HBPP compared to other strategies on The Retire Early Homepage

[clacy]

The fact is we none of us will ever really know how the PP will perform in the future.  40 years is not really long enough to draw concrete conclusions.  The HBPP seems to be as solid as it comes in terms of protection, but that protection likely comes at a price in terms of growth.  Which is exactly why I have a significant portion of my investable assets in the PP.  With that said, I have 2/3's in what most here would call my variable portfolio, because I'm hoping to beat 9% pa.

Should I have 100% in my VP or move it all to my PP???? That question won't be answered until after the fact.  Time will tell I guess.

[Gumby]

On April 17th, 2005, Harry Browne answered a listener's question on how the Permanent Portfolio would perform during a period of rising interest rates. I've taken the liberty of transcribing the first 10 minutes of that episode for everyone to read. If you'd rather listen to the episode yourself, you can download that episode from Craig's archive here:

Harry Browne Investment Radio Show: April 17th, 2005

Here is Harry Browne's response:

[01:37]

HARRY BROWNE: A question from "Jim" out in cyberspace...he says, "Your [Permanent] Portfolio seems to have a proven track record over a long period of time and through many different increasing investing environments. But, has the environment really been all that different over this period of time? Haven't we been enjoying a 20+ year period with down-trending interest rates? Fluctuating of course, but trending down. As you point out, a falling interest rate environment is good for both the stock and bond portions of the portfolio. Also, through most of this period, we've had a much lower rate of inflation than we experienced in the '70s. Would this have had the effect of keeping the cash portion from hurting the portfolio over most of this period?"

So, Jim goes on to say... I'll paraphrase the rest of it. He's worried that an inflation scenario gives you only gold as the one asset performing well. And he says, "Not to predict, but if this does happen, do you think the Portfolio could maintain the purchasing power of the invested funds?"

Well, Jim, the fact of the matter is that the Portfolio did very well during the 1970s. And I don't know if you're old enough to remember the '70s first hand, but inflation was really out of hand in the '70s. And it seemed as though we just kept bouncing back and forth between inflation and recession. And the inflation rate hit something like about 8% in the early '70s, backed off a bit. Then it went up to 12% later in the decade, backed off a little bit. And then went up to 14% in 1981. And stocks were not doing well. Bonds of course were doing terribly, because interest rates kept rising and rising. We finally hit a prime rate of 20% and a T-Bill rate of 15%. And I believe the rate on Treasury Bonds finally hit about 12% or 13%. And so, bonds were really in the tank, as they say. And of course, cash was not any help at all during such an inflation. But the fact of the matter is that the Portfolio kept growing during that period. Because gold went up 20-times over.

Now, I don't think we could count on gold going up 20-times over in the next run-up in inflation and gold. And the reason we can't count on the same result is because that result of the '70s was partly from the great inflation of the '70s and also partly from the fact that gold had been price controlled at $35 an ounce for a period of 35 years, that finally ended in 1968. And after a period of market time, gold really took off in the early '70s. And it was making up for lost time for those 35 years that it had been held down in price. That always happens when you lift price controls. Whatever was price controlled goes up much faster than the rate of inflation.

But, gold goes up much faster than the rate of inflation anyway, simply because its a powerful, leveraged investment — leveraged in itself, not leveraged by borrowing money. And I would think that in the next inflation — if we had something similar to the '70s — you could count on gold going up at least five or ten times over. In other words, gold would wind up at somewhere around $2,000 and possibly as high as $4,000. Right now that seems...that's in the stratosphere, that just seems impossible. But, I have to tell you that when I wrote my first book, How You Can Profit From the Coming Devaluation, published in the 1970s, I made the asounding forecast in that book...it wasn't really a forecast, but I talked about the idea of gold going to $70 or even $100 an ounce — when it was at $35. And that seemed astounding.

But, the truth is, that gold actually went to $800 before the period of inflation was over. Now $800 was way over the mark. And so it came back down again, and it finally bounced off at about $300, and came back up a little bit. But, there was quite a period there where gold was in the $300 to $400 range, and we have to think that that's probably the equilibrium where it belonged. And that was 10-times over the point where it had started in the early '70s.

So, yes, I do believe that gold is very, very powerful. Powerful enough to pull the entire portfolio upward during a period of turmoil caused by inflation.

And that's the point of the Portfolio. We have to remember that investments that are rising have a bigger impact than investments that are falling. In investment that is falling goes down 15, 20, 25, 30, 40 percent during a bad, bad bear market. But, investments that are rising, in a bull market, go up 100%, 200%, 300%, or in the case of gold, 1,000%. So, that investment that is rising, a single investment, can be strong enough to carry the whole portfolio upwards. Gold during inflation. Bonds during a deflation, ought to be able to carry the whole portfolio upward, while stocks and gold are falling. And, during the prosperity we have the benefit of two investments that pull the portfolio upward — stocks and bonds — why gold may be falling. And cash is relatively neutral. So, the whole concept of the Portfolio is built around the idea that the winning investment will have a bigger impact on the outcome than the losing investments.

Now, if you don't think that's true, what are you going to do?

The only alternative to the Permanent Portfolio concept is to speculate. To say, 'I think this is what's about to happen and I'm going to put all, or most, of my money in that.' In other words, during a period you think inflation is here to stay for awhile, you put 70% of your assets in gold. Well, if you're wrong, if the gold price goes up a little, inflation goes up a little, and then comes falling back down, you might take an enormous loss, because you won't have a strong other investment in there to carry the portfolio upward and offset the losses in gold — which is maybe three times the impact on the portfolio as the winning investments because there's three times as much gold as the winning investment.

So, I hope that clears this up. If not, give me a call and let's talk about what's on your mind, about your money...