Permanent Portfolio
European Permanent Portfolio Blogs
Feb 17th
For our readers across the pond there is another blog that focuses on Permanent Portfolio investing. The blog by Marc de Mesel looks at investing in the Permanent Portfolio from a European perspective. The blog is in Dutch, but Google translate does a passable job for those looking for foreign analysis of investing markets:
Marc de Mesel’s European Permanent Portfolio Blog (Dutch)
Marc de Mesel’s European Permanent Portfolio Blog (Translated through Google – Click on the blog links and they will translate for you.)
Marc covers many topics affecting Europe that aren’t covered here. He runs his own Permanent Portfolio using European-centric assets (like German Govt. Bonds vs. US Bonds). You’ll enjoy it whether you live in Europe or not. Check it out.
UPDATE: Marc adds that he still has a couple articles up at this link that discuss the Permanent Portfolio. In particular, he provides an interesting analysis of how the portfolio would have fared vs. a stock/bond only portfolio during Iceland’s 2008 currency collapse:
English European Permanent Portfolio
Why these assets?
Feb 9th
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
Feb 6th
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.
Which Asset Will Do Best?
Jan 12th
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.
Permanent Portfolio Results 2009 – A Thrilling Ride
Jan 1st
Well another year is gone and it was a kick in the pants for the markets. Let’s cut to the chase:
Performance Results
2009 was a great year for stocks. The numbers below include interest and dividend total returns from Morningstar and are rounded to the nearest tenth as of 12/31/2009 (values may change a little as distributions, etc. are counted but the point is still valid):
S&P 500 +26.3%
Total Stock Market Index +28.9%
EAFE International Index +26.9%
Emerging Market Index +68.8%
Commodities Index +16.2%
Real Estate Investment Trust Index +25.5
Treasury Inflation Protected (TIPS) Bonds +10.8%
Corporate Bonds 8.6%
International Bonds 6.7%
Total Bond Market 3.3%
Now we’ll list the components of the Permanent Portfolio Allocation if you chose to build it only with Exchange Traded Funds (ETFs):
Stock and Bond Only Portfolios: A Flawed Approach
Dec 20th
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 >
Porn and the Permanent Portfolio
Oct 29th
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 shear 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.