Updated Modification of Harry Browne Permanent Portfolio

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Updated Modification of Harry Browne Permanent Portfolio

Postby allenmickers » Wed Mar 26, 2008 10:36 pm

Note from admin Alex Frakt. This topic has been continued in a new thread: viewtopic.php?t=61964

There is also an entire forum dedicated to the topic which was set up by posters to this thread and includes many of the contributors here: Permanent Portfolio Discussion Forum
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I am by far not qualified to modify Harry Browne's Permanent Portfolio, but I believe he is dead and I wanted to see what I could come up with.

His basic premise is 25% Gold, 25% Bonds 25% Cash 25% Equities. The long term performance has been about 9% annualized gains with very low Std Dev.

I dont particularly care for the specific allocation as theres no way I would put 25% of my assets into shiny metal. It ignores REITs and TIPS (Which didnt exist when he created the portfolio).

However what I do like is his basic premise:

25% of portfolio does amazing in Inflation (Gold)
25% of portfolio does amazing in Deflation (Cash)
25% of portfolio does amazing in Bull Market (equities)
25% of portfolio does amazing in Bear Market (bonds)

The theory is that one section will do amazing - perhaps 200% returns over 5 to 10 year time frame while the other 3 sections do bad but not terrible, maybe 30% losses each, which are compensated by the huge runup in the single class. Take a look at the last 10 years. Gold is up like 300%, stocks are down 10 to 20% depending on when you bought in, Cash is down 10 to 20% from inflation over the 10 years, and bonds are slightly up about 8%. The 25% Gold would have compensated for losses in other categories.

Here is how I tentatively modified this theory with new stuff and there is some overlap among the sections:

25% For Inflation:

10% Gold
10% US TIPs
5% Foreign TIPs (not technically correlated with US Inflation)

25% for Deflation/Devaluation of USD


15% Cash in Foreign Currency
10% Foreign Bonds (5% TIPS 5% General Sovereign Bonds)

30% Bull market

20% Equities (split US and international)
10% REIT (split US and International)


25% Bear Market


25% Long Term T-Bonds

I overlapped 5% Foreign Tips between two categories, somewhat inappropriately, but to be able to boost Bear Market from 25 to 30%.

I lumped REITs and Equity in the same section, which is actually intentional since both perform well during Bull Markets however dont have high correlation.

I feel I may have over-done the devaluation portion of the AA considering that 15% of the "Bull Market section" (REITS/equity) are international and likely unhedged against the USD. While USD value is cyclical, and will likely return to power soon, I dont feel that it will always be strong in the long term based on my political beliefs and feel strongly that a hedge against devaluation of USD is important enough to take 40 to 60% of my portfolio through various asset classes such as international reits/equity and foreign bonds/cash. And if I am wrong, I still have the other half of my portfolio hedged in USD. So either way I "win".

I also lumped Deflation and Devaluation in the same category, when they are not the same.

I am not certain but I think they have opposite effects. If the USD has deflation and is worth more, then it should be worth more against foreign currency as well. So perhaps I should lump Devaluation and Inflation together, although they are not necessarily the same either.

Perhaps a modification to cover any scenario could be:

20% Inflation
20% Devaluation
20% Bull
20% Bear
20% Deflation

On one hand I feel "Bad" about having "only 20% equities in this AA, however looking at long periods of time where equities had negative real returns, and looking towards an uncertain future, I think its lunacy to put the common 80% in equities (80-20 portfolio).

To be completely honest if we were in a long bull market, this post wouldnt exist, however I am a relatively new and young investor looking for long term returns and when I run across concepts like this Permanent Portfolio that seem reasonable, I like to explore them.
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Postby allenmickers » Thu Mar 27, 2008 5:37 am

Modified 20-20-20-20-20 Portfolio I came up with this morning:

DEVALUATION OF USD:

10% Foreign Cash (in foreign bank)
10% Foreign Bonds

DEFLATION:
20% USD Cash Prime MMF

INFLATION:
10% Gold Coins (in safe deposit box)
10% TIPS/I-Bonds

BULL:
10% Stocks
10% REITS

BEAR:
20% Long Term Treasury Bonds


This would give you 20% of your assets off the financial radar (the Foreign Bank cash and gold) so you could overcome any potential problems in the US banking system over the next 50 years.

The goal of the portfolio would be to give about a 3 to 4% gain above inflation per year with high safety and low std dev.

A justification for such a portfolio might come from several "Experts" who believe that the stock market will not be returning the 10% annualized gains over the next 80 years that is returned over the last 80 years.
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Postby dumbmoney » Thu Mar 27, 2008 7:34 am

allenmickers wrote:Modified 20-20-20-20-20 Portfolio I came up with this morning:

DEVALUATION OF USD:

10% Foreign Cash (in foreign bank)
10% Foreign Bonds

DEFLATION:
20% USD Cash Prime MMF

INFLATION:
10% Gold Coins (in safe deposit box)
10% TIPS/I-Bonds

BULL:
10% Stocks
10% REITS

BEAR:
20% Long Term Treasury Bonds


Some of these are miscatagorized. Bonds are good for deflation (interest rates fall). Cash is good for inflation (interest rates rise).

allenmickers wrote:The goal of the portfolio would be to give about a 3 to 4% gain above inflation per year with high safety and low std dev.

A justification for such a portfolio might come from several "Experts" who believe that the stock market will not be returning the 10% annualized gains over the next 80 years that is returned over the last 80 years.


Then where does the 3-4% real return come from? Bonds won't be rewarding unless there's deflation (possible but very unlikely). You can't expect much from gold. So your hoped-for return depends on outstanding stock performance and/or a collapse of the dollar.
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Postby allenmickers » Thu Mar 27, 2008 7:43 am

dumbmoney wrote:Bonds won't be rewarding unless there's deflation (possible but very unlikely).


Bonds have about an 7 to 8% historical long term return.

dumbmoney wrote:You can't expect much from gold.


Gold is up 300% in the last 10 years. Rebalancing that into stocks and bonds over that time period would have captured some of those gains. If my 10% position in gold goes down, then it means the economy is strong and my 20% position in equities/REITs will go up.

dumbmoney wrote:
So your hoped-for return depends on outstanding stock performance


as opposed to portfolios with 60 to 80% equities who are also relying on outstanding stock performance?

dumbmoney wrote:and/or a collapse of the dollar.


The USD dollar is down almost 50% over the last 10 years.

I dont think its a good bet to put 60 to 80% in Equities/REIT and 20 to 40% in Bonds and feel "safe". This would require that there be no periods of hyperinflation, or deflation, or stagflation, or devaluation of the USD over the next 40 years and for the stock market to continue gaining 10%/year annualized.
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Postby dumbmoney » Thu Mar 27, 2008 8:03 am

allenmickers wrote:
dumbmoney wrote:Bonds won't be rewarding unless there's deflation (possible but very unlikely).


Bonds have about an 7 to 8% historical long term return.


