Permanent Portfolio – Back to Basics

Investing should be dead simple. Dead simple investing means sticking to the basics. This post I’m going back to the basics to help new followers of the Permanent Portfolio get a solid understanding of how the strategy works.

First, I recommend you listen to all of Harry Browne’s investment radio shows. Yes, there are a few dozen of them and it may take some time. But, if you are deciding on this investment strategy for your life savings isn’t it worth it to know all you can about it? I would hope so. I’d also hope you’d think the same thing for any strategy you choose to follow. These shows answer perhaps 99% of any basic question you may have and many you probably never even considered. The shows are an easy to understand course on investing and economics all in one package and you will learn a great deal by listening to them — promise:

Radio Show Archives

Along with the shows above, I also recommend you download the e-book version of Harry Browne’s last investing book Fail-Safe Investing. The e-book is about $10 and is a concise work of Browne’s 40+ years of investment experience and advice. This book is a short read and very easy to understand. It encapsulates Harry Browne’s very simple asset allocation strategy which actually is derived from a very sophisticated understanding of economics. His approach offers a level of diversification and safety not seen in any asset allocation approach I’ve ever run across (and I’ve seen a bunch of them):

Fail-Safe Investing e-Book

If you want a physical book, then you can pick one up below. It is the same as the e-book mostly. However, the e-book is more up to date. In the e-book he recommends using an index fund for your stock exposure and avoiding all active funds as may have been mentioned in the hard copy version which was published in 1998 along with his earlier books:

Fail-Safe Investing Hardcopy Book

Next up you have Browne’s 16 Golden Rules of Financial Safety. If you follow these rules religiously, along with the Permanent Portfolio allocation, you will have a tough time losing your life savings:

16 Golden Rules of Financial Safety

Still want more? You may want to read these articles that I wrote which talk about some more core concepts.

The Permanent Portfolio Allocation

Permanent Portfolio FAQs

Permanent Portfolio Historical Returns

Between Browne’s radio shows, books and the extra information I wrote you’ll have a thorough understanding of this approach to investing so you can make an educated decision if it is right for you.

If that’s still not enough then you can read articles with the “permanent portfolio” tag on this site:

Permanent Portfolio Tagged Articles

Between the radio shows, Browne’s books and the FAQs you will know just about all there is to be known about implementing the Permanent Portfolio strategy. These basics will provide a solid foundation to grow and protect your money.

10 thoughts on “Permanent Portfolio – Back to Basics

  1. Ryan

    I just wanted to thank you again for creating this blog and keeping it around. I check back now and then to see if there is a new post, but it is mostly nice to see the consistent message. This site is a remarkable asset.

     
  2. J

    Enjoy the discussion and am interested in implementing an investment plan based on these ideas, but can’t get past plunking a bunch of money into stocks and gold as these levels.

    If deflation is coming (not saying it is, but wouldn’t be surprised), not sure the the LT Bonds would be able to compensate for the losses in stocks and gold that would be seen.

    Looking at the historical results, I don’t think that is a scenario that the portfolio has faced up to now.

    I know you have heard this all before…

    Keep up the good work.

     
  3. craigr

    J,

    You may like this recent post that discusses what you are asking:

    http://crawlingroad.com/blog/2010/01/12/what-asset-will-do-best/

    Last year I was reading advice telling people to avoid stocks because they were over priced and the Dow would drop to something like 4000. Stocks instead posted almost 30% gains. In 2008 I was reading advice saying inflation was coming when gas was around $4 a gallon and avoid Long Term bonds. Long Term bonds posted 30% gains. In 2007 I was reading advice telling people to diversify into real estate and stocks because bonds were a drag on portfolio performance. In that year the real estate market started to crash.

    I could go on, but I think I’ve made the point. The markets are not predictable. I don’t care how many PhDs a person has, how many books they’ve written, how many magazine columns they’ve penned or how many interviews they’ve given on CNBC. Nobody can predict the future.

    It’s possible that stocks and gold could fall in price. But it’s also possible that they won’t. It may seem counterintuitive, but if you own all the assets all the time you are actually safer vs. concentrating your bets. On a concentrated bet if you are wrong you can lose a tremendous amount of money. By distributing your investments however you mitigate the damages and are far less likely to encounter a “black swan” type event that does serious damage to your net worth.

    There are no guarantees in life, but diversifying your savings is usually the best course of action.

     
  4. Mitch

    Thanks for the informative site. What do you think about using some basket of commodities instead of or in addition to some gold as a way of providing more diversification for this portion of the portfolio?

