Is the Permanent Portfolio better suited for rich people?
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Is the Permanent Portfolio better suited for rich people?
I noticed a thread on the Bogleheads forum where a poster claimed that the permanent portfolio is better for rich people as the portfolio has gold as an asset class with zero real returns. So it's better for someone who has a lot of money but just wants to keep it, rather than grow. Obviously backtesting says otherwise right?
Re: Is the Permanent Portfolio better suited for rich people?
People with less money have the same needs: grow and protect money.
I see loads of criticisms and opinions about not owning gold, cash or even LT bonds in a portfolio. But the empirical evidence up to this point shows conclusively that these opinions are flat out wrong. I have challenged critics in the past to defend their positions with data the way I have on the blog but they never do. The reason is pretty straight forward. If you actually look at the data objectively and not with a particular dogmatic outlook it is clear that the portfolio works despite what theory would suggest.
If you look at the alternative it's a stock heavy portfolio. But I can show periods of time where stocks have been horrible investments for 10+ years. An accumulator can be hurt just as bad by owning too much in stocks than not enough. Stock bugs are just as dangerous as gold bugs for an investor. It's best to own a wide variety of assets because the future is unknown.
I see loads of criticisms and opinions about not owning gold, cash or even LT bonds in a portfolio. But the empirical evidence up to this point shows conclusively that these opinions are flat out wrong. I have challenged critics in the past to defend their positions with data the way I have on the blog but they never do. The reason is pretty straight forward. If you actually look at the data objectively and not with a particular dogmatic outlook it is clear that the portfolio works despite what theory would suggest.
If you look at the alternative it's a stock heavy portfolio. But I can show periods of time where stocks have been horrible investments for 10+ years. An accumulator can be hurt just as bad by owning too much in stocks than not enough. Stock bugs are just as dangerous as gold bugs for an investor. It's best to own a wide variety of assets because the future is unknown.
Re: Is the Permanent Portfolio better suited for rich people?
The standard line is that you should take market risk proportional to your "need" and "ability" to bear that risk. This is a paradox because the wealthy have little need (already rich) and great ability (chop $1 billion in half and you're still rich). Conversely accumulators have great need (accumulating ASAP) and little ability (chop $1 million in half and you can never retire).
So, if you only look at the need dimension, the rich should invest conservatively and accumulators should invest aggressively. If you only look at the ability dimension, the rich should invest aggressively and accumulators should invest conservatively. It sounds like that poster is only looking at the need side of things.
IMO the financial industry, human nature, and selection bias of those who are able to invest, create a perfect storm for people to overestimate their ability to take risk. The default asset allocation advice is either a flat 60/40 or "age in bonds" allocation, which seems to be too volatile for a lot of people causing them to "opt-out" of volatility by going to cash in bear markets. The Permanent Portfolio starts with a conservative allocation that will work for people with low risk tolerance, and lets you "opt-in" to more volatility with the Variable Portfolio if you so choose. I think the latter approach, of requiring an explicit choice and action to take on more risk, is a more realistic plan for people in general.
So, if you only look at the need dimension, the rich should invest conservatively and accumulators should invest aggressively. If you only look at the ability dimension, the rich should invest aggressively and accumulators should invest conservatively. It sounds like that poster is only looking at the need side of things.
IMO the financial industry, human nature, and selection bias of those who are able to invest, create a perfect storm for people to overestimate their ability to take risk. The default asset allocation advice is either a flat 60/40 or "age in bonds" allocation, which seems to be too volatile for a lot of people causing them to "opt-out" of volatility by going to cash in bear markets. The Permanent Portfolio starts with a conservative allocation that will work for people with low risk tolerance, and lets you "opt-in" to more volatility with the Variable Portfolio if you so choose. I think the latter approach, of requiring an explicit choice and action to take on more risk, is a more realistic plan for people in general.
Re: Is the Permanent Portfolio better suited for rich people?
Well said!KevinW wrote:IMO the financial industry, human nature, and selection bias of those who are able to invest, create a perfect storm for people to overestimate their ability to take risk. The default asset allocation advice is either a flat 60/40 or "age in bonds" allocation, which seems to be too volatile for a lot of people causing them to "opt-out" of volatility by going to cash in bear markets. The Permanent Portfolio starts with a conservative allocation that will work for people with low risk tolerance, and lets you "opt-in" to more volatility with the Variable Portfolio if you so choose. I think the latter approach, of requiring an explicit choice and action to take on more risk, is a more realistic plan for people in general.
Re: Is the Permanent Portfolio better suited for rich people?
If the cost of entry were super-high, I could sorta understand a certain point of view. However, even looking at 1oz gold coins, or a vanguard fund with a $3k min, there are low-entry options available. You can always do GLD/ALU, or some other no/low min funds/ETFs until you're able to invest in higher quality assets. If anything, with a low dollar investment, it's even more important to be safe with your money - it's just that much more precious as a valuation of your time.