Deep risk: How History informs Portfolio Design is the third installment in the investing for adults series. this series is not for novices. This booklet takes portfolio design beyond the familiar “black box”? mean-variance framework. Most importantly, the short-term volatility of financial assets, commonly measured as standard deviation, is a highly imperfect measure of the actual long-horizon perils faced by real-world investors subject to the vagaries of financial and military history. These risks have names—inflation, deflation, confiscation, and devastation—and any useful discussion of portfolio design of necessity incorporates their probabilities, consequences, and costs of mitigation.
His book takes a look at portfolio construction with an eye towards history/market risk and how it can impact investors long-term. He calls it Deep Risk, and it's an important topic to understand.
I was able to read a draft before publication and he has very insightful comments on portfolio construction that will be of interest to those that use the Permanent Portfolio strategy. I highly recommend it!
Deep risk: How History informs Portfolio Design is the third installment in the investing for adults series. this series is not for novices. This booklet takes portfolio design beyond the familiar “black box”? mean-variance framework. Most importantly, the short-term volatility of financial assets, commonly measured as standard deviation, is a highly imperfect measure of the actual long-horizon perils faced by real-world investors subject to the vagaries of financial and military history. These risks have names—inflation, deflation, confiscation, and devastation—and any useful discussion of portfolio design of necessity incorporates their probabilities, consequences, and costs of mitigation.
His book takes a look at portfolio construction with an eye towards history/market risk and how it can impact investors long-term. He calls it Deep Risk, and it's an important topic to understand.
I was able to read a draft before publication and he has very insightful comments on portfolio construction that will be of interest to those that use the Permanent Portfolio strategy. I highly recommend it!
I would say that according to the bolded passage (which I agree with), the amount of discussion of portfolio design that is not useful is approximately 100%.
His thoughts on investing risk in terms of economic cycles mirrors a lot about what Permanent Portfolio'ers believe. Especially when it comes to what I've termed "extra-spreadsheet risks." Meaning those risks that show up outside of a spreadsheet backtest (political, extreme economic events, etc.).
I think Bernstein is one of the few respected academics who understand and value Harry Browne's work. I allways enjoyed his books, the four pillars is one of my favourite investments books ever, but I haven't read his "investment for adults" series and it seems very interesting.
craigr wrote:
His thoughts on investing risk in terms of economic cycles mirrors a lot about what Permanent Portfolio'ers believe. Especially when it comes to what I've termed "extra-spreadsheet risks." Meaning those risks that show up outside of a spreadsheet backtest (political, extreme economic events, etc.).
'Devastation—war or anarchy—is a long shot with horrific consequences, but there isn’t much you can do about it. If you hoard gold, you are as likely to be killed for it as to be protected by it. “For Armageddon, what you really need is an interstellar spacecraft,”? Mr. Bernstein quips.'
craigr wrote:
His thoughts on investing risk in terms of economic cycles mirrors a lot about what Permanent Portfolio'ers believe. Especially when it comes to what I've termed "extra-spreadsheet risks." Meaning those risks that show up outside of a spreadsheet backtest (political, extreme economic events, etc.).
'Devastation—war or anarchy—is a long shot with horrific consequences, but there isn’t much you can do about it. If you hoard gold, you are as likely to be killed for it as to be protected by it. “For Armageddon, what you really need is an interstellar spacecraft,”? Mr. Bernstein quips.'
Ha ha. Doesn't sound too respectful of HB's work.
Here's an article he wrote about the PP a while back.
Libertarian666 wrote:'Devastation—war or anarchy—is a long shot with horrific consequences, but there isn’t much you can do about it. If you hoard gold, you are as likely to be killed for it as to be protected by it. “For Armageddon, what you really need is an interstellar spacecraft,”? Mr. Bernstein quips.'
Ha ha. Doesn't sound too respectful of HB's work.
That's definitely not true. I think we all recognize there are limits to what an ordinary person can do. The main point really is that once you look outside of backtested data, there are a large number of long-term risks that can blow things up. This very much was in line with HB's thinking on the topic as well as Tex's and mine.
I mean hot returns from a spreadsheet are great, but the future often gets in the way...
craigr wrote:
His thoughts on investing risk in terms of economic cycles mirrors a lot about what Permanent Portfolio'ers believe. Especially when it comes to what I've termed "extra-spreadsheet risks." Meaning those risks that show up outside of a spreadsheet backtest (political, extreme economic events, etc.).
'Devastation—war or anarchy—is a long shot with horrific consequences, but there isn’t much you can do about it. If you hoard gold, you are as likely to be killed for it as to be protected by it. “For Armageddon, what you really need is an interstellar spacecraft,”? Mr. Bernstein quips.'
Ha ha. Doesn't sound too respectful of HB's work.
Here's an article he wrote about the PP a while back.
Sounds to me that Bill is in part addressing what I like to call the 5th possible economic condition (bowing to Harry's four). He calls it Devastation, which is a bit more elegant than my usual term (Oh $%^#!). As for Bill's well known antipathy towards gold, he makes a valid point. If you are in the middle of a country being devastated by war, disaster, political chaos or a confiscatory regime having a lot of gold there is likely to be of limited value and possibly very dangerous. This is why we PPers urge at least some geographic diversification.
