Tag Archive: stocks

New Permanent Portfolio Book – Topics Covered

Permanent Portfolio Book

The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy Book

The new Permanent Portfolio book is scheduled for the first week of October and we’re very excited to be presenting this information. This portfolio has a track record of performance and safety. Since the early 1970s it has returned between 9-10% compound annual growth with the worst losing year around -5% in 1981:

Permanent Portfolio Performance

If you are looking for performance, stability and safety with your life savings, the Permanent Portfolio is a powerful tool. Some of the topics we’re going to cover in this totally updated work include:

What is the Permanent Portfolio?

We go over the background, ideas and philosophies of Harry Browne and the Permanent Portfolio concept in detail. We explain the basics behind his approach, the revolutionary ideas of economic diversification he advocated, and other important details about the strategy.

Simple, Safe and Stable Diversification

We discuss why a simple, safe and stable portfolio is critical to investor success. We also show how a simple, safe and stable portfolio can easily match a portfolio that is much riskier over time with far less chance of catastrophic loss.

Real Returns

We cover the importance of real after-inflation returns and how the Permanent Portfolio can give them to you.

Stocks

We tell you how to own stocks and how to avoid common pitfalls in the investing world. We’ll also discuss how to work with less than ideal stock funds if that’s all you have access to.

Bonds

We cover what bonds to own (US Treasury bonds), why you only want those kinds of bonds and what kinds of bonds to absolutely avoid. We’ll also discuss how to hold these bonds in your account for maximum safety.

Cash

Just like bonds, we’ll discuss why you only want to own US Treasury T-bills for your cash and how to do it with maximum safety.

Gold

This in-depth chapter on gold will give an investor the details on various ways to obtain gold exposure in their portfolio and what ways to absolutely avoid. We cover everything from modern day gold funds, to gold bullion and new banking options that will allow you to easily have allocated secure gold storage both domestically and overseas with low expenses and high safety.

Geographic Diversification with Overseas Gold Storage

This is an extensively researched and approachable chapter on this subject. We boil down this subject into some very simple ways to achieve true geographic diversification. By true geographic diversification we don’t mean an ETF or electronic gold service that stores gold in Switzerland (although we touch on that briefly). Rather, we mean true secure allocated gold storage in safe recognizable institutions that are fully insured, fully audited, fully transparent and in places where you can actually drink the water.

We present options that are safe to do, easy to setup and will work with investors who only have funds to buy a single gold coin up to unlimited amounts of gold bullion. It was important for us to present options for all investors and we have done exactly that. Also it was important to us to have these options be inexpensive and we have done that, too. In fact, even the most expensive option is still 30% less than what the average mutual fund charges annually in typical expense ratios!

Now our readers will have affordable and safe options available to implement this critical piece of the Permanent Portfolio with minimal hassle and expense. If you ever wanted to implement geographic diversification but didn’t know how, this chapter will tell you in detail without anything complex or risky.

Tax Management

We will cover tax management issues relating to the portfolio and strategies you can use to maximize your after-tax profits.

Implementing the Permanent Portfolio for International Investors

If you live outside the US, you will find ideas in here to implement the portfolio where you live with locally available investment products in places like Canada, Europe, Australia and other regions.

Much More!

Even if you are not implementing the Permanent Portfolio, this book has information you can use to be a better and more intelligent investor. All investors will pick up something useful they can use.

Subscribe and Order

You can subscribe to the announcement list here to receive updates about the book when it ships the first week of October 2012:

Permanent Portfolio Book Announcement List

The book is available directly from Wiley at this link:

The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy

Also it is available from Amazon.com and other major online retailers (eBook versions will be available when it ships):

The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy

The book will also be available from other outlets as well.

We are very excited about the book and the information it contains. Thanks for your support!

 

Canadian Stock Market – Only Real Returns Matter!

In a follow-up on a previous post about a Canadian Permanent Portfolio, over on the Diehards, Stryker writes:

Just a little bit to add in regards to an earlier era in Canada.

From 1963 to the end of 1983 the annual compound growth rate (not including dividends) of the TSE 300 was 6.5%.

Unfortunately for the Canadian investor, inflation at 6.8% a year did even better.

