I have been a strong proponent of the permanent portfolio as described by Harry Browne. While it is defensive in nature, it also typically provides growth above price inflation in the long term. Of course, there are no guarantees of anything, but I consider the permanent portfolio as the best strategy for long-term passive investing.
There are probably better investments for those with an entrepreneurial spirit. Your best investment is in yourself in almost any situation. But from a monetary standpoint, someone with a profitable business that does not require an exorbitant amount of time to be spent by the owner is probably the best investment there is.
Real estate investors can also do quite well, at least for those who are savvy. If you can own rental properties and have them managed by a dependable management company, then this is close to passive income.
Still, for anyone with a significant amount of wealth, I think having some assets in a permanent portfolio is a good idea. It is a matter of diversification. Even a long-time business owner or real estate investor can run into problems. Even Bill Gates sells off some of his Microsoft holdings to diversify in other investments.
In the past, I have made suggestions for tweaks you can make to your own permanent portfolio. The most common objection is owning government bonds, especially with interest rates so low. It is still an important piece of the puzzle because bonds will do well in a depression/ deflationary type situation. They will probably do well even in a more mild recession. If you really hate bonds, I have suggested putting a slight percentage into paying down mortgage debt.
For risk takers, I have also suggested a more aggressive version of the permanent portfolio in which you reduce your cash portion. For example, you could put 30% in stocks, 30% in gold, 30% in long-term government bonds, and 10% in cash.
This portfolio is more aggressive and would have bigger ups and downs. It would do much worse in a recessionary environment, as cash tends to help in this situation. But over a long period of time, there is a greater chance for greater returns.
This is just my own suggestion for someone looking to be more aggressive. I haven’t seen this suggested by others. I never heard any such suggestion from Harry Browne. He would have said to keep a separate portfolio for speculations.
Of course, most people out there are either too conservative (too much cash) or they are too aggressive (too heavy in stocks). It is more the latter. One thing you can be sure of is that almost nobody owns any significant portion of gold investments.
Right now (October 2017), all asset prices seem to be on the high side. The permanent portfolio has not done that great because interest rates have been low for quite a long time now. The bond and cash portions have put off low returns in the low interest rate and relatively low price inflation environment.
Stocks make me nervous with them hitting all-time new highs, seemingly almost every day. Gold does not make me quite as nervous, but it could still take a decent dive if we hit a bad recession.
Bonds are a good protection for a recession, but they carry their own risks. With the Fed threatening to decrease its balance sheet (albeit slowly), who knows if private investors will pick up the slack?
Despite past suggestions of decreasing the cash portion for those who want to be aggressive, I don’t think now is the time to do it. You want to have a good cash portion if we hit a recession, and I believe the risks of a recession are greater now than they have been in a while. During down times, cash is king. There is a caveat to this. It is only king if we are not in an environment of high price inflation.
With that said, even in the 1970s, while cash was a loser, it wasn’t horrible either. The interest rates went into the double digits, so you could put money in a money market fund and make a good nominal return. It would lag behind inflation, meaning the real return would still be negative, but it wasn’t really bad.
It is always important to have cash (which includes cash equivalents like checking accounts, savings accounts, and money market funds). It is not just for emergencies though. It can be used to buy assets when they are cheap. Assets become cheap in a recession. This is why cash is king. In a recession that is not accompanied by high price inflation, cash is in high demand.
Until the Federal Reserve starts another round of massive monetary inflation, I don’t expect price inflation to take off. You may lose a little bit with your cash holdings, but it will be minimal. At this stage, it is better to have liquid funds to buy cheap assets in a recession.
In terms of major asset classes, stocks have been king for the last several years. But kings get overthrown all the time. Cash will rule once again, at least for a period of time.