How To Build Your Perfect Portfolio
If you've been wondering whether or not your investment portfolio is going to retain its value in these uncertain times, or whether your retirement savings are safe, there is an almosr fail-safe way to ensure that you don't get hurt - whatever the future may hold.
There is a concept that was devised in the 1970s, called a Permanent Portfolio. And it was so named because once you have set it up, you don't have to continually reevaluate it, alter it, or even think about it. And it doesn't matter whether the future brings prosperity, inflation, recession, or even a depression; you'll know you're safe - no matter what!
Over the decades, this portfolio has achieved an average annual gain of 9.3% and has had only four losing years. For individuals concerned above all else with capital preservation, this is truly the ultimate investment strategy.
Because there is no one who can reliably predict future stock valuations, the direction of the economy, or anything else that has to do with human action, the goal of the Permanent Portfolio is simple: to deal effectively with uncertainty, with a minimum of effort. Thus the bottom line is that you have to accept uncertainty and handle your investments as though you have no idea what's coming next - even when you think you do.
The general premise of this approach is that anything that happens - be it war, peace, civil unrest, instability, good times, bad times, etc. - will translate itself into one of four economic environments: prosperity, inflation, recession, or deflation. Fortunately, three of these four environments have an investment that does particularly well in it. Stocks and bonds both profit during prosperity; gold does well during inflation; bonds do well in deflation. And although nothing does well in a recession, cash helps to cushion the fall in other investments.
A portfolio consisting of equal parts of each of those four types of investments is not volatile and has a relatively consistent rate of return. Of course, this portfolio will never do as well as one that is over-weighted each year toward whatever investment is "hot," but unfortunately, that information is not available until after the fact. The Permanent Portfolio, in contrast, does not require precognition; just some simple mechanical adjustments whenever one of the portfolio segments gets too far out of the balance with the others.
It might seem that a Permanent Portfolio consisting of four contradictory investments would be neutralized: As one element rose, another would fall - and nothing would be gained. On a day-to-day basis, that can be true. But over broad periods of time, the winning investments add much more value to the portfolio than the losing investments take away.
During a bull market, for example, stocks, bonds, or gold might go up 100% or 200% - or more. But in a bear market, a losing investment generally drops between 15%-40%. Thus the winners usually more than cancel out the losses of the poorer investments during any particular economic environment.
If you want to build your own Permanent Portfolio, it's important not only to hold the proper mix of investments, but to keep those investments in the right form.
Cash means short-term debt instruments denominated in the U.S. dollar. The two safest and easiest ways to hold cash are with U.S. Treasury bills or a money market fund investing only in T-bills. And the reason you use Treasury securities is to eliminate the need to evaluate credit. Commercial paper or other debt instruments require continually monitoring the credit standing of the issuers. But the U.S. Treasury will always pay its bills by either taxing or printing money.
Gold consists of gold bullion or one-ounce gold coins that have no collector value. The link between dollar inflation and the price of gold doesn't necessarily exist between the dollar and numismatic coins or gold stocks.
Stocks consist of an index of corporate shares traded on the largest and most liquid securities exchange, the New York Stock Exchange. It's best to split the stock portion between two or three mutual funds or ETFs that clone the S&P 500. They stay fully invested at all times, so you aren't relying on someone's opinion as to when to be in stocks.
Bonds consist of long-term U.S. Treasury bonds, because you don't want to have to monitor the credit of the bond issuer. A second qualification is that you want the bond to have a large impact on the portfolio when interest rates change. So you should hold treasury bonds with the longest duration available - which is currently the recently resumed 30-year U.S. Treasury bond.
This simple approach has yielded amazing results since 1970, and should continue to do well in the uncertain future that lies ahead.
* * * * *
There is a concept that was devised in the 1970s, called a Permanent Portfolio. And it was so named because once you have set it up, you don't have to continually reevaluate it, alter it, or even think about it. And it doesn't matter whether the future brings prosperity, inflation, recession, or even a depression; you'll know you're safe - no matter what!
Over the decades, this portfolio has achieved an average annual gain of 9.3% and has had only four losing years. For individuals concerned above all else with capital preservation, this is truly the ultimate investment strategy.
Because there is no one who can reliably predict future stock valuations, the direction of the economy, or anything else that has to do with human action, the goal of the Permanent Portfolio is simple: to deal effectively with uncertainty, with a minimum of effort. Thus the bottom line is that you have to accept uncertainty and handle your investments as though you have no idea what's coming next - even when you think you do.
The general premise of this approach is that anything that happens - be it war, peace, civil unrest, instability, good times, bad times, etc. - will translate itself into one of four economic environments: prosperity, inflation, recession, or deflation. Fortunately, three of these four environments have an investment that does particularly well in it. Stocks and bonds both profit during prosperity; gold does well during inflation; bonds do well in deflation. And although nothing does well in a recession, cash helps to cushion the fall in other investments.
A portfolio consisting of equal parts of each of those four types of investments is not volatile and has a relatively consistent rate of return. Of course, this portfolio will never do as well as one that is over-weighted each year toward whatever investment is "hot," but unfortunately, that information is not available until after the fact. The Permanent Portfolio, in contrast, does not require precognition; just some simple mechanical adjustments whenever one of the portfolio segments gets too far out of the balance with the others.
It might seem that a Permanent Portfolio consisting of four contradictory investments would be neutralized: As one element rose, another would fall - and nothing would be gained. On a day-to-day basis, that can be true. But over broad periods of time, the winning investments add much more value to the portfolio than the losing investments take away.
During a bull market, for example, stocks, bonds, or gold might go up 100% or 200% - or more. But in a bear market, a losing investment generally drops between 15%-40%. Thus the winners usually more than cancel out the losses of the poorer investments during any particular economic environment.
If you want to build your own Permanent Portfolio, it's important not only to hold the proper mix of investments, but to keep those investments in the right form.
Cash means short-term debt instruments denominated in the U.S. dollar. The two safest and easiest ways to hold cash are with U.S. Treasury bills or a money market fund investing only in T-bills. And the reason you use Treasury securities is to eliminate the need to evaluate credit. Commercial paper or other debt instruments require continually monitoring the credit standing of the issuers. But the U.S. Treasury will always pay its bills by either taxing or printing money.
Gold consists of gold bullion or one-ounce gold coins that have no collector value. The link between dollar inflation and the price of gold doesn't necessarily exist between the dollar and numismatic coins or gold stocks.
Stocks consist of an index of corporate shares traded on the largest and most liquid securities exchange, the New York Stock Exchange. It's best to split the stock portion between two or three mutual funds or ETFs that clone the S&P 500. They stay fully invested at all times, so you aren't relying on someone's opinion as to when to be in stocks.
Bonds consist of long-term U.S. Treasury bonds, because you don't want to have to monitor the credit of the bond issuer. A second qualification is that you want the bond to have a large impact on the portfolio when interest rates change. So you should hold treasury bonds with the longest duration available - which is currently the recently resumed 30-year U.S. Treasury bond.
This simple approach has yielded amazing results since 1970, and should continue to do well in the uncertain future that lies ahead.
* * * * *
posted by Bob Moser at
9:20 PM
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