Posts tagged asset allocation
Callan Periodic Table for 2008
Jan 16th
Investment advisor Callan Associates released the annual update to their Periodic Table of Investment Returns:
Callan Periodic Table of Investment Returns 2008
If you’ve never seen it, the Callan Periodic Table shows common asset classes and their returns each year back to 1989. The table doesn’t list all the assets that the Permanent Portfolio uses (it’s missing Gold [+5% in 2008] and US Treasury Long Term Bonds [+33% in 2008]), however it gets a point across. What point is that you ask?
The markets are not predictable – Something you’ll hear me repeat over and over again on these pages.
This table shows some assets doing well for a couple years and then falling from grace. Then the losers rise to carry the title of hot performer until they finally go down in flames. This is the way of the markets. In fact, Harry Browne used to say:
“Investment success begins the day you accept the fact that you cannot predict the future”
This is excellent advice.
The benefit of the Permanent Portfolio strategy is you’ll usually have an asset doing well no matter what is going on in the economy. This asset can often offset your losses in the other parts of the portfolio or at least dampen serious losses. To capture your gains, the strategy has you selling down your winners and putting that money into the under-performers which may do well going forward. The net result is a smooth stable growth through the years without the volatile gut wrenching swings in portfolio value.
All of this can be done without turning yourself inside out relying on fortune tellers, market timing, predictions, chart analysis, reading mountains of investment news and hoping that your risky gamble doesn’t leave you in the poor house. Once you accept that the markets cannot be predicted you are able to adopt an investment strategy to deal with this uncertainty and sleep at night.
Market timing doesn’t work, but it’s not the end of the world. In fact, this realization is critical to investment success. So let go and trust the Force, Luke. You’ll be a better investor for it.
How Long to Recover from Losses?
Dec 31st
Risk and reward go hand in hand. The more reward you expect, the more risk you are taking. This has always been true and always will be true.
But with risk comes the possibility of losses and avoiding large losses in a portfolio can be just as important as reaching for big gains. The way the math works, large losses do a disproportionate amount of damage to a portfolio (e.g. a 50% loss means you need to earn 100% just to get back where you started).
If you are curious about what kind of returns you need to recover from a serious portfolio loss I recommend you consult this handy table:
This is just some food for thought about consequences of investing risk. Understanding risk is a critical component to developing an investment strategy you can stick with when markets aren’t going your way.
Time to Rebalance?
Dec 29th
Economist Robert Higgs comments in the following piece about the prospect of inflation in 2009 and beyond:
The Fed versus the Banks: Who Will Blink First?
I have never been inclined toward touting doomsday financial scenarios. I raise the possibility now only because, as I consider the situation portrayed in the graph of excess reserves linked above, I am unable to foresee how the Fed and the Treasury can navigate through these treacherous waters – waters that their own previous actions have whipped to a foam – without creating terrible financial and economic harm. If the dollar survives the ministrations of Bernanke, Paulson, Bush, and the Obama gang, its survival will be something of a miracle.
Earlier in 2008 inflation fears were the bogeyman. Oil was at $150 a barrel (it’s now $40). Gold hit $1000 an ounce (it’s now in the $800’s). And the Dollar was at record lows against the Euro and other world currencies (it recovered greatly). The markets were sure that inflation was coming on strong.
Ahhh, but Fall 2008 came and so did the popping of the Real Estate bubble. This caused a massive destruction of paper wealth that rippled through the financial markets taking out many large banks. By December, Long Term bonds (a powerful deflation shield) swapped places with gold, commodities and other inflation hedges for being the winning asset of the year. The US Dollar shot up in value at a rate never seen against the Euro. Deflation was on everyone’s mind and Long Term bonds proved their mettle as they powered ahead with 30-40% gains. This boost erased almost all market losses in the Permanent Portfolio strategy during the October/November stock crash.
Who would have thought that we’d start 2008 with the prospect of inflation only to end the year with our illustrious central bankers scrambling to prevent an all out deflation? The markets are like that though. Moody. Random. Unpredictable.
But what should we do now?
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.
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