Wednesday, November 8, 2017

The Permanent Portfolio

You'd like to invest for the long-term, but you can't take the stomach churns that result from being fully invested in the stock market, no matter how rewarding the returns can be over long periods. The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy is aimed at you. The authors have compiled a strategy that they believe generates decent returns in most economic periods - at the very least, it will lower your portfolio's volatility, even if you have to sacrifice returns in the process.

I liked the book for how it suggests implementing its less-volatile-return strategy. The details into how exactly to execute (e.g. with specific ETFs or places to store gold etc) are not something I usually find in books, so that was interesting.

But I don't love the strategy. I think I'd rather see the case made that long-term investors should try to get over the volatility so that they can seek the best returns overall. At least, that's how I look at it. Why end up with less money at the end of the day because your investment strategy is less volatile?

But maybe some people just aren't wired that way, which is fine. Nevertheless, even if your goal is low volatility rather than great returns, I think there are ways to go about it without sacrificing as much in the way of returns. (E.g. with 25% in gold, and another 25% in treasuries, I feel like one is sacrificing a heck of a lot in the way of potential returns over long time frames.) One way to do that would be to invest in stock markets globally on the basis of the lowest CAPE ratios. Here you can lower some correlation inside your portfolio and yet get very good returns. Another would be to buy a basket of cheap stocks. I suspect that in this way you could raise the stock allocation (and therefore the average annual return) and yet because you are going international and cheap, you are reducing the correlation of your assets.

I'm also not convinced the volatility as well as the returns going forward will be as good as the authors believe. The back-testing only goes back 40 years, which in my opinion is pretty short for a macro strategy; considering that business cycles tend to average almost 10 years long, you're really only looking at 4 cycles here.

I subscribe to the adage that the the years following a back-test is when a strategy is likely to perform at its worst, and the shorter that back-test period is, the less confidence I have in its future.

In the end, I can't recommend the book. To me, the goal is maximizing returns. As such, I think investors need to learn to embrace and try to take advantage of volatility rather than seek ways (which may not even work!) to reduce it.

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