The Permanent Portfolio is the creation of the late Harry Browne. It was designed to overcome the pitfalls and surprises that have ruined many investors. Authors Craig Rowland and J.M. Lawson have written an excellent book about this very unusual but sophisticated portfolio. Bogleheads will recognize Jack Bogle's wisdom in many of these quotes:
Thank you Craig and J.M.“The Permanent Portfolio is an investment strategy designed to grow and protect your life savings under any set of economy conditions.”
“According to Browne, the Permanent Portfolio should provide three features: safety, stability, and simplicity. 25% in U.S stocks; 25% in long-term U.S. Treasury bonds; 25% in cash; and 25% in gold.”
“The goal of each of the Permanent Portfolio’s assets is not to beat the market, it’s simply to own the market.”
“Over the last 40 years the strategy has returned between 9% and 10 % a year. The worst loss in any year was around -5% back in 1981. -- There is no 10-year period where the portfolio failed to beat inflation by at least 3%.”
“Recovering from a 50% loss can be very difficult because an investor will need a 100% return to just get back to where he started!"
“The truth is that smart investing is easy. -- It will do it with less risk, less management, lower costs, and more profits to compound. – Complexity kills returns.”
“We believe that most investors are better off putting their money into low-cost index funds.”
“The Permanent Portfolio is a strategy to embrace uncertainty in the markets.”
“The cash allocation provides an investor with a place to store interest, dividends, and capital gains from the other assets, and provides ‘dry powder’ for rebalancing purposes during market declines.”
“Where an investor has a plan, the speculator only has hope.”
“Market timing doesn’t work and it doesn’t matter who is doing it or how scientific it sounds..”
“Using leverage in your investments is the single fastest way to lose everything you own.”
“The mirage of easy riches conceals a long history of ruined investors.”
“Investing can seem complicated because the financial industry spends millions each year trying to convince you it is.”
“The more complicated an investment is, the more likely it is to lead to losses due to unknown or poorly understood risks.”
“If you don’t understand how an investment works within about five minutes, walk away.”
“Keep some assets outside the country in which you live.”
“Don’t ever let your emotions lead you to do something with your life savings that you will later regret.”
“So many people are now are able to invest in small-cap value funds it is likely that the return bonus (if present) will have been arbitraged away.”
“In investing there are many good ways to make money and a multitude of ways to lose it all.”
“Be cautious about drawing any firm conclusions about an invest strategy based solely on backtesting data.”
“It is an unusual investor who can calmly sit thought a -30% or worse decline in the value of his portfolio.”
“In the United States the rate of inflation has averaged around 4.4% a year since the early 1970s.”
“Complex strategies provide more opportunities to conceal fees, commissions, and other expenses that increase investment professionals’ income, while reducing their clients’ returns.”
“Very few investors are able to withstand large fluctuations in a portfolio’s value without eventually abandoning a strategy (often at the worst possible time and locking in those losses).”
“Since long-term investment success is related to the ability to stay the course and not try to outguess the markets, a stable portfolio will help you emotionally to stick with the plan.”
“Passive investing is the opposite of the active asset management that is typically offered on Wall Street.”
“Think of survivorship bias as going into your school records, erasing the course you took where you received a bad grade, and then recalculating your GPA.”
“Ironically, just trying to get the market average means over time you will beat most investors and investment professionals.”
“Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.” -- William Sharpe, Nobel Laureate.
“If you reduce your annual costs from 1.5% a year to 0.20% a year you instantly gain a 1.3% performance improvement with no effort and no additional risk. It’s the closest thing to free money an investor is ever going to get.”
“The Permanent Portfolio seeks to increase volatility in each asset class in order to achieve stability across the whole portfolio.”
“One of the largest obstacles for investors to overcome is the tendency to focus on individual assets in isolation within a portfolio instead of looking at the complete package."
“No matter how much anyone wants to believe that investing can be quantified and reduced to a set of equations, investing is an inherently uncertain activity.”
“The past is not guaranteed to repeat into the future. Without realizing it, many investors are essentially driving forward by looking in the rearview mirror.”
“Investing should be simple. Not only does simplicity make portfolio management easier, it will often also make it more profitable.”
“Investors are strongly encouraged to get the idea out of their heads that their favorite asset is always going to perform well going forward.”
“Taking too much risk in one asset class is gambling, not investing.”
“Simply relying upon historical asset class correlations is dangerous. Depending on what time period is selected, the correlation numbers can be radically different. -- In the market crash of 2008 large company stocks, small company value stocks, technology stocks international stocks and emerging market stocks all fell sharply in value. The diversification investors thought they had turned out to be illusory.”
“When it comes to economic matters, the future is simply unpredictable.”
“The only asset that can be relied upon during a recession is cash.”
“Owning stocks is the best way for investors to have ownership in the productive capacity of a prosperous economy.”
“Unfortunately, the term ‘index fund’ has been used in recent years to describe all kinds of investment products, some of which bear little resemblance to a true index fund.”
