We came across this quote earlier this week. Take a look:
“For the money you’re counting on to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio.”
Investment author Harry Browne wrote this in his book, Fail-Safe Investing. It’s good advice. But what would such a portfolio look like today? We need a balance of safety and risk. What asset classes should it include? How much of each?
That’s the challenge.
Harry’s answer was what he called the ‘Permanent Portfolio‘. You might remember regular DR editors Eric Fry and Addison Wiggin wrote about the ‘Permanent Portfolio’ earlier this month. But Dan Denning actually put the idea in front of his Australian Wealth Gameplan subscribers almost a year ago.
This is part of what he wrote at the time:
“Harry identified four basic economic cycles: inflation, deflation, prosperity, and recession. He claimed that there would be one stand out asset class during each cycle, gold for inflation, bonds for deflation, stocks for prosperity, and cash for recession.
The Permanent Portfolio was a simple asset allocation model where you put 25% of your assets in gold, 25% in cash, 25% in stocks, and 25% in bonds.”
We can’t know the future. So Harry had three essential requirements – safety, stability and simplicity. Even within the asset classes, the Permanent Portfolio isn’t complicated: physical gold, a money market fund (cash), share market mutual funds and long-term US treasury bonds. In theory, at any one time at least one asset will carry the portfolio.
Seems nice and simple, right?
Harry came up with the idea at the beginning of the eighties. Bonds and stocks were about to go into twenty year bull markets. Gold was about to get hammered for two decades. But for thirty years the Permanent Portfolio worked.
But we all know past performance doesn’t predict future performance.
So what about constructing a Permanent Portfolio today, in Australia? This is where you come in. We’re throwing out the challenge to put one together. Should gold make way for silver? Or a mix? Should you hedge your cash allocation in foreign currencies? Which ones?
US treasuries look a dodgy bet, but what about Australian Government or corporate bonds? The Australian reported recently on the growing number of bond ETF’s in the Australian market, such as here, here or here.
Harry didn’t allow for individual stocks in the permanent portfolio – he put his speculative plays into a separate ‘variable portfolio’ – insisting on one or more mutual funds that represent the whole market.
But we’ll loosen the rules a bit. If you can’t find a fund that represents the asset class or theme allocated to that asset class, you can substitute an individual stock as a proxy. But you must explain why you think that stock behaves like a proxy.
So what does your permanent portfolio look like for the next decade or more?
1) Safety, stability and simplicity – it’s only supposed to be rebalanced once a year.
2) Make sure the assets you select are traded publicly.
3) Select three to six investible assets – no more than three and no more than six.
We look forward to seeing what you come up with – send submissions to email@example.com.
Then keep an eye out for them to appear in Markets and Money.
for Markets and Money
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