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Andrew Hallam
31.10.2018

Do You Want A Portfolio That Can Weather Market Storms?

Global stocks slid into a ditch in October, dropping more than 10 percent. Plenty of investors are terrified that the plunge might continue. If stock market drops give you the jitters, let me offer a solution.

It’s an investment strategy that has had only five losing years since 1971. Its biggest drop was in 1981, when it fell just 4.1 percent. In 2008, when global stock market levels were almost cut in half, this portfolio dropped less than 1 percent.

It also averaged a compound annual return of 8.49 percent between 1978 and 2018. The late investment writer, Harry Browne, created this bit of magic. It’s called The Permanent Portfolio. This isn’t something investors should jump in and out of, based on market sentiment. That’s speculating, not investing. Instead, if the portfolio fits your personality, it’s worth a long-term commitment.

The strategy combines gold, stocks, long-term bonds and cash in equal proportions. The mix never varies.

Permanent Portfolio Allocation

• 25% Cash (or short-term government bonds)

• 25% Long Term Bonds

• 25% Stocks

• 25% Gold

The investor needs to maintain the above target allocation. The portfolio won’t gyrate wildy when stocks plunge, yet it still provides growth. It works because it’s equally weighted to asset classes that often move in opposite directions. For example, the global stock index dropped 9.97 percent during the first 29 days of October, 2018. But short-term bonds gained slightly. Gold also rose 3.06 percent. Long-term bonds barely dipped. As a result, this portfolio dropped less than 3 percent.

The Permanent Portfolio’s greatest benefit might be its effect on the human psyche. People hate investment losses. As Richard H. Thaler wrote in the Journal of Behavioral Decision Making, we hate investment losses much more than we enjoy investment gains. Plenty of people think an investor’s success comes from picking the right stocks, timing the market or choosing the best allocation of low-cost index funds. But that isn’t entirely true.

Most professional stock pickers underperform the market after fees. Studies show that market timing doesn’t consistently work. And the best allocation of index funds is only as powerful as the person behind the wheel. After all, most investors underperform the funds they own. They buy more on highs. They sell or cease to add fresh money when those funds are on a low.

This is pretty serious stuff. Investors tend to be their own worst enemies. Here’s an example. Between 2003 and 2013, U.S. stock market funds averaged a compound annual return of 7.3 percent. That would have turned a $10,000 investment into $20,230. But according to Morningstar, the average investor in U.S. stock market funds averaged a compound annual return of just 4.8 percent over the same time period. That would have turned a $10,000 investment into $15,981. Over longer periods of time, such a performance gap becomes a Grand Canyon.

If $10,000 gained a compound annual return of 7.3 percent for 50 years, it would grow to $338,833.

But if the same amount gained a compound annual return of 4.8 percent over 50 years, it would grow to just $104,247.

Many investors don’t perform well because they speculate. They let greed and fear manipulate their decisions. They sell or cease to add fresh money when the market drops.

 

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But if their portfolios don’t plunge when the market falls, such investors might not sabotage their ride. Check out the Permanent Portfolio’s annual returns (in blue, below) during the 2000-2002 stock market plunge. It gained 3.13 percent in 2000. It gained 0.47 percent in 2001. And it gained 7.33 percent in 2002. In contrast, U.S. stocks (in red, below) dropped three years in a row: losing 10.57 percent in 2000, losing 10.97 percent in 2001, and losing 20.96 percent in 2002.

 

The Permanent Portfolio’s long-term stability might keep investors on track. It won’t make as much money as a pure stock portfolio when the market soars. Long-term, it has also underperformed a portfolio devoted to 60 percent stocks and 40 percent bonds. But because most people speculate as a result of fear and greed, Permanent Portfolio devotees will likely beat them anyway.

 

 Permanent Portfolio Performance

Period Compound Annual Return Number of Down Years
Worst Down Year
Brackets show losses
1978-2018 8.49% 5 1981 (4.1%)
1978-1988

12.41%

1 1981 (4.1%)
1988-1998 8.04% 1 1994 (2.46%
1998-2008 6.98% 1 2008 (0.73%)
2008-2018 5.51% 4 2015 (2.03%)

Source: portfoliovisualizer.com 

 Permanent Portfolio Model

Allocation Symbol Fund
25% ERNA iShares Ultra-Short Bond ETF
25%

DTLA

iShares Treasury Bond 20+ year accumulating shares
25% SWDA or IWDA iShares Core MSCI World ETF (SWDA or IWDA)
25% SGLN iShares Physical Gold

 Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas


Internaxx Bank S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Internaxx Bank and Internaxx Bank accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Internaxx Bank.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

 

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