     
  5. craigr

    Gold works the best. It’s a commodity and it’s also a monetary metal so you get two types of protection against inflation. Browne talked about this same question in one of his shows, I think October, 24, 2004. Commodities can have bull and bear markets that have nothing to do with threats of inflation. 2008 for instance saw commodities fall through the floor. But gold was up about 5% because when banks were teetering on collapse, and trillions of dollars in money being used for bail outs, people would rather own gold if they think inflation is going to be bad.

    Also, I just don’t think you can diversify better than gold for a hard asset. When currencies are having problems, people think gold and not a basket of commodities. Finally, most commodity exposure is with opaque commodity futures funds and these can have many risks hidden inside of them. Gold is really simple to understand. You can own it physically or use a fund to get exposure if you need to. But it’s simple to understand and store vs. barrels of oil, wheat, etc.

     
  6. Mike Turner

    Hi Craig,
    I am still having a tough time committing to Treasuries – as it appears (at least for now) -they are trending down – it seems inflation protection treasuries are fairing better – in yours/harry’s opinion would this be a good substitute in this stage of the economic cycle?

     
  7. craigr

    Mike,

    There usually is one asset in the portfolio that is not doing well. But it doesn’t matter too much because other assets are offsetting the losses. That’s why I tell people to not look at assets in isolation. You only want to look at how they work in the total portfolio. Also I just checked Morningstar and the iShares Treasury Long Term ETF TLT is up 0.56% for the year. Not stellar, but it is hardly taking a beating compared to 2009 where it took a -21% loss (yet the entire portfolio was up 8% the year).

    I really don’t want all my assets doing well together because that means they can all do bad at once. 2008 was a prime example of portfolios that failed because what they thought was diversification was not. The assets that they owned that seemed to just keep going up every year all of the sudden turned down at the same time inflicting large losses. This doesn’t mean that you’re going to see -20% losses in assets each year. More like one may have some small loss, another could be flat, then one or two will be doing very well. The overall result is a positive gain.

    I’ve heard the same arguments about Treasuries now for years. Yes, they could lose money. But then again we could have a deflation re-lapse and they could save the day as they did a couple years ago. Gold and stocks could both crash. We just don’t know.

    Also consider that buying assets should not be done on the news you are reading. In fact, I’d say the more glowing reviews I hear about Asset X, the less I’m enthused about owning it. For all we know, the trashing of LT bonds could be the start of a new bull market.

    TIPS are not recommended for the portfolio. They do not provide the deflation protection of nominal long term bonds. Nor do they provide the strong inflation protection of gold. They are also very expensive to hold for taxable investors if you are in that situation.

    For me, I still own LT Treasuries and have for years. They pay me their interest and I ignore the talking heads. If I didn’t own them in 2008 my portfolio would have taken a tremendous loss. So I don’t think it’s a good idea to go fiddling around with the internals of the allocation. The future is not predictable.

    P.S. Vanguard posted an article talking about surprises in bond markets for people thinking that short term bonds and TIPS may save them vs. long term bonds:

    https://personal.vanguard.com/us/insights/article/bear-flattening-bond-surprise-04012010

    Just some food for thought to show that there are good arguments for both sides of this debate.

     
  8. bethers

    Craig,

    On the cash allocation, instead of a treasury money market and short-term treasury combo, what do you think of a treasury money market and cd combo?

    Also, on the flashlight review (Fenix), have you ever come across one as good in a hands-free head lamp style?

     
  9. craigr

    Technically CDs are not as safe because you are relying on FDIC to back the banks if there is a problem. However this is a small risk. The bigger risk is going over FDIC limits on the CDs which you should never do because you could take a loss if the bank goes under.

    The other problem I see people doing with CDs is chasing yields by putting money in shakier banks that are trying to entice new money with higher rates. Problem is though that the cash is supposed to be a stable part of the portfolio. So it’s the last place you want to take any kind of risk. This is why I just accept the lower returns on the cash with Treasury MMF and not worry about putting it into CDs. If you want to use CDs, make sure you stay under the FDIC limits and only put the money in banks that have solid books. However, I do think that a good Treasury MMF is safer. Especially if we ever have a serious banking crisis in this country again (like 2008 but worse).

    On headlamps. I actually like headlamps the best and always carry one in my pack and in my cars. It’s easier to do things with your hands when you don’t fumble for a light. I think the major brands of lamps like Princeton Tec, Petzl, Black Diamond, etc. are all fine. Just get the LED version that takes standard AA or AAA batteries. They are all tough and run a long time.

     

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