William Bernstein on the Permanent Portfolio

[mathjak107]

“ I would argue that what we think of as 'odds' are really just being calculated from a relatively short time frame of late twentieth century technological development and prosperity. Taken from a longer term viewpoint human history is much more fraught with upheavel. The later half of the twentieth century is not an accurate representation of the wide spectrum of eras in human development and there is not an appropriate timeframe by which to measure the odds of certain economic outcomes.”

But Bernstein’s book points out not only that are the 4 economic conditions the PP is designed to address not equally likely to occur but also that the costs of and even ability to address them are very different as well.

What about the disastrous effects of not being prepared for the unlikely ones?
E.g., not being prepared for hyperinflation is likely to be catastrophic.

Bernstein considers inflation the most likely risk you have to protect against, and argues that globally diversified equities are a 'good enough' long-term hedge against permanent capital loss because of severe inflation. For optional further protection he suggests tilting the equity allocation to value stocks, or adding a sprinkling of gold, gold stocks or commodity producers.

Fine, but that doesn't address my point, which is that hyperinflation is the most devastating situation not to be prepared for.
E.g., if there is a 5% chance of hyperinflation, can you ignore it? My answer is: No, because if that 5% turns up and you aren't prepared for it, you will be wiped out.

Bernstein does in fact address this in detail in the last chapters of his booklet. He points out that:

1. Gold (contrary to what Harry Browne postulated) isn't a very good inflation hedge.
2. Stocks are a good hedge and they become a great one if internationally diversified and tilted towards value.
3. Commodity-producing equity assets - especially those that produce precious metals - do exceptionally well.
4. TIPs or (worst choice) inflation-adjusted annuities work in some situations - especially for retirees - as supplements to the above assets.

But again - inflation is (historically) likely, hyperinflation (or prolonged deflation) are not.

actually stocks only became an inflation hedge AFTER , KEY WORD AFTER inflation came down ..for almost 20 years from 1964 to 1984 stocks were flat ..... so minor inflation , yes stocks were fine , high inflation THEY SUCKED !

[Smith1776]

Fine, but that doesn't address my point, which is that hyperinflation is the most devastating situation not to be prepared for.
E.g., if there is a 5% chance of hyperinflation, can you ignore it? My answer is: No, because if that 5% turns up and you aren't prepared for it, you will be wiped out.

Exactly.

My analogy has always been the seatbelt in a car. There is a small probability that you will get in a car accident on any given day, but you still wear a seatbelt every time you drive. That one time you get into an accident, not wearing a seatbelt could be the deciding factor between surviving and not.

[mathjak107]

all insurance works on probabilities and most of what we insure has a minuscule chance of happening yet we insure against it if will be devastating ....

while statistics play a big part in insurance , and life insurers can tell us in any normal given year how many of us will die , they cant tell us who .

so us humans only have two outcomes ....it is us bad shit happened to or it isn't ....


but we do carry different amounts of insurance based on what would be most devastating to us if it was us on the wrong side of the statistic since someone has to be .

but there is lots of things that can happen that we don't insure against too that can happen .