My Version of Harry Browne’s Permanent Portfolio

I get a bunch of questions asking my thoughts on Harry Browne’s Permanent Portfolio.

(I do need to add a disclosure here. I VOTED for Harry Browne for President in 1996.  He ran on the Libertarian Party and was cool, before it was cool to be cool.  By now, most thoughtful conservative-minded people recognize the disaster prohibition has been. Even the reactionary left has “seen the light” and taken baby-steps towards some degree of freedom.  But it wasn’t always like that.  It was people like Harry Browne, and even National Review magazine if you can believe that, who took the arrows to at least get the conversation started.)

The portfolio is simple, which makes it fantastic first off; 25% in US Stocks, 25% in Long US Bonds, 25% in cash, and 25% in gold. I love simplicity so that’s a win. BUT, I am a believer in stocks and not in bonds, so 25% in Long Bonds and 25% in cash means 50% of the portfolio is in non-performing assets.

30 Year Treasury Bonds

Oh, I hear you now, “But Josh, if you bought at 30 year Treasury in 1982, you had a 15.25% ANNUAL return until the end of 2011 – GUARANTEED by the FEDS!”

Yup. That is correct. Good luck getting that now. Also, one must always remember, bonds do NOT have compounding returns. You can’t reinvest your interest in that 15.25% bond. You have to reinvest in something else, inherently that something else was less, and probably much less, than 15.25%.

If you invested in the S&P 500 index during that time your COMPOUNDED rate of return was 11.03% – meaning $1 invested grew to $23.10. Of course, since the end of 2011, the SP 500 has compounded at 12.69%. The 30 Year Treasury? Let’s not go there.

Bonds did have a good, nominal (before inflation) run during high inflationary times of the 70s and going into the 80s. Those days are gone. Hard to see them coming back anytime soon, if Japan is any indication. In fact, a reader suggested I get I this book

about lessons from Japan. It’s en-route, and I’m very much looking forward to reading it.

Cash

Obviously, in any given year, or even stretch of a couple years, bonds can vastly outperform stocks. Just look at 2008 for an example of that. But that’s why you hold cash! I like Harry Browne’s take of 25% cash, once you’re retired. I don’t like it while you’re accumulating retirement money. Cash is a dead asset for accumulation. But it’s a great asset for distributions in retirement.

Cash, in the form of Savings Accounts and Certificates of Deposit, has NO downside risk. There is no volatility.  Bonds have volatility. So, during chaotic times, 2008 for instance, cash is king.  Yes, GOVERNMENT bonds did very well then. But did you not have corporate bonds? If so, you lost money.

In 1994 and 1999 the Vanguard Long Term Treasury fund was down pretty big, 7% and nearly 9% respectively. In 2009? 12%. Yes it was up nicely in 2008 but if you’re going to be that volatile, why not just be in stocks?

Remove ANY volatility from your safe bucket of investments and just go cash.

Gold

The Permanent Portfolio has you holding 25% in Gold. That is too high, in my estimation. Gold, similar to cash and bonds, is also a dead asset, meaning there is no compounding growth.

Now gold rescued portfolios incredibly well during the aughts, the first decade of this century. I’ve done videos on that in fact, using 25% gold as per Harry Browne’s take. It’s amazing how well gold performed. But that was the exception, certainly not the rule.

Now, as we sit here today on August 16th Gold is above $1500 an ounce, which is SIGNIFICANTLY higher than the start of the year, when it was around $1200 or so. The problem with that, of course, is the price relies completely on what OTHER people will pay for it. If other people decide Gold isn’t worth $1500 an ounce, it will drop in value. That simple.

Stocks, the actual business, on the other hand actually have intrinsic value by producing this thing called EARNINGS. Business make money. That money gets passed on to shareholders by dividends or the idea that the business will make even more money and increase value. Gold doesn’t do that. Gold is completely at the whims of what’s called the “Greater Fool Theory”, you get only what someone is willing to pay.

Now, before you start throwing rotten tomatoes at me, I do own gold and I think YOU should too. I do that because history tells us when your world goes to hell in a handbasket, gold keeps some value. So, it’s good to have gold coins in your safe box. Absolutely. Silver too for that matter. But as a large part of one’s investment portfolio? Nah.

Don’t forget, we don’t even really have a history of gold anyway because FDR, that champion for freedom, made it literally ILLEGAL to own it. It wasn’t until the 70s when you were able to hold it without fear of reprisal. Crazy.

Ultimately, for me, having 10% of your liquid net worth in Gold, the actual coins, makes sense. 20% in cash, and the rest in stocks. That would be my version of the “permanent portfolio” for retirees.

For accumulators, though, that’s too much cash. You need growth and cash won’t do it.  You need an emergency fund of a year of income, absolutely. 20% cash in a portfolio you need to grow is a bit too much for me.

Stocks

And thus we’re left with everyone’s favorite whipping boy, stocks.  I don’t get the animosity towards owning an equity position in the greatest companies in the world.  Stocks are the easiest way to build wealth, bar none. You just buy a fractional share of an index of 500 good, ole USofA companies and watch out.

Let the power of American ingenuity kick in and watch your profits explode…over time.  Yes, on any given year, or even 3, there’ll be lots of turmoil, chaos and even calls for Bolshevik-style revolutions against the capitalists.

Well, let’s think this through. If a modern-day Lenin takes over Washington, do you truly think your GOVERNMENT BONDS will be exempt? Your gold?  Just look at history, my friends.  Argentinian bonds, Mexican Peso, Russian Ruble, etc. etc. and etc.

History is replete with government bonds, fiat currencies and even gold stores being confiscated either by force or devaluation.  Yet, somehow, many investors come to think it’s only stocks that will get hammered. Yeah, not quite.

So, here’s the way I look at it. I’m a capitalist. I support capitalism, even if what we have here in the US isn’t true capitalism, it’s the best thing going. Thus, I’m investing as best I can in capitalistic enterprises whose primary goal is to increase shareholder value.

The history of capitalistic enterprises has been one of permanent growth, like the world has never seen, arrested on occasion, by temporary declines.  But as long as investors have been able to stay the course, like a true-believer should, that investor has been well rewarded. There has been no investing scenario that has made more middle-class citizens as wealthy as the US stock market.

Not to see that, is to succumb to fear. And fear is NEVER a good investment strategy.

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