Investing, economics, finance and random thoughts.
Posts tagged investing myths
The Past Does Not Predict the Future
Sep 17th
Johnny Carson as the Amazing Carnac
Have you seen the statement from the SEC that states: “Past performance does not guarantee future results?”
Harry Browne once said that the above was one of the only true things he ever saw come from a government agency. However, it’s also the core belief behind the Permanent Portfolio strategy.
While I have presented an analysis of the portfolio performance from the past, it is important to remember that this does not prove anything about the future. It just shows that the strategy has survived to this point. This means that there is no guarantee in the world of investing no matter what strategy you are using. Whether it’s the Permanent Portfolio or something else.
However, what the Permanent Portfolio attempts to do is give you wide enough diversification so you have a better chance of prospering in an uncertain future. This is not a guarantee, but an attempt to disperse the risks of investing across disparate asset classes so a very bad event that happens to one part of the portfolio is not fatal to the rest. So while nobody can promise the portfolio strategy will always work going forward, what we can do is diversify in a way to try to minimize the impact of the unpredictability of the future. That’s simply what the Permanent Portfolio tries to do.
Over at the Bogleheads forum, Taylor Larimore reminded readers on the massive Permanent Portfolio Thread about this statement. To build upon this idea, I went through the first chapter of Harry Browne’s classic Why the Best-Laid Investment Plans Usually Go Wrong and pulled out quotes that speak directly to the issue:
Investing Myths: Do Stocks Always Beat Bonds?
May 28th
There are many myths about investing. One of the most popular myths is that “Stocks always beat bonds.” Therefore, the thinking goes, investors should overweight stocks in their investment portfolio if they want to generate higher returns.
Well, as Harry Browne would have said: “The best kept secret in the investing world: Almost nothing turns out as expected.”
When I was restructuring my investments several years ago and considering the Permanent Portfolio I did quite a bit of my own research. And you know what I found? Stocks in fact do not always beat bonds. Or, I should say, they don’t always beat bonds on your particular time table.
Sure, perhaps if you look back 200 years you can make a case that stocks have a better chance of beating bonds. After all, there is more risk so theoretically there is more reward. But individual investors don’t have a 200 year time horizon. Most don’t have even a 50 year time horizon. For many people their investment horizon before they need that money for retirement purposes is more like 20 to 40 years. When you look at time slices of the market from this perspective it is clear that stocks can in fact lose to bonds in total returns.