Saturday, April 28, 2012

Addison Wiggin on the Permanent Portfolio

Addison Wiggin has written a piece on Harry Browne's permanent portfolio concept.  This piece was also published at LewRockwell.com.  Since I promote the permanent portfolio as number one in my investment advice, I figured I would comment on this.

First, I think Wiggin has done a fair assessment of the permanent portfolio.  He points out that there is not a lot of volatility, with very few years where there are negative returns.  With this, the portfolio still gives an overall good return, particularly considering that you don't have to go through the major up and down swings.

Wiggin also does a nice job of describing the mutual fund PRPFX, which is based on the concept.  As he notes in his article, the mutual fund deviates from the permanent portfolio.  It is a little more complex and perhaps a little more aggressive.  While this can mean bigger returns, it can also mean more volatility.

At the end of his piece, Wiggin asks the reader for his opinion.  He is wondering if there is another allocation that could possibly work better for the next 10, 20, or 30 years.  Here are a few responses, most of which I don't really care for.

I am in the Richard Maybury camp on this one.  The permanent portfolio is not perfect and it actually somewhat scares me.  With that said, it is the best and safest portfolio that I know of.

If we tweak the portfolio because of today's environment, then we are speculating.  That should be saved for the speculation portion of your portfolio, which would be separate from your permanent portfolio.  The only time I would really consider changing it would be is if there is some drastic structural change.  For example, if the government ever stops issuing bonds or decides to go to a gold standard, then this would change things.  Of course, this is unlikely any time soon, but there are other possibilities of major structural changes that might alter the permanent portfolio.

Government bonds scare me, but I realize they still serve a purpose.  It helped the portfolio quite a bit in the downturn of 2008.  In addition, the Federal Reserve is the biggest buyer of bonds right now, so I wouldn't fight it.  Of course, if the Fed keeps buying government debt, then gold will do exceptionally well.

I do like the suggestion of real estate, but I'm not sure how that would fit into the permanent portfolio.  I would just keep it as a separate investment right now.  It is more of a speculation in the sense that I think now is a good time to buy.  If you are in the right position to buy an investment property, now may be a good time, especially if you live in a good place.

My one suggestion of the permanent portfolio is that it could be tailored for risk tolerance.  If you want to be more aggressive, you could reduce the cash portion only.  If you are really aggressive, you could have 30% stocks, 30% gold, 30% long-term government bonds, and 10% cash.  I would always try to keep a minimum of 10% cash, just so that you have some cash to buy depressed investments after a recession.

It is hard to imagine getting more conservative with the permanent portfolio, but I suppose it could be done.  To be more conservative, I would reduce the holdings of bonds and stocks and hold more cash and slightly more gold.  For example, you could hold 15% bonds, 15% stocks, 30% gold, and 40% cash.  If you are going to increase your cash, you should add a smaller portion to gold, just to protect against the threat of inflation.

In conclusion, the permanent portfolio still works.  It outperforms many professionals.  You can do it yourself and pay little in the way of trading and management fees.  If it is too complicated, you can always just buy the mutual fund.  The permanent portfolio should really be called the sleep-at-night portfolio.

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