So what? The 20-year TIPS real yield is 1.7%, before taxes. You pay taxes on the nominal income, not the real return. The effective tax rate depends on the inflation rate (and can exceed 100%).

Bonds are great for safety but the return sucks.
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Postby snowman9000 » Thu Mar 27, 2008 9:39 am

AM,

Harry's book, Fail Safe Investing, is what got me to finally diversify about 5 years ago. I give him credit because he did something that Bogle and Swedroe had not. He cause me to finally do it. Actually I synthesized my own PP from what the 3 of them said, but Harry's book was the one that finally convinced me of why it was all likely to work.

I agree with you that his PP might not be ideal but I think his reasoning is great. The performance record of the PP is good, certainly on the risk side. Although I doubt he included costs in his calculations.

BTW there is the Permanent Portfolio Fund, of which Harry was an advisor. (You might already know about it.) It uses a more complex portfolio, and its return and risk stats are quite good. To me, it is heavily biased towards fighting inflation, more so than Harry's PP.

If you have never listened to Harry's investment radio shows, you should. You can find them at www.harrybrowne.org. Wade through the pages until you find radio archives, investment show, or something like that. Many of them are repetitive, just as Jack Bogle would be, because the message is simple and Harry was spending a lot of time counseling listeners to stop worrying about the timing of their investments or alternatives to them.

AM, you should realize that while there will be an ideal portfolio for the next 10/20/30 years, there is no way to know today what it is. I congratulate you for incorporating Harry's reasoning into your thinking. I think the four scenarios of the economy is a real insight, and dovetails with EMH, because if markets are efficient, ultimately they have to respond to the economy.

Like you, I decided to "improve" the PP by adding Swedroe influences. Here is what I came up with. This is what I actually did, starting in 03:

.10 US Growth
.10 US Value
.05 US Small

.20 International including EM

.10 Precious Metals & Mining

.15 Long term bonds
.10 International bonds (fund: GIM)
.20 Short term bonds & MM's (ie "cash")

So, mine is heavier in stocks and lighter in gold and slightly, cash. I already had the US stocks so I built around them.

I made a decision that including international stocks would be a good diversification. (Thanks to Swedroe.)

As to REITs, I think they were around when Harry started. Harry just didn't seem to like real estate. If you listen to his radio shows you will hear him explain his reasons. But he was talking about actual RE, not REITs. Whatever.

I believe REITs should be included. AT LEAST 10%! I am in the process of including that into mine.

I also see the need to have a good portion (I like 20%) in "cash", which I consider to be short term bonds. I have owned Short Term Investment Grade, formerly ST Corporate, for years. Its NAV barely fluctuates, and the returns are much better than true cash.

I believe a precious metals or commodities position is essential. AT LEAST 10%! To me, the combo of REITs and gold does a lot of what Harry used gold to do, but with the blessing of steadier NAV and income. Everything is a tradeoff, ya know?

Here is my new improved PP (less-taxing) going forward:

.20 US stocks, basically TSM
.20 Intl stocks including EM
.10 REITs (excluding TSM REITs) (in my IRA)
.10 Precious Metals fund (could be commodities instead)
.20 longer bonds including "some" international
.20 short bonds/cash

My bonds are in taxable, so they are munis, except for the international.

So, really, it's not that much different than a Coffeehouse or Swenson AA, is it? I believe it covers the four economic seasons quite well.

The key points are to have international, REITs, gold, and cash! And enough of them to make a difference when they are needed.

At some point you have to commit to it and give up fiddling. I haven't fiddled for 5 years, and only now because I've learned the tax consequences were bad with my first PP. I went the last 5 years blissfully ignoring financial news. On any given day or month I could not have told you the DJIA to the nearest thousand. Lately I've gotten sucked into it because I've been thinking so much about how to improve my AA. But my plan is to get this AA in place and go back to ignorance! I highly recommend it.

Whatever you put in place, in 5 or 10 years you will get an idea of how it performs in the various scenarios. If it needs adjusting, you will figure it out. You are well past paralysis by analysis at this point. Anything that is very broadly diversified will be decent. So get going and then set it aside! Good luck.
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Postby snowman9000 » Thu Mar 27, 2008 10:06 am

One thing I should mention is that Harry was a rare breed, a reformed market timer. He had a newsletter. He made a great call in the gold market in the 70s, and wrote some more books after that. It was his meal ticket. But later in life he realized he got lucky.

I think it would be more accurate to say he saw a once in a lifetime sure bet, if you call that luck. After that he found out the meaning of once in a lifetime. :)

You'd have to learn about the history of gold regulation in the US to know why his call was basically a slam dunk, rather than out and out market timer's luck. It was not a free, efficient market, and he realized what was going to happen when it became one.

OK, back to the topic....
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Postby waitforit » Thu Mar 27, 2008 10:13 am

Funny thing here. When you look at this:

.20 US stocks, basically TSM
.20 Intl stocks including EM
.10 REITs (excluding TSM REITs) (in my IRA)
.10 Precious Metals fund (could be commodities instead)
.20 longer bonds including "some" international
.20 short bonds/cash


Not much different than the average Boglehead portfolio, wouldn't you say?

The USD dollar is down almost 50% over the last 10 years.


Compared to ___? What is the real consequence of this? For someone who lives in the US and buys their goods in USD, I can't get too excited about statements like these. Of course, YMMV.

I like the premise of the thread, but disagree with some of the conclusions.
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Postby snowman9000 » Thu Mar 27, 2008 11:18 am

waitforit wrote:Funny thing here. When you look at this:

.20 US stocks, basically TSM
.20 Intl stocks including EM
.10 REITs (excluding TSM REITs) (in my IRA)
.10 Precious Metals fund (could be commodities instead)
.20 longer bonds including "some" international
.20 short bonds/cash

Not much different than the average Boglehead portfolio, wouldn't you say?


Yes and no. Not many Bogleheads believe in .10 gold or commodities. Most don't believe in international bonds. Many don't bother with REITs.

To my way of thinking, this portfolio is more hedged or diversified against US risks than most.

waitforit wrote:
The USD dollar is down almost 50% over the last 10 years.


Compared to ___? What is the real consequence of this? For someone who lives in the US and buys their goods in USD, I can't get too excited about statements like these. Of course, YMMV.



I understand your point of view. You want returns in the currency of your realm. I think there is a great case for that. However there is always the risk of high inflation from having all your eggs in one basket. It has happened before in civilized countries. US citizens are IMO myopic on this. We assume our society is much better than say Germany, Brazil, Argentina, etc. Yet this is not immune to the concept that past performance is not predictive of future results. :wink: Heck, in the 70s, inflation was brutal. And other civilized countries have experienced much worse.

We buy insurance against tornadoes even though we don't consider it likely that our house will be hit by one. Well, my house was actually destroyed by one, so I'm here to tell you that the most unlikely things can actually happen. I like to have some disaster insurance against the dollar.

You could increase the gold allocation and that would probably do it.

