The full title of this book by Craig Rowland and JM Lawson is
“The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy“.
In my review at Amazon.co.uk, I gave the book Five Stars. This means I think it is Excellent and is Very Highly Recommended.
Here is my book review.
Excellent lesson on effective diversification because of economic uncertainties
I was introduced to the idea of the Permanent Portfolio by a magazine article and I wanted to know more so I bought the book.
It sounds strange but I found it hard to put down as I finally had the nagging doubts I had about diversification erased from my brain.
I’m used to financial advisers telling me that I need to diversify my investments but that normally seems to be about spreading the money across different countries, sizes of companies and sectors.
Instead this theory says that there are two big unknowns about the economy:
- will it grow or contract
- will retail prices go up or down
Four main investments – shares, long term bonds, gold and cash – historically do well or badly under these situations but importantly, they move in different directions.
Evidence from the last 40 years suggests that a permanent portfolio consistently increases in value, even after allowing for inflation and does it with few overall risks. The portfolio has only had a very small number of years where it would lose money because gains in some assets offset losses elsewhere.
My one criticism of the book is that it doesn’t go into detail on the portfolio and the crazy situation at the moment where central bankers have blown up price bubbles with Quantitative Easing and suppressed interest rates and investment returns.
When all asset values are potentially inflated, even a well diversified portfolio won’t protect you. History is no longer a reliable guide because we’ve never been in such a crazy, mixed up world for investments and savings.
I also have a concern that we live in a time when a more fundamental change could happen. I find the analysis and conclusions drawn in the book Life After Growth: How the global economy really works – and why 200 years of growth are over to be frighteningly compelling. This argues that not only is our money based economy broken, the real economy based on net surplus energy (after finding, extracting or creating it) is already on a slippery slope that may be mitigated but not reversed. It’s hard to see that even a permanent portfolio will offer much safety in this nightmare scenario.
I give The Permanent Portfolio a five star recommendation but believe that it may not be the complete answer because the future may bear few similarities with the past.
Harry Browne himself, suggested using a permanent portfolio to provide long term asset protection and a variable portfolio for investors who wanted to follow hunches of which markets offered the best value. This two portfolio method is the approach I’m intending to take.
Update – Performance Of the Permanent Portfolio in 2013
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One of the authors, Craig Rowland writes the Crawling Road blog and reports that the permanent portfolio yielded a 2.4% loss in the strange investment world of 2013 based on American investments.
* the total return on shares was 30% positive
* long term treasury bonds were down by 11.7%
* short term treasury bonds (held as a safe cash equivalent) were up by 0.4%
* gold was down by 28.2%
This performance helps to show how bad performance in two asset classes (gold and long term bonds) are offset by a good performance from the stock market. This is a reverse of the total period from 2000 to 2012 where gold and bonds have regularly increased in value and shares had fluctuated wildly but remained below their peak index values.
The performance of the permanent portfolio for UK investors would have been worse:
* long term bonds were down as interest rates rose in the UK as well as the USA
* the UK stock market in the form of the FTSE all share index increased by 16.7% in 2013, a very good performance but well below the increase seen in America.
* gold in sterling terms was down by slightly more than in dollars because the pound strengthened by about 1%
This will mean that the UK permanent portfolio will have fallen by 6 or 7%. I don’t have the exact numbers because I wasn’t tracking it at the start of the year.
I don’t believe this invalidates the concept but it does highlight the unusual investment conditions at the moment.
What may happen in 2014?
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Most investment forecasts I see suggest that interest rates will increase and bond values therefore reduce. Views on the stock market are more mixed, some see a crash, others think that central bank intervention will continue to keep momentum rising higher. The forecasts on gold are even more volatile.
I find the permanent portfolio concept very appealing but I think there are right and wrong times to buy the asset classes. Since I’ve been monitoring the PP from the end of July 2013 to December 2013, my numbers indicate long term bonds and gold are down by over 15% each and shares are slightly up.
Financial advisors may argue that a sensible approach in these volatile conditions might be to drip feed money into the PP each month or quarter, using pound cost averaging to take advantage of falls in value to buy more units. Like the PP itself, this approach helps you to become a slight contrarian, buying more of an asset when values fall.
The advice of the professionals is to avoid market timing. I think that makes sense for individual shares but I believe there are times when markets are cheap, fair value or expensive. There’s not much written about when is a good time to invest because the vested interests want your money as soon as possible.
You may find these two books helpful:
Financial Bull Riding (LFB)
Yes, You Can Time the Market!
My Updated Thoughts In February 2016
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I have no doubt that this book has fundamentally changed the way I think about investing and particularly in the current uncertainty about the short and medium term economic futures.
Stock markets around the world have moved into bear territory in 2016 now that they’ve declined by at least 20% from their peak values. Some “experts” I’ve been reading expect this bear market to be crushing, taking markets down by between 50% and 75%. Others say that the central banks still have the backs of investors and will do whatever is necessary to keep the economic wheels on the road.
I’m spending a lot of time thinking about inflation vs deflation. The world seems to be a deflationary stage (massive debts, asset bubbles, massive overcapacity in and because of China, technological innovations that will destroy many jobs) but the policy makers desperately need to create inflation to reduce the burdens of private and public debt without pushing up interest rates to unsustainable levels.
The idea of combining a permanent portfolio based on cash, gold, bonds and equities combined with a temporary portfolio remains at the core of my thinking. I’m scared of the effects that either significant deflation or inflation can have on my portfolio (and the world) but I also see temporary deflation in asset markets as an opportunity for increasing my wealth.
This is the most important investment book that I’ve ever read.
In the bull market of the 1980s and 1990s, investing was easy because, almost whatever you bought, went up with the exception of Japan. You didn’t need to worry about having a balanced portfolio.
Things have become much more complicated from 2000 onwards and whilst I stayed invested in the bears of 2000 and 2008, I fear that the UK, USA and European economies are turning Japanese.
This book has given me the confidence to reduce my equities sharply and invest in gold and hold cash. I didn’t invest in bonds because I thought the shackles had to be taken off interest rates but hindsight shows I was wrong as bond interest rates have turned negative in Europe and Japan as central banks start their negative interest rate policies.
Update in December 2016
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The crash that I’ve been expecting (it’s now 13 December 2016) hasn’t happened. The sharp dips in the first couple of months of 2016 reversed and now, despite the shock to the establishment of Brexit and Trump winning in America, stock markets are riding high.
Bond yields have risen as the Federal Reserve prepares to increase interest rates. Inflationary pressures seem to be growing while gold prices have slid in recent months.
I feel the Permanent Portfolio concept needs updating to reflect the new, distorted realities. I’ve become increasingly interested in trend following as a way to help me make buy and sell decisions.
Nothing too complicated and I don’t think I have the confidence to dabble in options and short positions. I’ve been watching some defensive hedge/alternative investment funds. Those that have made bets in the direction of my expectations have struggled but someday they will be right. Following their trends will hopefully help me take advantage of their momentum.
It is available to buy from Amazon.co.uk and Amazon.com.
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