The above is not including the dividends apparently, but the problem still is there. You may see an impressive figure over a long span of time (30, 40, or more years) but only the real returns matter. Often if you look at smaller time segments that are still protracted (e.g. a decade or longer) you get this failure to deliver real returns from time to time. By any measure, 10 or 20 years of potentially negative growth is a very long period when you consider most people are only saving for retirement for 20-40 years before they need that money. What happens if that pocket of dead air for stocks and bonds lands in the middle of your saving time horizon?

The above is something to ponder when someone tells you that stocks always do best if you just wait long enough. Yeah, well again I say that sometimes the markets don’t work on our own particular timetable of life. The markets really don’t care about your retirement plans, junior’s college fund or that house you want to buy. You had better diversify and that diversification better include more than just owning a lot of stocks.

One of the biggest criticisms of the Permanent Portfolio is the allocation to gold. I hear it all the time. But it also owns 75% in non-gold. Yet when inflation is a threat it’s the 75% that is having the problem, not the gold. Investors get fixated on the idea that gold does not have interest or dividends but ignore the irrefutable fact that it has serious capital appreciation under markets that are very bad for stocks and bonds. Nobody cares how you made your money. It could be stock dividends, it could be bond interest or it could be capital appreciation from the price of gold going up. All that matters is that your money was protected and grew.

The end result so far has been a portfolio that is able to deliver real returns no matter what was going on in the economy with very low volatility. And yes, a large part of the performance has been from owning this supposedly zero-return asset called gold in the diversification!

Taxes and Stock Funds – Tread Cautiously

Taxable Stock Investing Thoughts

For many investors that save more than their tax-deferred accounts allow, taxes are a very big consideration. Often you will be forced to put assets like stocks outside of tax-deferred savings vehicles and that means taxes from those investments need to be managed. If you find you have to put a stock allocation outside tax-deferred space, here are some thoughts on the subject.

Move Slowly to Avoid Regret

First, taxable investors should move very slowly when considering adding assets to their portfolio. It’s so expensive to fix mistakes in the future that rushing into new offerings can be really dangerous. The hot new fund and/or strategy you’ve just got to have today could be a real tax disaster in the making.

For instance, there are many ETFs hitting the market now. Many of them appear to have some new twist that is supposed to make them better than ordinary cap-weighted indices. Because they are so new, it is completely unknown how they will really do. WisdomTree, for instance, offers “fundamental indexing” which doesn’t even have any real world results outside of a few years. These kinds of funds are trying to chase after dividends. Their marketing reads like any of thousands of other investment methods in the past that came with much fanfare and then quietly vanished after their system stopped working in the real world.

Additionally, we must consider that the current tax rates for dividends are likely going to return to their much higher income rates in the next few years. The fact that many of these new funds are having 100% qualified dividends is nice, but let’s keep in perspective that it likely won’t matter going forward. As a taxable investor, you need to think about your funds as something you hold for decades, not just short-term. In the next few years I anticipate seeing many questions in investing forums that will be something like this:

“Several years ago I bought a fundamental/dividend/equally weighted index that pays out high dividends and has high turnover. However, the dividends/capital gains it’s paying out now are costing me a lot of money each year in additional taxes under the reverted tax laws. The problem is the fund has a lot of gains and if I sell it now I’ll also have to pay a big capital gains bill. What should I do?”

My answer right now is: Don’t buy a fund with an unproven tax track record. Further, don’t buy a fund seeking out high dividend investments. This is because they are largely a waste for taxable investors due to how mutual funds are taxed on distributions not to mention how they’ll be likely taxed in the future.

But you see it would be too late for someone in a few years to follow that advice, so that’s why I gave it just now for you to follow!

Seek out Simplicity and Predictability for Tax Planning

I only buy broadly based cap-weighted index funds for both my taxable and tax-free accounts in the Permanent Portfolio. I know in ten years they’ll still be performing just as they are now and just as they were ten years ago and ten years before that. Yet with a new fund you don’t even know if it will be around in 5 years. What if it shuts down and liquidates the assets? Could you get a big tax bill? Maybe. Will it get merged into another fund that has high taxes? Maybe.

If you own a fund with a long track record however the odds of it going away are much lower. As it turns out, broadly based index funds have such a large amount of assets that it is unlikely any fund company running them would ever shut them down. Certainly, companies like Vanguard wouldn’t because that’s their bread and butter. Therefore you stand a good chance the fund will still be here in 20 years and that’s very valuable. The simplicity and predictability is priceless for tax planning and tax economy. Broadly based indexing is stock investing with no regrets.