It's a diversification. One way or the other, you pays your money and you takes your chances.
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby craigr » Thu Mar 27, 2008 3:06 pm

Ok, Here is my Harry Browne Permanent Portfolio brain dump:

allenmickers wrote:I am by far not qualified to modify Harry Browne's Permanent Portfolio, but I believe he is dead and I wanted to see what I could come up with.

His basic premise is 25% Gold, 25% Bonds 25% Cash 25% Equities. The long term performance has been about 9% annualized gains with very low Std Dev.


I've read all of Harry Browne's books and many of his news letters. The portfolio was created in the late 1970's as a way for him and his subscribers to diversify away from hard assets that did well during that decade. He advocated his simple approach for the next 30 years.

From 1972-2007 the results are:

CAGR: %10.02
Std. Dev: 8.43

YTD in 2008 the portfolio is up almost 4% in these turbulent markets.

I dont particularly care for the specific allocation as theres no way I would put 25% of my assets into shiny metal. It ignores REITs and TIPS (Which didnt exist when he created the portfolio).


Harry Browne was certainly aware of both REITs and TIPS. He just didn't think they belonged in the permanent portfolio. He discussed REITs in the 1980s and also knew about TIPS in the 1990's but just didn't like them over gold for inflation protection.

25% For Inflation:

10% Gold
10% US TIPs
5% Foreign TIPs (not technically correlated with US Inflation)


I would disagree with this approach. Harry Browne would never substitute any asset for gold for inflation protection. He specifically stated on more than one occasion that inflation indexed bonds are not a substitute for gold for inflation protection or other currency problems.

You will enjoy this show where he talks about avoiding TIPS and investment risk:

ftp://radio.harrybrowne.org/04-10-24.mp3

Gold gets a bad rap around here. It has plusses and minuses just like any asset. It's absolutely horrible to hold when the markets are doing well and there is no inflation. However when inflation gets over 5% or other problems come around that appear to affect the local currency then it takes off like a rocket. TIPS simply do not, and cannot, react this way due to their own limitations. He discusses why using gold for inflation protection is important and why you should only hold Treasury bonds to avoid credit risk (seems appropriate for today's market) in this show:

ftp://radio.harrybrowne.org/05-04-17.mp3

But remember that gold and the other assets need to be rebalanced for the portfolio to work. Gold has an expected real return of 0% if you just hold it and never sell. For it to work in the portfolio you need to stick to the rebalancing bands just as you do for the stock and bond portions.

The rebalancing bands advocated are to sell down to 25% any asset that goes up to 35% of the portfolio. You should buy any asset back up to 25% if it ever falls to 15% of the value of the portfolio. You can do it more frequently, but keep in mind the rebalancing costs involved.


25% for Deflation/Devaluation of USD

15% Cash in Foreign Currency
10% Foreign Bonds (5% TIPS 5% General Sovereign Bonds)


During deflation your dollars are becoming more valuable against every other currency. You wouldn't want to hold foreign currency in this situation. Cash and long-term bonds will do well. Stocks and gold will do poorly under bad deflation. TIPS are not a substitute for nominal bonds during deflation.

30% Bull market

20% Equities (split US and international)
10% REIT (split US and International)


Harry Browne recommended that your stock holdings should be just a simple S&P 500 index fund. Early on (1970's, 1980's) he advocated other simpler funds before indexing became widely available and affordable for most people. In the 1990's he was squarely in the indexing camp though. Intl. holdings could be indexed as well, but it should come out of your 25% equity holding according to his 1989 book. Of course we'll never know, but I suspect that today he'd just advocate a TSM fund as long as it is an index with low costs.

Harry Browne didn't consider real estate specifically a good investment. He considered it a speculation. Moreover, he thought it straddled the stock/inflation protection part of the portfolio. Again, in his 1989 book if I recall he said if you wanted to use REITs it should come out of the stock and gold allocations to get your percentage. However, he always said that real estate can perform inconsistently based on the economy and is not an asset he considers particularly useful for the portfolio.



25% Bear Market


25% Long Term T-Bonds


Are you referring to recession here? Harry Browne always advocated 25% allocations to cash for recessions. I found that better performance and identical volatility could be obtained by substituting a Treasury Short-Term bond fund for a Treasury Bill money market fund. This is the only change I've found that produced a positive result without negative impacts on diversification of the strategy.

Perhaps a modification to cover any scenario could be:

20% Inflation
20% Devaluation


Inflation and devaluation are technically the same thing. Although since we don't have a gold standard any longer the term "devaluation" is anachronistic because the dollar isn't commodity based and can't be devalued against any particular measure of value officially.

To be completely honest if we were in a long bull market, this post wouldnt exist, however I am a relatively new and young investor looking for long term returns and when I run across concepts like this Permanent Portfolio that seem reasonable, I like to explore them.


The Permanent Portfolio concept is unorthodox but is soundly thought out. It is designed to have consistent and reasonable performance with little chance for a big loss. The worst losing year it had was 1981 where it lost somewhere around 4%. There were one or two other years where it lost around 1%. The CAGR over the past 36 years has been about 10% which is quite good considering the low volatility involved. Even if I exclude the first couple years because of the crazy gold market and start in 1975 you still have a CAGR of almost 10%.

Fail-Safe investing is a condensed version of his 40 years of investing experience. It's one of my most favorite investing books. The other book I really enjoy is "Why the best laid investment plans usually go wrong". You can buy it used for about $0.34!

This book is huge, but it spends 1/3rd of the time blowing holes in virtually all investing bunk (timing, chart reading, predictions, insider information, stock tips, etc.). It is worth the price just for that alone. The last two parts of the book talk about the Permanent Portfolio concept, why it works and how to implement it. The information is dated in some parts now. For instance, the mutual funds and stocks recommended were supplanted with his advice to just use index funds (which weren't commonly available back in 1987). However, most of the information is just as applicable today as it was back then. I'd highly recommend getting that book if you enjoyed Fail-Safe Investing.

BTW. I recommend listening to all of his archived investment shows. They all contain excellent and balanced information. He is not a speculator at all. He advocates a balanced, simple and diversified portfolio and not trying to time the markets. He was a Diehard before there were Diehards.

These shows were recorded in 2004-2005. It's fun listening to them because he talks about things that, at the time, seemed remote. Such as not relying on real estate investing or your home equity because prices could come down. Or only buying Treasury bonds and not buying munis or corporate bonds because during flights to safety people want Treasuries. Or how gold can outperform all other inflation hedges when the time comes. Etc.

I'm a firm advocate of Harry Browne's 16 Golden Rules of Financial Safety (also available in his radio show). If more people followed this advice they would have far fewer problems with their investments.
Last edited by craigr on Thu Mar 27, 2008 3:33 pm, edited 6 times in total.
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby snowman9000 » Thu Mar 27, 2008 3:20 pm

craigr wrote:
Fail-Safe investing is a condensed version of his 40 years of investing experience. It's one of my most favorite investing books. The other book I really enjoy is "Why the best laid investment plans usually go wrong". You can buy it used for about $0.34!



