Let me introduce you to the idea of a permanent portfolio. The idea was originally developed by Tom Brown, whose approach was to ensure long term capital gains – besides what happens with the economy.
He realized that the only certainty about the future economy is uncertainty. Then he divided into four possible different scenarios:
1. Recession
In a recession almost all assets usually fare not well, with stocks losing generally the most value. The only good thing about a recession is: It's not going to last long as then one of the other 3 scenarios will come true. In a recession he makes clear that "cash is king" as it can be converted in other then cheap assets.
2. Depression with Deflation
Usually when things become worse in an economical downturn. Japan experienced a long term depression after its economical boom in the 70s and 80s. In a depression you are advised to hold long term treasury bonds, as they will appreciate when long term interest rates decline.
3. Inflation
In an inflation the best thing to own is Gold. Gold will profit heavily when money becomes less valuable as has been seen in the inflation in the 80s
4. Prosperity
When the economy is doing good, Brown says you have to own stocks to profit from this period.
Brown then makes the next conclusion, by telling you not to speculate with the money you need for your pension or your children. It is impossible to know which scenario will come true in the future. Hence he advises you to hold 25% of the following assets:
Cash / Long term treasury bonds / Gold / Stocks
Once in a year you should reset your allocation to 25% each again.
This is not a strategy to make you rich, but it will ensure that – no matter how the future will play out – you will earn a fair share and face no risk of a permanent capital loss.
So how did his strategy work out over the long term???
Here the 10 year comparison between stocks, bonds and the permanent portfolio fund:
Conclusion: Not making you rich, but giving you a fair return and letting you sleep well. And a big plus is the low volatility, so that you safely can access your money.
Sascha Seiler
http://www.commerzbank.de
He realized that the only certainty about the future economy is uncertainty. Then he divided into four possible different scenarios:
1. Recession
In a recession almost all assets usually fare not well, with stocks losing generally the most value. The only good thing about a recession is: It's not going to last long as then one of the other 3 scenarios will come true. In a recession he makes clear that "cash is king" as it can be converted in other then cheap assets.
2. Depression with Deflation
Usually when things become worse in an economical downturn. Japan experienced a long term depression after its economical boom in the 70s and 80s. In a depression you are advised to hold long term treasury bonds, as they will appreciate when long term interest rates decline.
3. Inflation
In an inflation the best thing to own is Gold. Gold will profit heavily when money becomes less valuable as has been seen in the inflation in the 80s
4. Prosperity
When the economy is doing good, Brown says you have to own stocks to profit from this period.
Brown then makes the next conclusion, by telling you not to speculate with the money you need for your pension or your children. It is impossible to know which scenario will come true in the future. Hence he advises you to hold 25% of the following assets:
Cash / Long term treasury bonds / Gold / Stocks
Once in a year you should reset your allocation to 25% each again.
This is not a strategy to make you rich, but it will ensure that – no matter how the future will play out – you will earn a fair share and face no risk of a permanent capital loss.
So how did his strategy work out over the long term???
Performance (from morningstar) in percentages (annualized)
Total Return % +/- Morningstar Moderate Target Risk +/- Morningstar Moderately Cons Target Risk Rank in Cat Year-to-date 14.74 -1.97 2.64 70 1-Year 12.45 6.27 5.45 8 3-Year Annualized 7.7 6.68 4.93 1 5-Year Annualized 8.61 3.83 3.84 1 10-Yr Annualized* 9.51 --- --- 1Here the 10 year comparison between stocks, bonds and the permanent portfolio fund:
Conclusion: Not making you rich, but giving you a fair return and letting you sleep well. And a big plus is the low volatility, so that you safely can access your money.
Sascha Seiler
http://www.commerzbank.de
