to inflate the dollar to force people to spend money. They’ll worry about the inflation it causes later.
Will it work? Hard to say. It didn’t work in Japan for the past 20 years and may not work here. Economics is just as much about psychology as anything else. If people don’t want to spend money and take on new debt it’s hard to force them to.
People often wonder why the Permanent Portfolio holds a 25% gold allocation at all times. After all, isn’t gold a zero real return asset? Well, this is the reason. If bad inflation comes the other components of the portfolio will do poorly, but the gold will react so strongly that it’s likely all the other losses will be overcome. But what about a deflationary situation and these predictions of inflation are wrong? Well, the portfolio holds 25% in Long Term Treasury bonds which will do very well under that scenario.
The Permanent Portfolio Allocation
Dec 18th
Harry Browne and Terry Coxon formally introduced the Permanent Portfolio in their 1981 book entitled: Inflation Proofing Your Investments. Like most great ideas, the Permanent Portfolio was simple, but was not simplistic.
The Permanent Portfolio investment strategy is the first one I’ve seen that developed an allocation based on economic cycle analysis. The Permanent Portfolio idea separated these economic cycles into four basic categories:
- Prosperity
- Inflation
- Deflation
- Recession
The Permanent Portfolio and the 16 Golden Rules of Financial Safety
Dec 17th
The foundation of the Permanent Portfolio strategy lies upon what Harry Browne called his 16 Golden Rules of Financial Safety (expanded minimally to 17 rules in his 2003 version of Fail-Safe Investing). These rules will help anyone avoid many dangers that face investors. I will re-print them here (with permission) from his main website. I believe if investors followed these rules diligently they’d be hard pressed to lose their entire life savings due to an investing mistake.
You can hear Harry Browne discuss the 16 Golden Rules yourself in this radio show link.
Liars and Hedge Funds. Do I repeat myself?
Dec 14th
The latest financial fiasco is a private hedge fund run by Bernard L. Madoff that was found to be a giant Ponzi Scheme. The whole decades-long swindle bilked investors to the tune of $50 Billion dollars.
Will new regulations prevent investment scams like this in the future? No. This stuff has been going on throughout human history. It’s obvious to most, but the fundamental problem with investing scams are they are run by liars. You can’t regulate liars. You can only diversify against and try to avoid being entangled by them.
Liars come in all forms and wealth levels. Enron had perfectly fine books for years according to the regulators and auditors. It was just that their executives and accountants were lying about everything. Then there’s the recent real-estate bubble. Many people who took out sub-prime mortgages lied about their income to buy a home they couldn’t afford. Mortgage brokers sold those loans to banks while lying about the credit quality. Investment banks then took pools of these mortgages and bundled them together and lied about the safety. Investors bought those mortgages thinking they were getting above market returns with little risk and lost a lot of money (they were lying to themselves).
Regulations can’t make liars honest. Ponzi schemes like this have been illegal since the dawn of modern securities regulations and they still happen. Liars are creative so you need to protect yourself against them.
A Permanent Portfolio?
Dec 13th
The investing world is full of advice. Some good. Most bad. Stocks, bonds, cash, 401(k), IRA, etc. Up is down. Left is right. And if you only follow the right sage advice you can become an instant millionaire. It’s all too complicated isn’t it? Well, the fact is that investing can be easy and profitable if you avoid the major pitfalls that stalk every investor.
When I first started investing I was drawn into the circus of the stock markets. Educated analysts, sophisticated computer models and wise money managers were advertised as the keys to success. The brochures showed retired couples walking on a sunny beach into the sunset (presumably after they just got off their yacht). Marketers trumped up the past returns of their funds and how much money you would have made if you were smart enough to have invested back then. Yet, the results just weren’t there. Sure, there were some mutual funds that did fine from time to time but it was never consistent. Money would be made, and then unmade, just as fast.
Like many, I invested through the tech boom of the late 90′s only to see much of what I earned evaporate. Remember those days of analysts hocking the IPO of companies like furniture.com? How could that fail! When you want a sofa everyone knows the best way to get it is to order it off the web and have UPS drop it off on your doorstep, right?