I just read Harry Browne's 'why the best laid investment plans usually go wrong'. In chapter 18, he wrote:
The problem I see here is that while stocks and gold indeed have the ability to rise by more than 100% from any level at any time, long terms bonds do not.Volatile stock-market investments, long-term Treasury bonds, gold,
and Treasury bills combine to provide balance and safety.
Apart from Treasury bills, each has the ability to rise by more than
100% over a period of time, while the decline of any investment is
limited to 100%. So a Permanent Portfolio comprised of these investments
has a natural tendency to gain in value. And this upward
bias is augmented by the interest earned by the Treasury bills and
bonds.
The yield on a canada 30 year is 2.162%. In his radio shows, Browne said that rates dropped to 1% during the great depression. Let us assume that rates go even lower to 0.01% on a 30 year and plug in the numbers in a calculator (http://www.free-online-calculator-use.c ... lator.html) and we find a gain of 64%. A rate drop to 1% would create a gain of 30%. In any case, bonds do not seem to have the ability to rise by more than 100% as he said. For a 30 year bond to have the potential to rise by 100% assuming rates drop to 0%, current rates would have to be >3.5%.
So first I'd like to know if my math is right or if I'm missing something.
And then, what should be done about this apparent flaw? In the absolute best case of rates going to 0%, bonds would gain 64%, which would 'pull' the portfolio upwards by 16%. In a more reasonable case of rates going to 1%, the positive effect on the overall portfolio would be +7.5%.
Shouldn't we simply not bother and go with 50% cash/ short term bonds in the portfolio until long term bonds recover their potential? What are the experts thinking?