No he can't. I just bought that one, he'll have to buy the $0.36 cent one instead! :D

Thanks for the link Craig, I never heard of that book.
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Postby zhiwiller » Thu Mar 27, 2008 3:38 pm

Craigr,

Thanks for all that information. It is helpful informative posts like yours as to why I read this iste multiple times a week. I knew about Harry Browne from his political ideology book "The Great Libertarian Offer" which I read when deciding who I wanted to vote for back in 2000 and which I still keep a copy of because his ideas are so clearly communicated. I always thought he was a gold speculator, but I guess I should do some more reading! If he is as clear with his investment ideas as he was in the other book I've read of his, then I'm on board.

But the real question I have is, does he spell out what younger vs. older investors should do? Surely you should take risk tolerance into account, right? I have a hard time stomaching a 50% bond portfolio when I am 25 y/o.
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Postby allenmickers » Thu Mar 27, 2008 3:46 pm

Craig, just wanted to say thanks for taking the time for that extended response. It appreciated :)

So your interpretation would then be that I shouldnt worry about "Devaluation" of US Currency as a separate economic risk, and instead clump it under inflation?

I plan on travelling internationally in my retirement so USD devaluation is an extreme concern of mine.

Do you think that the Permanent Portfolio changes based on my inclination NOT to sell gold coins? The spread involved is a few percent and theres 28% capital gains collectibles tax. I would rather redirect new investment money into the other 75%. It would seem that by doing so, I am not really "capturing" the gains I got in the gold since in a huge gold boom, I am not exchanging it for stocks/bonds/cash. However I should be able to maintain a +/-10% band through new aquisitions only.
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Postby craigr » Thu Mar 27, 2008 7:32 pm

zhiwiller wrote:But the real question I have is, does he spell out what younger vs. older investors should do? Surely you should take risk tolerance into account, right? I have a hard time stomaching a 50% bond portfolio when I am 25 y/o.


More brain dump:

Harry Browne always advocated the same exact portfolio for everyone. He never believed in 100% investing in any one asset because anything can happen in the markets. He always felt a balanced portfolio gave the best compromise for someone who wasn't trying to predict the future. I agree with him. I don't recommend 100% stock nor do I recommend 100% bonds for anyone. You can get burned doing 100% in any asset.

From my analysis of the portfolio it has had fairly consistent performance. There was a period during the 1990's where it was not so hot as the large caps and tech stocks took off. However over most periods of time it managed to have a real after-inflation return that was acceptable to me. More importantly, it never experienced a large loss in a variety of very bad market conditions. It just plodded along doing its thing.

You also need to understand that Harry Browne felt that your career was the primary generator of your wealth. He called your savings "The money that is precious to you." This means that you should never risk your money that you can't afford to lose in risky investment schemes. It also acknowledged the balance between needing to grow your money and the recognition that if you were to take too much risk and lose a large part of your savings you may never have the chance to get it back again. He also understood that very few people get filthy rich off of their investments alone and taking too much risk can lead to ruin just as often as riches.

Harry Browne was a speculator in the 1970's for sure, but soon saw the light in a couple years. By the late 70's he was quite clear that for the money that was precious to you it should be invested as advocated by the Permanent Portfolio strategy. If you choose not to speculate (Harry Browne didn't speculate at all later in life according to him) that was fine, too. His books often fell into the doom and gloom scenarios, but his portfolio advice remained the same for most of his career even when he was thinking something bad could happen to the economy.

However getting back to your allocation question I never read nor heard him advise anyone to vary the allocations based on age.

In my opinion, his portfolio is quite sophisticated. He combined four asset classes based on how they respond to economic conditions on their own. These asset classes are largely uncorrelated with each other and don't drift around that much. Moreover, the portfolio focuses on the economic conditions that drive returns as opposed to modern attempts that look at returns in a vacuum and tend to ignore economic history as to why those returns actually happened.

In the end, the portfolio combines several very volatile asset classes and uses that volatility to smooth out the bumps in the road. He never got much into the idea of Modern Portfolio Theory and correlations, but that's exactly what is going on. The extreme volatility of each asset combines together to make a portfolio that works as promised.
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Postby craigr » Thu Mar 27, 2008 7:42 pm

allenmickers wrote:Craig, just wanted to say thanks for taking the time for that extended response. It appreciated :)


No worries. I really like Harry Browne's advice in case you couldn't tell. At first I was a bit skeptical, but the more I watch the markets the more I realize just how good his advice is.

So your interpretation would then be that I shouldnt worry about "Devaluation" of US Currency as a separate economic risk, and instead clump it under inflation?


Devaluation and inflation are the same. Frankly, devaluation is a better word to use than the deceptive "inflation". Inflation implies that prices are "going up" instead of what really is happening which is the dollar is "going down".

Politicians and economists use the word "inflation" to cover up the fact that they are printing too much money and making it worth less. It tricks the common person into believing that higher prices are due to "greedy business owners" and not due to over-spending, debt and over-printing to pay bills.

For instance, here is a chart I made of the price of oil in dollars vs. 1/10 ounce of gold. You'll see that it pretty much moves in lockstep. So while our politicians are busy blaming greedy oil companies, what they fail to mention is that the price of oil hasn't gone up at all in terms of gold. It's only gone up in terms of dollars. What that means is a component of the price increase is due to the dollar fall and not due strictly to excess demand. Although there is a demand component causing rising prices, just not as much as people think. It's easier to blame China and India for our problems when we're really causing a lot of it ourselves:

Image



I plan on travelling internationally in my retirement so USD devaluation is an extreme concern of mine.


Well keep in mind that there are no commodity based currencies operating on the planet at this point. So all countries are inflating their money to some degree or another. The USD is the current leader, but the Euro and others will certainly catch up sooner or later. It's inevitable with fiat currency that they are devalued down to zero. It always happens so you must stay diversified.

Do you think that the Permanent Portfolio changes based on my inclination NOT to sell gold coins? The spread involved is a few percent and theres 28% capital gains collectibles tax. I would rather redirect new investment money into the other 75%. It would seem that by doing so, I am not really "capturing" the gains I got in the gold since in a huge gold boom, I am not exchanging it for stocks/bonds/cash. However I should be able to maintain a +/-10% band through new aquisitions only.


I'm not sure I understand your question. But I think you are saying you hold gold coins that are now exceeding the upper 35% rebalance band of the portfolio. If you can rebalance with new money then that is always the best way to go to avoid taxes. However if it will take you too long to invest to bring the asset allocations into alignment then you should sell the gold coins and re-deploy that money to your other assets and just suck up the taxes.

Gold has had a spectacular run. The only way you can get a return off of it is to sell and move the money elsewhere. Otherwise the real long term returns are 0% for that asset class. Gold responds violently to inflation for a variety of reasons. One of those reasons is human emotion. By selling it at a high price you are capturing what I call the "panic premium" and using the money to buy much cheaper assets.

