For anyone looking for safety and stability with an investment portfolio, I advocate a permanent portfolio as described by Harry Browne in his book Fail-Safe Investing. Even if you are looking for something with more risk and reward, I still recommend a portion of your investments be put into a permanent portfolio, while allocating a certain portion for speculation.
Unfortunately, the permanent portfolio is too boring for most people, so they don’t listen to the advice. And if you do tell someone about it who is outside of libertarian circles, they think it is crazy to have a 25% allocation towards gold. Most financial advisors won’t recommend any more than 5% towards gold, if any at all.
Still, there are some who do follow the permanent portfolio, or at least a basic outline of it. I have been working on writing a report about the permanent portfolio and possible tweaks that can be made to fit each person’s situation.
With that said, I received the following question the other day via email. I asked for permission to write a response via a blog post. The background and question is as follows:
“You know how experts will say ‘don’t invest in stocks if you don’t have at least xxx years before you need the funds.’ Well I am contemplating a move to another state in 3-4 years and maybe a house purchase there. I have no idea the exact time (but it’s at least 3 years) nor how much of my savings it would use. In a situation such as that, what are your feelings on the PP for my savings as opposed to just treasury bills? I have adjusted my PP a bit, upping the cash and lowering the gold. So the daily volatility is very low. So the only real risks I see is if stocks AND long term treasuries both crater in unison. Or of course if my ETFs go bust. As an aside, I have adjusted my PP to 40% cash, 25% Stocks and LT Bonds and 10% Gold. All ETFs.”
My response:
The permanent portfolio is different as compared to stocks. I don’t agree with advice from the so-called experts that people should invest the majority (or all) of their funds into stocks. However, if someone does take the advice to invest heavily in stocks, then it is correct that you should only do so if it is for the long run.
Even here, what is the long run? If someone had invested in the Japanese market at the top in 1989, they would still be down by almost half nearly three decades later. If someone had invested in U.S. stocks near the peak in 1929, they would have waited at least a couple of decades to recover. When most advisors recommend staying out of stocks if you need the money in the short run, they aren’t talking decades.
The good thing with the permanent portfolio is that you are not vulnerable to these prolonged downturns, or at least not as compared to stocks. There are no guarantees in life, so it is theoretically possible that the permanent portfolio could be down over the course of, say, 5 years. But it is highly unlikely, and it hasn’t happened so far in the United States in modern times.
In fact, in the few years that the permanent portfolio has been down for a calendar year, it tended to give double-digit gains the following year.
Therefore, if you don’t need the money for at least 3 to 4 years, I would recommend just putting it all in the permanent portfolio. The chances are very slim that you would lose money over this timeframe. And since you don’t know exactly how much you will need to move to another state, and how much you will need for a down payment on a house, then you have some wiggle room anyway. If the portfolio were down by 10%, it doesn’t sound like it would be that devastating.
I agree that it is unlikely that both stocks and long-term bonds will perform really poorly over this time. If we hit a recession and stocks tank, then I expect U.S. government bonds to do well. And if we continue on this little boom (at least for those with assets), then stocks should hold up well.
Of course, nobody can predict the future with certainty. While higher price inflation and inflation expectations do not seem to be on the horizon, we know that things can change quickly. An unexpected war or some major event could shift things quickly, and maybe gold will resume its bull market from where it left off back in 2011.
Since you may need some of this money, you should not buy physical gold coins for your gold portion, or at least not the majority of your gold position. It is always a good idea to have a little bit of physical gold. But if you are going to sell off part of your portfolio to use as a down payment on a house, then you want to have some of your gold in an ETF or something similar where the transaction costs are low. You don’t want to be buying and selling gold coins in a relatively short period of time because of transaction costs.
As you get closer to your move and have more certainty as to how much money you will need, then you can start shifting more money towards cash (or cash equivalents). If you know you are moving within a year and will need the money, then that is the time to go even more conservative towards cash and out of the permanent portfolio.
One other consideration is to use the mutual fund PRPFX. While this does not perfectly mimic the permanent portfolio setup, it is a pretty good alternative.
In conclusion, I believe the permanent portfolio is stable enough that you can keep your investments in it for a 3 to 4 year time window and be reasonably sure that it isn’t going to lose value in nominal terms. Once you get within a year of needing the money, then it is appropriate to move towards a stronger cash position.