“Jack Bogle stated it best when he said: ‘The shortest route to top quartile performance is to be in the bottom quartile of expenses.”
“Investors have been surprise to see many companies that were considered safe disappear almost overnight (Enron, Lehman Brothers, etc.). – A broadly based index fund protects you from disaster.”
“Index funds are the most tax-efficient stock fund you can own. They do not have managers actively trading stocks and generating unnecessary taxes behind the scene.”
“Skip the idea of using Morningstar’s rating stars to buy funds. – Simply buy a broad-based index fund with the lowest expense ratio you can find.”
“Over the 29 years ending in 2009, actively managed funds trailed their benchmarks by an average of one percentage point a year.” Wharton Business School
“Nearly 9 out of 10 trades happening each day on Wall Street are between professionals.”
“The indexing paradox is that by trying to be average you end up well above average in long-term returns.”
“Use your work to generate money and take that money and invest it elsewhere. Failing to do so risks the loss of both your job and stock profits at the same time.”
“The beauty of the total stock market index is that you will own everything with simplicity and no regrets.”
“The bond market is probably one of the most complex pieces of the investing world to understand.”
“Bond risks may include, interest rate risk; default risk; credit risk; call risk; currency risk; political risk; tax risks; and manager risk.”
“Markets are simply not predictable and popular storylines such as ‘stocks always beat bonds’ often yield to the more sobering reality.”
“High turnover is common (in bond funds) because as bonds mature they are cycled out of the fund and replaced with new bonds of longer maturity.”
“In a sense junk bonds are one of the worst investments you can own—you get all of the volatility and the risk of stocks but little of the upside potential.”
“It came as a great surprise to many investors at the end of 2008 to find that long-term U.S. Treasury bonds were easily the best performing asset class of the year.”
“The yield of a bond is only one piece of the puzzle. The capital appreciation can also be used to provide protection and growth in the portfolio.”
“Every financial crisis seems to prove than in an emergency U.S. Treasuries are viewed as one of the safest places to be.”
“The first money market fund ever created, the Reserve Fund, broke the buck and locked up investor’s assets for years.”
“Putting money in a shaky bank is like getting into a car with a drunk driver because you think the air bags are going to save you if it wrecks. The better strategy is not to go for the ride.”
“Gold is the last asset an investor should put into a retirement account. Fill these accounts first with stocks, bonds, and some cash.”
“Some investors believe that a basket of commodities will work just as well (or better) than holding gold. They won’t.”
“Avoid any type of numismatic (collectible), rare, or antique coins.”
“Don’t let the search for the perfect portfolio keep you from implementing a portfolio that is good enough.”
“All diversified portfolios will experience unbalanced growth. -- One asset is going to be doing great and another will be in the dog-house much of the time. -- Eventually it becomes necessary to rebalance the whole portfolio in order to maintain its safety and stability.”
“Rebalancing ensures that you are never too exposed to any one asset in the portfolio. A second by-product is that it allows you to capture additional returns over time by selling a portion of your winning assets and buying more of the losers.”
“The truth is that smart investing is easy.”
“We believe that most investors are better off putting their money into low-cost index funds.
“Every penny you pay in taxes today is one less penny that can compound over time.”
“Using simple passive investing avoids managers and strategies that can churn a portfolio and generate unnecessary taxes.
“Unfortunately, disasters don’t provide notice for you to contact your broker before they occur.”
“Having as much of your bond holdings as possible in a tax-deferred account is a good idea.”
“When you have to do a sale, pick transaction lots you've owned the longest to get favorable long-term capital gains tax treatment.”
“Gains from the sale of gold in the United States are currently taxed either at an investor’s marginal tax rate or the collectibles tax rate, whichever is lower.”
“You want to have your funds invested mostly where you actually live, earn, and spend your money.”
“Individual Retirement Accounts and 401(k) plan accounts provide some protection from the claims of creditors.”
“Tax-loss harvesting is based on the concept that if you have a loss in an asset, you can sell the asset and recognize the loss for tax purposes.
“There are risks to your wealth outside of what the markets are doing. These risks can show up in the form of institutional failures, manager incompetence and outright fraud to name just a few.”
“Sadly, identity theft often doesn't even happen with anonymous criminals but with relatives, caregivers, and others with close intimate knowledge of the victim.”
“The last thing you want is to put your money in some tiny, offshore haven only to find that if it goes missing you have no legal recourse (and the judge hearing your case is the uncle of the person who took it).”
“Keeping some gold outside of the country where you live provides geographic diversification against natural or man-made disasters and other emergencies like government confiscation of private property.”
“It is an unfortunate fact of life that most speculators eventually go broke, and many of them do it repeatedly.
The investing markets can be risky, but they don’t need to be terrifying. The ability to grow and protect your savings means you can enjoy life and stop worrying about your nest egg.”
Best wishes.
Taylor
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