Gold can be a religious issue for investors. I just look at it as a tool. Right now the tool is doing the job it is supposed to do. To let it work most effectively you need to rebalance out of it when your allocations become too tilted in that direction.
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Postby allenmickers » Thu Mar 27, 2008 8:12 pm

If gold has a real return of 0, why are we using it? Couldnt an argument be that the only way gold is making money is due to that panic premium, and that is essentially speculation on the part of you that people will always in the future continue to drive up the price of gold due to panic buying? Maybe in the future people will buy ammo or guns or palmtrees in a panic due to inflation concerns. We are just speculating on what they will panic to buy.

If the real return truely is zero, then isnt it dragging the entire portfolio down if the goal is to exceed inflation by a few percentage points?
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Postby craigr » Thu Mar 27, 2008 8:30 pm

allenmickers wrote:If the real return truely is zero, then isnt it dragging the entire portfolio down if the goal is to exceed inflation by a few percentage points?


Panic premium is probably too strong of a word to use. Really what it is is that gold is the second most popular form of money in the world after the dollar. It is the ultimate currency hedge. Period. When people think the dollar is having problems they will sell dollars and buy gold. This may change in the future with rise of the Euro or even Chinese Yuan, but even then I suspect gold will still remain number two in the minds of most people.

The real return from gold comes from the fact that it acts like a leveraged asset without having to use leverage. There is a very small supply relatively to world GDP. It doesn't take a lot of people wanting to buy it to make it go up quickly in price. Not only that, but the sellers of gold are often reluctant to part with it as they may also feel a bit of anxiety about a paper currency. So this can also drive the price up higher.

Gold is a drag on the portfolio during times of prosperity. Then again, bonds can be a drag too. However, stocks are a drag when the markets are doing badly. ;) During the 1970's stocks and bonds were in negative real return territory for the entire decade. A portfolio that had hard assets balanced with stocks and bonds profited.
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby docneil88 » Thu Mar 27, 2008 8:30 pm

allenmickers wrote:However what I do like is his [Harry Browne's] basic premise:

25% of portfolio does amazing in Inflation (Gold)
25% of portfolio does amazing in Deflation (Cash)
25% of portfolio does amazing in Bull Market (equities)
25% of portfolio does amazing in Bear Market (bonds)


Ever hear the military maxim: "He who defends everything defends nothing"? The key question, is this: Over your investment horizon, what % of time do you expect a bull market, a bear market, inflation, and deflation? Personally, I expect inflationary periods to take up far more time than deflationary periods. And I expect bull market periods to take up far more time than bear market periods. Thus, I choose to vastly overweight real assets (as an inflation hedge) and equities. Moreover, if deflation hits, at least I get to pay less for the goods and services I buy. That will soften the declines in my real assets. (I have about 10% of my portfolio in DBA, an agriculture CCF fund, and about 20% of my portfolio in REITs; I own no real estate directly. Almost all of the rest of my portfolio is in equities, half international, and half domestic. The international equity gives me currency exposure that will help if the US has more inflation than the rest of the world.) Best, Neil
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby allenmickers » Thu Mar 27, 2008 8:39 pm

docneil88 wrote: Over your investment horizon, what % of time do you expect a bull market, a bear market, inflation, and deflation? Personally, I expect inflationary periods to take up far more time than deflationary periods. And I expect bull market periods to take up far more time than bear market periods.


Isnt this a form of market timing? Trying to time what market trends might be over the next 30 years?
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Postby dumbmoney » Thu Mar 27, 2008 8:39 pm

allenmickers wrote:If gold has a real return of 0, why are we using it? Couldnt an argument be that the only way gold is making money is due to that panic premium, and that is essentially speculation on the part of you that people will always in the future continue to drive up the price of gold due to panic buying? Maybe in the future people will buy ammo or guns or palmtrees in a panic due to inflation concerns. We are just speculating on what they will panic to buy.

If the real return truely is zero, then isnt it dragging the entire portfolio down if the goal is to exceed inflation by a few percentage points?


It makes sense if you expect it to pay off big when other asset classes do badly.
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby dumbmoney » Thu Mar 27, 2008 8:51 pm

docneil88 wrote:Thus, I choose to vastly overweight real assets (as an inflation hedge) and equities. Moreover, if deflation hits, at least I get to pay less for the goods and services I buy. That will soften the declines in my real assets.


In a deflationary Great Depression type of scenario, you would want to own treasury bonds (the longer the better). Everything else would be toast.
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby docneil88 » Thu Mar 27, 2008 8:57 pm

allenmickers wrote:
docneil88 wrote: Over your investment horizon, what % of time do you expect a bull market, a bear market, inflation, and deflation? Personally, I expect inflationary periods to take up far more time than deflationary periods. And I expect bull market periods to take up far more time than bear market periods.


Isnt this a form of market timing? Trying to time what market trends might be over the next 30 years?

Not in the sense that the term "market timing" is typically used. I'm not darting in and out of markets based on short or intermediate term predictions. In fact, my asset allocation (across asset classes) has been pretty steady over the last 20 years, except for my addition of REITs in 2002 and my addition of DBA (Agriculture CCF ETF) in 2007.

It would seem odd to me to equally weight the respective assets that do well in bull, bear, inflation, and deflation while I think bull periods and inflationary periods will take up the vast majority of the time over my investing horizon. If you think bull periods will take up more time than bear in your investing horizon, why would you equally weight the assets that do well in bull with the assets that do well in bear? If you think inflationary periods will take up more time than deflationary in your investing horizon, why would you equally weight the respective assets that do well in inflation with the assets that do well in deflation? Best, Neil
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby docneil88 » Thu Mar 27, 2008 9:04 pm

dumbmoney wrote:
docneil88 wrote:Thus, I choose to vastly overweight real assets (as an inflation hedge) and equities. Moreover, if deflation hits, at least I get to pay less for the goods and services I buy. That will soften the declines in my real assets.


In a deflationary Great Depression type of scenario, you would want to own treasury bonds (the longer the better). Everything else would be toast.

You're probably right, unless the next great depression is caused by the US government accumulating so much debt that it defaults. Still, I probably should add a 5% position in LT Treasury Zero-Coupon bonds just in case your low-probability scenario becomes a reality. Best, Neil
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby snowman9000 » Thu Mar 27, 2008 9:10 pm

dumbmoney wrote:
docneil88 wrote:Thus, I choose to vastly overweight real assets (as an inflation hedge) and equities. Moreover, if deflation hits, at least I get to pay less for the goods and services I buy. That will soften the declines in my real assets.


In a deflationary Great Depression type of scenario, you would want to own treasury bonds (the longer the better). Everything else would be toast.


Cash would be fine, right?
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby dumbmoney » Thu Mar 27, 2008 9:12 pm

docneil88 wrote:It would seem odd to me to equally weight the respective assets that do well in bull, bear, inflation, and deflation while I think bull periods and inflationary periods will take up the vast majority of the time over my investing horizon. If you think bull periods will take up more time than bear in your investing horizon, why would you equally weight the assets that do well in bull with the assets that do well in bear? If you think inflationary periods will take up more time than deflationary in your investing horizon, why would you equally weight the respective assets that do well in inflation with the assets that do well in deflation?


