Learning about the Harry Browne Permanent Portfolio

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snowman9000
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Learning about the Harry Browne Permanent Portfolio

Post by snowman9000 »

Although there is a thread about it, that thread is quite long and goes in numerous directions, mostly about people trying to change the AA to suit their own views. (Oh how I wish I had not done that myself!)

The Permanent Portfolio is a buy, hold, and rebalance lazy portfolio. It is designed to be all-weather, and is even holding up well today. Here is a site comparing the ongoing performance of most of the well-known lazy portfolios. You will see that as of the end of September, the PP was in the lead. http://madmoneymachine.com/portfolios/

Our resident expert here is craigr. He created a website with copies of Harry Browne's archived radio investment shows. Lately I've had several people expressing a lot of interest in learning about the PP. I recommend the book Fail Safe Investing. But I know myself that the radio shows do a tremendous job of fleshing out the advice in the book. Here is Craig's website: http://www.crawlingroad.com/finance/harrybrowne/

On it you will see the link to his mirror site, and a link to the original site. On the original site there are brief descriptions of the shows.

There is a fair bit of repetition in the radio shows. Craig, do you have any suggestions as to which handful of them might give an interested newbie a good overview of the whys, wherefores, and hows of the PP?

Thank you.
pkcrafter
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Post by pkcrafter »

Snowman,

Thanks for this interesting link.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
brswif00
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Post by brswif00 »

I enjoyed the other thread very much, and bought Fail-safe investing and enjoyed reading it. I have no problem with the four-by-25% allocation. But my question about implementing the PP is how to do it if you want to have currency exposure of 50% USD and 50% Euro, in expectation of splitting time between two countries. I also think it is overconfident to have 50% of portfolio [25% cash & 25% LTbond] in credit from one issuer, Uncle Sam.

I know the gold holding is supposed to protect from dollar inflation, but I just don't feel totally comfortable with that.

I would prefer to buy governemnt bonds of hard-currency nations like Swiss and german direct from their governments, but don't know if that is possible even for their own citizens, much less an American.

Has craigr or anyone else intersted in PP given thought to including international bonds/cash?
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stratton
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Post by stratton »

brswif00 wrote:I know the gold holding is supposed to protect from dollar inflation, but I just don't feel totally comfortable with that.

I would prefer to buy governemnt bonds of hard-currency nations like Swiss and german direct from their governments, but don't know if that is possible even for their own citizens, much less an American.

Has craigr or anyone else intersted in PP given thought to including international bonds/cash?
Most of what you've mentioned above is answered in this gigantic thread:

Updated Modification of Harry Browne Permanent Portfolio

Paul
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craigr
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Re: Learning about the Harry Browne Permanent Portfolio

Post by craigr »

Hi Snowman,
snowman9000 wrote:There is a fair bit of repetition in the radio shows. Craig, do you have any suggestions as to which handful of them might give an interested newbie a good overview of the whys, wherefores, and hows of the PP?
I think the first two shows are the basic ones to listen to to get an introduction. He goes over his 16 Golden Rules of Financial Safety and the basic components of his portfolio:

Mirror:

http://www.crawlingroad.com/finance/har ... -08-08.mp3
http://www.crawlingroad.com/finance/har ... -08-15.mp3

Original Site:

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

The other shows go into various topics more deeply about why market timing doesn't work, why the assets were chosen, how assets respond to changes in the economy, etc.

I need to finish my show index which I've been procrastinating on. When I get it done I'll post it here.

The allocation he suggests is unconventional in the Diehards sense (it holds gold for one), but his advice about it is not. He was not into market timing, predictions, speculating with money you can't afford to lose, etc.

He had been advocating a form of Permanent Portfolio strategy since the late 1970's. So while his portfolio may seem unorthodox, it actually has a pretty long track record of real-world testing.
Last edited by craigr on Fri Oct 10, 2008 6:56 pm, edited 3 times in total.
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craigr
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Post by craigr »

brswif00 wrote:But my question about implementing the PP is how to do it if you want to have currency exposure of 50% USD and 50% Euro, in expectation of splitting time between two countries.
I don't have a good answer for you on this. Generally he'd suggest that you buy the bonds of the country where you live though.
I would prefer to buy governemnt bonds of hard-currency nations like Swiss and german direct from their governments, but don't know if that is possible even for their own citizens, much less an American.
There are no 100% commodity backed currencies any longer from what I understand. Even the Swiss Franc isn't gold convertible any longer. So purchasing these currencies has lost a lot of their appeal in that regard in my opinion. Although Switzerland may tolerate inflation less than other nations, they still are a fiat currency and open to the same risks.
Has craigr or anyone else intersted in PP given thought to including international bonds/cash?
I don't simply because I'm not exposed to those risks. My main exposure is the US Dollar and I diversify that risk with the gold ownership. If you live in a foreign country your risk is with that currency and by buying into other's currencies you are now taking on their risk as well. This is probably not what you want.
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snowman9000
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Post by snowman9000 »

I will add that any alteration to the PP, as I have learned the hard way, carries unforseen risks. HB designed it to absolutely minimize risk and maximize return. The best example is Treasuries. He specified them for a reason. Today you can look at the bond markets and see the reason in real life. He did not pick his components from any sort of tilt towards capturing some premium. Everything he did was aimed at conserving capital first and earning a nice return next. At least that is my take on it.

I think that if people keep an open mind about gold, listen to HB's shows, and then look at how it is working today in real time, they might shed their biases towards it.

The worst part of the PP for me is that it does not take taxes into account. It does not fit well into a mostly taxable portfolio, unless the investor uses muni money markets and bond funds. Which are not as safe as Treasuries.
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craigr
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Post by craigr »

snowman9000 wrote:I will add that any alteration to the PP, as I have learned the hard way, carries unforseen risks. HB designed it to absolutely minimize risk and maximize return. The best example is Treasuries. He specified them for a reason.
I don't take risks on the bonds and don't advise my friends to either. If you like to take risks then just own more equity above the fixed 25% allocation. Just include the extra part in your variable portfolio which is for speculating (as opposed to your Permanent Portfolio which is your core investing vehicle). Owning equity is more profitable and tax efficient than taking risks on bonds.

Over the last year the higher yield/lower quality bond funds are down about 20-35%. The extra yield would have to be quite high to compensate for that type of loss in principal.
The worst part of the PP for me is that it does not take taxes into account. It does not fit well into a mostly taxable portfolio, unless the investor uses muni money markets and bond funds. Which are not as safe as Treasuries.
He does take taxes into account, but it's hard to get everything you may need tax-free and still have the protection required.

However, there is a balance that needs to be struck. Muni bonds have more credit risk and have call risk. Because LT bonds in the portfolio are held to protect against deflation the last thing you want are bonds that are called on you if interest rates collapse. If possible, it's always best to have bonds in a in a tax-deferred account if you can. But if you can't then you may just have to suck up the tax impacts as part of the protection that LT Treasury bonds offer.

For example:

Over the past 12 months the Vanguard LT Treasury fund is up 9.98% vs. the Vanguard LT Tax Exempt which is down -2.70%. That's a tremendous difference in performance. Whether it is enough to offset the performance you receive in a high-tax bracket with tax-free bonds is something to consider. But there is a clear difference to how the bond types perform and whether that performance differential is worth paying extra taxes to have is a personal decision.

However, I believe that it's worth the extra tax cost because having non-callable and low-risk Treasury bonds is a critical part of the strategy during a deflationary or similar scenario.
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