In fact, I’ll put any broadly based stock index portfolio up against the most academically/scientifically proven equity gimmick portfolio in a taxable account. There is no question about it for me that the broadly based stock portfolio will have lower taxes and lower costs which means it is likely to outperform.

In fact, I’ll put any broadly based stock index portfolio up against the most academically/scientifically proven equity gimmick portfolio in a taxable account. There is no question about it for me that the broadly based stock portfolio will have lower taxes and lower costs which means it is likely to outperform.

Take Certainty Over Theory

Now, I see a lot of people with taxable accounts chasing after relatively small theoretical performance advantages and not minding the long-term certainty of tax impacts. If I know I can definitely reduce my tax bill that is a much better bet than chasing after possible future gains that may not materialize. After all, the taxes are certain but the future performance of a fund isn’t. The bottom line is that broadly based index funds are very good performers, especially for taxable investors. Every time I’ve looked at various strategies for taxable investing the cost analysis always favors simplicity and using well-tested broadly diversified stock funds.

Only After Tax Returns Matter for Taxable Investors

If you are curious how a fund compares after-taxes, use the Morningstar Tax Cost Analysis tab to compare past performance. Here is how Vanguard’s Total Stock Market index compares:

Vanguard Total Stock Market Tax Cost Analysis

Now it’s good to look at 10 year performances of funds. This insures they usually went through a bull and bear market cycle which tells you how management handles the fund during heavy inflows and redemptions by shareholders. Over 10 and 15 years we see the Vanguard Total Stock Market fund had the following returns:

10 Years +4.83%

15 Years +5.23%

Now after taxes we have:

10 Years +4.51%

15 Years +4.79%

So looking at this we see that the fund lost about 0.30% annually to taxes over 10 years and around 0.40% annually to taxes over 15 years. That’s pretty good compared to its peers. I’d be happy holding this stock fund in a taxable account.

I won’t ruin the fun by looking up the competitors (most haven’t even had 10 years of returns because most funds close down before then!). I’ll leave it as an exercise for the reader to research their favorite fund and compare the after-tax returns to the broadly based index. You will probably be surprised at how much taxes drag down the average fund’s performance.

Capital Gains vs. Dividends – Take the Capital Gains!

Also consider that current tax rates are near a historic average low since the inception of the US income tax (that is average capital gains and dividend taxes are well below the historic averages). At the same time we’re running a massive debt that eventually will need to be paid. So there is a much higher chance that taxes are going to revert back to a higher rate than stay the same (or go down). I just think we should be realistic about the possibilities on this.

With that in mind, capital gains are usually cheaper than dividends for taxable investors historically. Dividends pay out each quarter whether you want them or not. Capital gains (or losses) can be banked and only cashed out (and taxed) when you want them (assuming a tax-efficient low-turnover fund). That’s a huge difference for a taxable account strategy. So even if dividend tax rates stay the same, they are still not a good idea because you can’t put them off to pay taxes when you are ready to do it as you can with capital gains. To sweeten the pot even more, long term capital gains are almost always taxed lower than dividend income as well. Yet another reason to avoid dividends in taxable accounts.

Unfortunately, this idea seems lost on a lot of investors who are so focused on “income” that they forget you can still get income by selling down appreciated shares from your stock funds and spend the money just the same! Nobody cares whether your money came from dividends or capital gains, the money works identically.

Broadly Based Index Funds Win

In sum, new funds, funds with high dividends, or complicated stock allocations have a lot of risks for taxable investors:

1) A new fund doesn’t have an established track record through a bull and bear market.

2) These strategies may throw off lots of dividends that will likely be more expensive in a few years tax-wise.

3) These funds may have a high turnover and throw off needless capital gains.

4) New funds may be from a company with no track record (or a bad track record) on tax performance.

5) New funds could also be shut down in a few years when the en vogue strategy goes cold leaving taxable investors with taxes from the liquidation of the fund shares.

Because of the above, I recommend that taxable investors always stick to a well-established broadly based index fund from a company with a track record for good tax management. That would be people like Vanguard, iShares, State Street SPDRs, etc. Also this is a warning for you taxable investors trying to chase after higher yields that you should consider the impact of your decisions in 5, 10 or more years as taxes are likely to increase. Keeping things simple is the best long-term tax management strategy.

 

* Keep in mind that each investor’s tax situation is different. So before you go re-swizzling your portfolio based on the above, please see a qualified tax professional who is familiar with your personal situation and goals.