What's the point of investing in anything but stocks? This portfolio isn't a doomsday prediction. It's just a conservative portfolio.
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby dumbmoney » Thu Mar 27, 2008 9:21 pm

snowman9000 wrote:
dumbmoney wrote:
docneil88 wrote:Thus, I choose to vastly overweight real assets (as an inflation hedge) and equities. Moreover, if deflation hits, at least I get to pay less for the goods and services I buy. That will soften the declines in my real assets.


In a deflationary Great Depression type of scenario, you would want to own treasury bonds (the longer the better). Everything else would be toast.


Cash would be fine, right?


Yes, but bonds would perform much better. The return on cash tracks the inflation rate, so it does okay in both inflation and deflation.
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby docneil88 » Thu Mar 27, 2008 9:23 pm

snowman9000 wrote:
dumbmoney wrote:
docneil88 wrote:Thus, I choose to vastly overweight real assets (as an inflation hedge) and equities. Moreover, if deflation hits, at least I get to pay less for the goods and services I buy. That will soften the declines in my real assets.


In a deflationary Great Depression type of scenario, you would want to own treasury bonds (the longer the better). Everything else would be toast.


Cash would be fine, right?

Only Long-Term Treasuries should have a high return in such a scenario, so long as the government doesn't default. Still, cash under a mattress would hold its value well, so long as it's not stolen. Cash in a bank would hold its value well, so long as it's FDIC insured, and FDIC remains solvent. Cash in a money market fund may have trouble since some of its portfolio investments may default. A treasury money market fund would do better, so long as the government doesn't default. Best, Neil
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby docneil88 » Thu Mar 27, 2008 9:31 pm

dumbmoney wrote:What's the point of investing in anything but stocks?
That's not what I'm trying to say. I think it's fine to put some money in assets that do well in deflation and assets that do well in bear markets. I'd just recommend that the % in such assets be far less than in other assets given my firm belief that deflationary periods and bear periods will take up far less time in the long run than inflationary periods and bull periods. Best, Neil
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Re: Updated Modification of Harry Browne Permanent Portfolio

Postby dumbmoney » Thu Mar 27, 2008 9:37 pm

docneil88 wrote:
dumbmoney wrote:What's the point of investing in anything but stocks?
That's not what I'm trying to say. I think it's fine to put some money in assets that do well in deflation and assets that do well in bear markets. I'd just recommend that the % in such assets be far less than in other assets given my firm belief that deflationary periods and bear periods will take up far less time in the long run than inflationary periods and bull periods.


Insuring against a bad outcome is not the same as predicting a bad outcome. We all expect more bull markets than bear, etc. The issue isn't what we expect but how much risk, and which risks, we want to take.
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Postby Arnie » Thu Mar 27, 2008 10:16 pm

This is a really interesting thread!! I've learned a ton

A few questions:

1)Why isn't this talked about in Bogle's books? Seems the kind of thing he would like?

2)Is there a simple way to actually execute this - e.g., a fund that sticks to the Harry Browne ratio's so I don't have to do it myself? Or an easy way to buy things like gold in a fund?

3)Is there a way to actually look at historical data for this kind of approach?

Many thanks!!!
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Postby nick in ohio » Thu Mar 27, 2008 11:29 pm

Arnie,

You can buy the fund here:
http://permanentportfoliofunds.com/
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Postby hafis50 » Fri Mar 28, 2008 3:33 am

nick in ohio wrote:Arnie,

You can buy the fund here:
http://permanentportfoliofunds.com/


It seems this fund did/does not invest in Browne's original portfolio:

Skousen - The Permanent Portfolio Fund (2006)

Harry put his money where his mouth is by helping to create the Permanent Portfolio Fund (PRPFX) in 1982. The fund has a mix similar to Browne's original proposal:

* 25% precious metals (20% gold bullion, 5% silver bullion)
* 10% Swiss franc bonds yielding less than 2%
* 15% real estate and natural resource stocks, foreign and domestic
* 15% aggressive growth stocks; and
* 35% in government securities, including T-bills.
...
Since 1982, the fund has had an average return of 6.38%...During a period of boom and bust, it's been up 20 years, down only three years. Morningstar gives it a four-star rating for its low-risk formula.

But there's a downside: The fund's long-term performance is poor compared to stocks, or even junk bonds. Its average return of 6.38% is only one percentage point higher than safe T-bills! During the roaring 1990s, the Permanent Portfolio Fund seemed "permanently" in a funk, rising only 1% a year while stocks were exploding at a 20%-30% annual rate
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Postby Arnie » Fri Mar 28, 2008 7:17 am

Thanks Hafis50 - this performance of ~6% is very different from Craig's 10% that he mentioned before - certainly not nearly as attractive!

Maybe its because this fund isn't exactly Browne's allocation as you point out (e.g., TIPS vs Gold) Strange that Browne would affiliate himself with a fund that seems so different from his elegant allocation.
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Postby snowman9000 » Fri Mar 28, 2008 8:22 am

Arnie wrote:This is a really interesting thread!! I've learned a ton

A few questions:

1)Why isn't this talked about in Bogle's books? Seems the kind of thing he would like?

2)Is there a simple way to actually execute this - e.g., a fund that sticks to the Harry Browne ratio's so I don't have to do it myself? Or an easy way to buy things like gold in a fund?

3)Is there a way to actually look at historical data for this kind of approach?

Many thanks!!!


Here are Harry's numbers. I doubt they include any costs:

http://harrybrowne.org/PermanentPortfolioResults.htm

The fund is run by someone else, and Harry was an advisor. I would say it is of the same philosophy but since they are professional managers they are attempting to include assets that would be problematic for individuals.

Here is something I put together for my own amusement, which I posted elsewhere here a few days ago:

Code: Select all
PermPortFund   1,000
1995   15.40%   1,154
1996   1.60%   1,172
1997   5.58%   1,238
1998   3.39%   1,280
1999   1.10%   1,294
2000   5.83%   1,369
2001   3.76%   1,421
2002   14.31%   1,624
2003   20.44%   1,956
2004   12.04%   2,192
2005   7.62%   2,359
2006   13.82%   2,685
2007   12.43%   3,018
CAGR      8.86%
STD DEV   5.84%   
SHARPE   0.649   


"The fund did better (than I did with my own portfolio) but with a slightly higher std dev, and lower Sharpe ratio. Still a good performance. "

Here are the lifetime returns.
http://www.permanentportfoliofund.com/p ... eturns.pdf

It's one of those things. In some recent years many folks here would have loved to have its peformance. Maybe not so much in 98 and 99. It delivers steady performance but when the stock market roars ahead, some people feel stupid for not being on board, and they can't handle this sort of fund.