Of course there are no guarantees in life and if someone pushes the button sending the world up in a fiery mushroom cloud, a deep well stocked bunker or Bill's spaceship will be the only real options. But for anything less than that, having an overseas stash of gold could be what gives you the best chance to emigrate and survive. In the end of though it is not usually a good idea to put all your money into a bet on catastrophe. History has long established habit of making fools out of doomsdayers.
But then you never know...
99 years ago look at what was going on in Europe.
Trumpism is not a philosophy or a movement. It's a cult.
Someone I know pointed out that the world is in a position where there is great volatility and great fragility in multiple geographic areas. He said it reminded him of the scenario before one of the world wars (forget which he said) and that while nothing may happen the safest bet was to live in some country off the beaten path e.g. NZ.
It was good being the party of Robin Hood. Until they morphed into the Sheriff of Nottingham
Someone I know pointed out that the world is in a position where there is great volatility and great fragility in multiple geographic areas. He said it reminded him of the scenario before one of the world wars (forget which he said) and that while nothing may happen the safest bet was to live in some country off the beaten path e.g. NZ.
Historically, really catastrophic wars have tended to be separated by around two generations. Once you move beyond the two generations two things come into play that seem to make the possibility of another major war more possible. First all parties have usually recovered from the last one. And secondly the living memory connection to the last one is waning. As the memories of the horror fade the willingness to reach for guns and bombs tends to increase. Three generations separated the Napoleonic Wars from World War I (two from our Civil War) but only twenty years divided the two World Wars. In the latter case likely because they were really just one war with a long armistice in between.
In any case, if history is a guide (and it is at best an imperfect one), it could be said that we are due for something unpleasant.
Trumpism is not a philosophy or a movement. It's a cult.
Someone I know pointed out that the world is in a position where there is great volatility and great fragility in multiple geographic areas. He said it reminded him of the scenario before one of the world wars (forget which he said) and that while nothing may happen the safest bet was to live in some country off the beaten path e.g. NZ.
Historically, really catastrophic wars have tended to be separated by around two generations. Once you move beyond the two generations two things come into play that seem to make the possibility of another major war more possible. First all parties have usually recovered from the last one. And secondly the living memory connection to the last one is waning. As the memories of the horror fade the willingness to reach for guns and bombs tends to increase. Three generations separated the Napoleonic Wars from World War I (two from our Civil War) but only twenty years divided the two World Wars. In the latter case likely because they were really just one war with a long armistice in between.
In any case, if history is a guide (and it is at best an imperfect one), it could be said that we are due for something unpleasant.
I assumed that something unpleasant started on 9/11 (and in the form of smaller events prior to that).
The violent conflict involving radical Islam vs. everyone who disagrees with them seems like a conflict that will be with us potentially for decades. It's sort of like the Cold War, except it's not cold and the enemy isn't operating at the state level in most cases.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
AdamA wrote:
Do you consider 2008 to have been a disaster?
2008 would be no more than an inconvenience. It was very widespread, but its impact was minimal. Yes, some people had it pretty rough but I don't think "personal disaster" is particularly meaningful.
Compare 2008 to Sandy hitting NYC. And Sandy was only a minor disaster. See also Katrina and New Orleans, the earthquakes the past few years in Christchurch/Indonesia/Belize or the many bombed out cities after WW-II. Those are disasters. Calling 2008 a disaster is to trivialize real disasters.
I am about half-way through the book and it is well worth the read.
I think Dr. Bernstein has treated the HBPP very fairly both in this book and elsewhere.
And our very own craigr is mentioned in the book and gets a nice acknowledgement by Dr. Bernstein.
It is the settled policy of America, that as peace is better than war, war is better than tribute. The United States, while they wish for war with no nation, will buy peace with none"James Madison
frugal wrote:did you find any better or complentary Portfolio strategy ?
Not in this book. Dr. Bernstein appears to think very highly of the HBPP, though.
One main point he makes is the cost of insuring against his various "four horseman" scenarios is different for each. For example, he considers the probability of deflation to be much lower than the probability for inflation and would therefore argue that allocating equal portions of the portfolio to "insure" against either scenario is not appropriate. So he considers the 25% of the HBPP in LT Treasuries to be too much insurance for a low probability event.
It is the settled policy of America, that as peace is better than war, war is better than tribute. The United States, while they wish for war with no nation, will buy peace with none"James Madison
frugal wrote:did you find any better or complentary Portfolio strategy ?
Not in this book. Dr. Bernstein appears to think very highly of the HBPP, though.
One main point he makes is the cost of insuring against his various "four horseman" scenarios is different for each. For example, he considers the probability of deflation to be much lower than the probability for inflation and would therefore argue that allocating equal portions of the portfolio to "insure" against either scenario is not appropriate. So he considers the 25% of the HBPP in LT Treasuries to be too much insurance for a low probability event.
