The Permanent Portfolio by Craig Rowland & J.M. Lawson
Posted: Mon Mar 08, 2021 2:22 am
I came to investing, like many people, through Mr. Money Mustache. I have been firmly in the "all stocks, all the time" camp out of ignorance. My current portfolio is 100% equities. Recently I have been thinking about portfolios... "Surely bonds aren't just for old people?"
Finding the link here, I read through some of Tyler9000's posts on his excellent website Portfolio Charts.
There were two real lightbulb moments for me in regards to investing. Firstly, bonds can actually earn money. They're not just 'defensive'. Of course it makes sense when I thought about it, but I never had. The second, real shocker, was discovering that risk is not always rewarded.
WHAT!?
It turns out, there are portfolios that capture most of the upsides of a 100% stock portfolio, and avoid many of the downsides. I spent the next 5 hours eagerly plugging in numbers and clicking links on Portfolio charts to verify this, and sure enough (based on historic data) it's true. Preaching to the choir I know, but it was news to me.
Seeing the Golden Butterfly Portfolio having performed well in the past I decided to read the Permanent Portfolio and uncover some of the underlying thinking.
The book (a very short review by a complete investing noob)
The book is a re-hash of another investor's portfolio, which he (Harry Browne) wrote about in the 90's. The modern authors have re-approached the same portfolio with a modern take. The book was written in 2012.
The Permanent Portfolio (PP) is based around the idea of holding 25% stocks, 25% long-term bonds, 25% short-term bonds (cash), and 25% gold. The authors argue markets are unpredictable and therefore the portfolio needs to be able to protect wealth that you acquire at your job no matter what the markets are doing. The idea is that each asset class will perform well during one of the four economic conditions: inflation, deflation, recession, and prosperity.
There wasn't much discussion about assets outside of those 4 classes. Where does real estate fit? How well does something like a timber plantation hold its value? and so on. The book does not delve into these, nor does it really explain the reasoning behind picking exactly 25% of each 'class' of asset.
(As an aside, I was interested to learn the relationships between of these 4 classes of assets has not always been the same historically, however. Again, it's one of those things that is obvious in hindsight, but not something I had considered).
After the initial idea (markets are unpredictable) and the portfolio is explained, the authors make recommendations about how to buy and hold each asset class. The book is primarily targetting a US audience which, for me in Australia, was a bit less useful. A later chapter on international investors was thoughtful, but brief. The book makes mention of taxable and non-taxable accounts, what asset class to hold where, how best to rebalance the PP, and how to diversify your investments beyond/outside of one country.
The authors present lots of charts/data regarding the performance of the PP (Although Tyler9000's website is better for this), then conclude that we should all consider the PP if we want to safeguard our wealth.
Offshore gold, really?
A focus of the book, particularly in the chapter on international diversification, is holding gold. The authors recommend holding numbered gold buillon in segregated accounts offshore to best protect the asset from misappropriation. My question for my fellow ERE-ites, is: does anyone actually do this? It seems like overkill, not to mention expensive. Is there a way to do this cheaply? The whole idea of buying gold is a bit daunting for someone who only knows Exchange Traded Funds.
Conclusion
Not a bad book for someone like me who knows very little about investing in general and portfolio design in particular. It's very practical. If you wanted to implement the PP, this book would tell you how. I didn't feel particularly convinced that this exact portfolio was the best, but reading the book certainly changed my mind from "stocks r teh best" to a more nuanced approach. I intend to investigate bonds and gold more thoroughly, and diversify my portfolio when I next have enough money to make the transaction costs worthwhile.
Interested to hear other people's thoughts on the subject .
Finding the link here, I read through some of Tyler9000's posts on his excellent website Portfolio Charts.
There were two real lightbulb moments for me in regards to investing. Firstly, bonds can actually earn money. They're not just 'defensive'. Of course it makes sense when I thought about it, but I never had. The second, real shocker, was discovering that risk is not always rewarded.
WHAT!?
It turns out, there are portfolios that capture most of the upsides of a 100% stock portfolio, and avoid many of the downsides. I spent the next 5 hours eagerly plugging in numbers and clicking links on Portfolio charts to verify this, and sure enough (based on historic data) it's true. Preaching to the choir I know, but it was news to me.
Seeing the Golden Butterfly Portfolio having performed well in the past I decided to read the Permanent Portfolio and uncover some of the underlying thinking.
The book (a very short review by a complete investing noob)
The book is a re-hash of another investor's portfolio, which he (Harry Browne) wrote about in the 90's. The modern authors have re-approached the same portfolio with a modern take. The book was written in 2012.
The Permanent Portfolio (PP) is based around the idea of holding 25% stocks, 25% long-term bonds, 25% short-term bonds (cash), and 25% gold. The authors argue markets are unpredictable and therefore the portfolio needs to be able to protect wealth that you acquire at your job no matter what the markets are doing. The idea is that each asset class will perform well during one of the four economic conditions: inflation, deflation, recession, and prosperity.
There wasn't much discussion about assets outside of those 4 classes. Where does real estate fit? How well does something like a timber plantation hold its value? and so on. The book does not delve into these, nor does it really explain the reasoning behind picking exactly 25% of each 'class' of asset.
(As an aside, I was interested to learn the relationships between of these 4 classes of assets has not always been the same historically, however. Again, it's one of those things that is obvious in hindsight, but not something I had considered).
After the initial idea (markets are unpredictable) and the portfolio is explained, the authors make recommendations about how to buy and hold each asset class. The book is primarily targetting a US audience which, for me in Australia, was a bit less useful. A later chapter on international investors was thoughtful, but brief. The book makes mention of taxable and non-taxable accounts, what asset class to hold where, how best to rebalance the PP, and how to diversify your investments beyond/outside of one country.
The authors present lots of charts/data regarding the performance of the PP (Although Tyler9000's website is better for this), then conclude that we should all consider the PP if we want to safeguard our wealth.
Offshore gold, really?
A focus of the book, particularly in the chapter on international diversification, is holding gold. The authors recommend holding numbered gold buillon in segregated accounts offshore to best protect the asset from misappropriation. My question for my fellow ERE-ites, is: does anyone actually do this? It seems like overkill, not to mention expensive. Is there a way to do this cheaply? The whole idea of buying gold is a bit daunting for someone who only knows Exchange Traded Funds.
Conclusion
Not a bad book for someone like me who knows very little about investing in general and portfolio design in particular. It's very practical. If you wanted to implement the PP, this book would tell you how. I didn't feel particularly convinced that this exact portfolio was the best, but reading the book certainly changed my mind from "stocks r teh best" to a more nuanced approach. I intend to investigate bonds and gold more thoroughly, and diversify my portfolio when I next have enough money to make the transaction costs worthwhile.
Interested to hear other people's thoughts on the subject .