We all have regrets like that, but some will stay the course and some will not. I think if you stay the course with the PP fund, you'll have a solid lifetime return. Just my opinion, obviously.
Last edited by snowman9000 on Fri Mar 28, 2008 8:26 am, edited 2 times in total.
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Postby MossySF » Fri Mar 28, 2008 8:24 am

Arnie wrote:Thanks Hafis50 - this performance of ~6% is very different from Craig's 10% that he mentioned before - certainly not nearly as attractive!


I'd say main factors to why PRPFX hasn't performed all that well:

1) Expense ratio.
2) Overweighting on domestic aggressive growth stocks instead of a simple 50/50 TSM+TISM ratio.
3) What's up with holding Swiss Francs? I can't begin to guess what kind of expense drag that would be.

Overall, about 1.5%-2% in low hanging fruit available for today's do it yourself indexer.

Craigr's numbers are also 1972-2007 versus PRPFX which only started in the early 80s. The 70s were much kinder to gold -- about 1.5% difference when comparing a "permanent portfolio" starting from 1972 and one from 1982. Add this to the 2% drag from non-optimal asset class management and you have the 10% versus 6% difference.
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Postby allenmickers » Fri Mar 28, 2008 11:04 am

MossySF wrote:3) What's up with holding Swiss Francs? I can't begin to guess what kind of expense drag that would be.


I think Swiss Francs beat the dollar by 30 to 50% over the last 10 years during the devaluation of US Currency. So that portion of the portolio probably did extraordinarily well. But that was just luck. Whats the chances that the USD will continue to devalue?
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Permanent Portfolio:

Postby Barry Barnitz » Fri Mar 28, 2008 11:39 am

The asset allocation of the fund is based on Harry Browne's earliest iterations of the Permanent Portfolio thesis.

In the 1970's Browne allocated gold, silver, and swiss francs as the "hard asset" allocations to hold in anticipation of the economic effects of severing the US dollar's monetary link to gold. Browne felt diversifying the " hard asset" allocation was prudent.

As that once in a lifetime scenario played out, Browne, realizing the folly of continually predicting an uncertain future, began to hedge these hard assets with stock investments, treasury bills, and long-term treasury bonds. The mutual fund was created at this point of time, reflecting these allocations.

Over time, Browne, came to believe that this earlier Permanent Portfolio could be simplified to its final 4 asset class, evenly balanced allocation. He felt that simplification made the portfolio easier to execute and manage for individual investors.

Realizing that investors often had the itch to tinker and make bets against accepting market returns. Browne suggested satisfying this itch with a Variable Portfolio, which could hold any asset class and employ any strategy, as long as one was willing to play with assets that one could afford to lose (100%).

The only rules for the Variable Portfolio are:

1. Never to use margin;
2. Never to shift funds from the Permanent Portfolio to the Variable Portfolio to make up for losses;
3. Not a hard and fast rule, but Browne felt it was a good idea to shift a good portion of Variable Portfolio profits to the Permanent Portfolio. Also, due to the potential tax consequences, it is often advisable to locate Variable Portfolio assets inside tax sheltered accounts.

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Postby craigr » Fri Mar 28, 2008 12:30 pm

I think Barry summed everything up. The first iteration of the portfolio idea had too much weighting to hard assets. By the early-mid 1980's he just cut it down to the four asset classes in equal splits.

His variable portfolio is basically what we call "play money". The idea was that if you blow it, that's it. You don't touch the money in the Permanent Portfolio to make up your losses. This is the money you can afford to lose if you are wrong. Of course, you don't need to run a variable portfolio if you don't want to.

If you wanted to make the Permanent Portfolio using just ETFs you could do:

25% Stock - iShares Russell 3000 (Ticker: IWV) or Vanguard (Ticker: VTI). You could also add in some broad based Intl. index such as EFA or VEU to the mix.

25% Long Term Treasury Bonds - iShares Long Term Treasury (Ticker: TLT). I haven't seen any other long-term funds that really are 20+ year treasuries other than this fund. The Vanguard LT Bond fund has too short of duration and is not suitable. You could also just purchase 25-30 year treasuries on the market or from the treasury directly to save on expenses.

25% Cash/Short-Term Treasury Bonds - A treasury money market fund or you could us iShares 1-3 Year Treasury (Ticker: SHY). Harry Browne advocated holding it in a MMF. I found that you could substitute the MMF for a short-term bond fund and not affect volatility but could boost CAGR by almost 1% a year over the past 35 years. FWIW.

25% Gold - iShares Gold Trust (Ticker: IAU)

Keep in mind that optimally, Harry Browne would have you in some type of physical control of the gold and not using an ETF. He considered it a special asset that should be nobody's promise to you. He advocated having physical control in a safe deposit box or segregated storage at a bank somewhere.

Also the only bonds he advocated holding were Treasury bonds. He didn't advocate munis, corporate, junk or other types of non-treasury bonds. He wanted to avoid credit risk in bonds and felt that Treasuries were the only type that filled this criteria. Given the recent happenings in the bond market, it appears that he was correct.

I like the idea of the wide diversification this portfolio offers. The assets chosen have very little in common with each other and how they react in the economy. At any time one or more of the assets are doing poorly. However the other portions of the portfolio are usually doing well enough to pull the losers up with it. Overall this is fine with me. I don't like portfolios where everything is doing well at the same time. That also means they can all do very badly at the same time, too and create large losses.

Also this is just one portfolio concept and obviously many people may not agree with it. Even if it's something that doesn't appeal to you, I found his advice and information on economics contained in his radio show and his books to be useful.
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Postby Rose21 » Fri Mar 28, 2008 12:47 pm

Craig, I seem to recall that Harry did not advocate the use of a long-term bond fund as a substitute for the bonds themselves. Although my recollection of his book is somewhat hazy, I think his issue was that none of the available funds came close enough to the 30-year duration that was required.

That issue aside, wouldn't a bond fund defeat the purpose intended by Harry because NAV and yield offset one another?
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Postby craigr » Fri Mar 28, 2008 12:56 pm

Rose21 wrote:Craig, I seem to recall that Harry did not advocate the use of a long-term bond fund as a substitute for the bonds themselves. Although my recollection of his book is somewhat hazy, I think his issue was that none of the available funds came close enough to the 30-year duration that was required.

That issue aside, wouldn't a bond fund defeat the purpose intended by Harry because NAV and yield offset one another?


He did prefer holding the LT bonds directly. They're so easy to do today through Treasury Direct or a Brokerage that this is no problem. However, in one of his radio shows he did mention that TLT appeared to him to be a substitute if you couldn't own the bonds directly (maybe a restrictive retirement plan for instance). TLT is the only ETF/Fund I've come across that is purely LT Treasuries of long enough duration.

Again though, holding the bonds directly is quite easy as long as you have the minimum to purchase. You can buy 25-30 year issues and sell them when they get to about 20 years and repeat the process. The important part is to have long enough bonds to ensure ample volatility to offset other parts of the portfolio.
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Postby snowman9000 » Fri Mar 28, 2008 1:07 pm

A few weeks ago there was a thread describing an ongoing friendly contest amoung various diehard portfolios. I can't find the thread now.

If anyone reading this is in the contest, could they put the Harry Browne Permanent Portfolio into it? The allocation suggested by Craigr 3 posts above this would be it.
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Treasury bonds:

Postby Barry Barnitz » Fri Mar 28, 2008 1:11 pm

Harry Browne also countenanced the use of zero coupon bonds for the long term treasury allocation. Since zeros are roughly twice as volatile as treasury bonds of similar maturity, he suggested using either 15 year duration zeros, or reducing the bond allocation by half (equally reallocating the difference to the other three asset classes.) Zeros were most appropriately located in tax-deferred accounts.

Browne suggested that those wishing to use mutual funds for zeros should use the Benham (now American Century) Target Maturity Treasury Funds. Over time one would simply rebalance the position to the Target Fund meeting the 15 year duration.

American Century Target Maturities Trust 2025 is the current maturity meeting the allocation requirement.

Annual Report

regards,
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Postby allenmickers » Fri Mar 28, 2008 3:22 pm

So then Harry Browne might suggest I buy and hold 10 "sets" of 30 year treasury bonds within my VG VBS IRA?

If I started now, I would put 25% into a single 30 year bond. Then next year, with whatever new money I contribute and/or interest from the first bond and/or dividends from the stock fund, I buy a new 30 year bond so that along with the first one, I have 25% total.

Then after 10 years, I am holding 10 different bonds with maturities from 20 to 30 years with 1 year differentials. I sell the one with 20 years left on the secondary market, and put that towards my new 30 year bond purchase in that year.

I dont know what the minimum for VG - Brokerage 30 year treasury bonds are but it might be too much for me to employ this strategy with a $50k portfolio.
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Postby fundtalk » Sat Mar 29, 2008 9:07 am

Thank you to all the contributors. This is an interesting thread. I have to admit that I hadn't heard of Harry Browne before this, so I appreciate the links.

I agree with the concept of having a more static portfolio over an investing lifetime. This has led me to believe that most investors should have a "balanced" portfolio (60% stock, 40% bonds) during the accumulation phase with a further reduction (to 40 or 50% equity) when an investor is within 5 years of the withdrawal phase.

Reading this thread and following Larry's writings over the last several years, I can't help but wonder if the "balanced" portfolio isn't really balanced unless gold or commodities are included.

Several of the posters on this thread seem to be strong believers in Harry Browne's writings. Do you all own gold in your portfolio? Do you care to divulge how long you've held it and at what percentage of your portfolio?
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Postby snowman9000 » Sat Mar 29, 2008 11:14 am

fundtalk,

To me there are two schools of thought in investing.

One is, the US (or global) stock and bond markets offer a satisfactory risk-reward proposition. Sure, there will be times when it all comes off the rails, but the investor feels that by diversifying and rebalancing, he will do well in the end. And most of the time, this turns out to be the case.

The second is, return OF capital is more important that return ON capital. Large losses cannot be tolerated no matter what. The investor wants capital appreciation but will trade off some of the potential reward for greater insurance against catastrophe. Harry Browne would be in this category.

The second implies either taking less risk (lower % of equities), or something that provides insurance. I'm of this school of thought. I do both of those things. I own some actual gold (on paper anyway) but mostly I'm in the VG precious metals and mining fund. It has varied between 7 and 15% of my AA. My target is 10%. I have owned it since the mid to late 90s.

Gold was not on Ben Graham's radar screen. He liked approximately 50-50 stocks and bonds. I've followed and/or owned the Wellington and Wellesley funds for 20 years, and their performance bears out the widsom of Ben Graham. If you abhor losing years, 60-40 or less is a great mix, IMO.
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Postby craigr » Sat Mar 29, 2008 11:54 am

allenmickers wrote:Then after 10 years, I am holding 10 different bonds with maturities from 20 to 30 years with 1 year differentials. I sell the one with 20 years left on the secondary market, and put that towards my new 30 year bond purchase in that year.


Yes. When the bond gets down to 20 years left to maturity you'd sell it and buy the longest bond available at the time. Of course, if your bond allocation is too high then you'd use that money to rebalance towards the underperforming assets.

I dont know what the minimum for VG - Brokerage 30 year treasury bonds are but it might be too much for me to employ this strategy with a $50k portfolio.


I don't know the answer. You can always setup an account at Treasury Direct and just purchase straight from the treasury. Or use another brokerage to make the purchases if VBS is too restrictive.
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Postby craigr » Sat Mar 29, 2008 12:44 pm

snowman9000 wrote:The second is, return OF capital is more important that return ON capital. Large losses cannot be tolerated no matter what. The investor wants capital appreciation but will trade off some of the potential reward for greater insurance against catastrophe. Harry Browne would be in this category.


I think this is an important point of the Permanent Portfolio concept. At any time at least one asset class is doing poorly. It may be that even two are doing poorly. Three of the asset classes may be doing bad at once, but it's unlikely it would carry on for that long. The chances of all four of the assets doing poorly is remote except in some kind of extreme circumstances.

My portfolio has shifted gradually to the Permanent Portfolio concept. I had too much equity exposure and wanted a strategy that could reduce my equity risk but also protect me against severe inflation or other economic problems.

In the end, as Snowman9000 (I can't quote that name and keep a straight face) pointed out, the portfolio concept pays a nod to the unexpected events that happen all the time in the investing world. However, the stock and long-term bond portion of the portfolio do bias it towards a growing economy so it's not purely a doomsday allocation.
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Postby allenmickers » Sat Mar 29, 2008 2:07 pm

craigr wrote:My portfolio has shifted gradually to the Permanent Portfolio concept. I had too much equity exposure and wanted a strategy that could reduce my equity risk but also protect me against severe inflation or other economic problems.


If you dont mind sharing, what is your portfolio look like? (please provide tickers/fund names if posslble)
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Postby craigr » Sat Mar 29, 2008 5:01 pm

allenmickers wrote:
craigr wrote:My portfolio has shifted gradually to the Permanent Portfolio concept. I had too much equity exposure and wanted a strategy that could reduce my equity risk but also protect me against severe inflation or other economic problems.


If you dont mind sharing, what is your portfolio look like? (please provide tickers/fund names if posslble)


I really don't like sharing portfolio specifics because it is a personal choice and my situation is going to be different from the many others reading this. I will simply say that it closely follows the permanent portfolio strategy. Other people may take some concepts from the idea and apply it to themselves and their portfolio. Everyone is different.

I posted some good proxy information above using just iShares or Vanguard funds.

A lot of this information is covered in his investment radio show. Specifics on the asset allocation were introduced here:

ftp://radio.harrybrowne.org/04-08-15.mp3

He discusses index funds to buy, what bonds to buy and how to buy gold here:

ftp://radio.harrybrowne.org/04-11-21.mp3

It would probably be worth downloading all the episodes, loading them on an MP3 player, and listening to them at your leisure:

http://www.harrybrowne.org/Archives/Arc ... stment.htm
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