[javanissen]

I don’t follow the Harry Browne portfolio advice, but I have read Craig Rowland’s very good book about it [0], and I disagree. The Permanent Portfolio has had pretty good overall returns extremely consistently despite its low (25%) stock allocation because it holds four assets with poor correlation and rebalances between them, and because one of them is cash.

These assets each do well under different economic conditions. The cash asset does well during periods of sharply rising interest rates since it retains its principle and gets higher rates, while all the other assets get wrecked. Because cash’s correlation with the rest of the portfolio assets is 0% or negative, you tend to store some gains from the other assets in the cash section during up years, and then use the cash section to buy other assets once they have down years - in effect buying low and selling high. This is why the permanent portfolio gets pretty good returns with a low standard deviation: the cash protects the downside, but doesn’t significantly hamper portfolio performance due to the rebalancing effect. (It also helps that your cash should be in short treasuries per Harry Browne’s advice, which almost always have better yield than bank accounts with basically no risk).

You could remove or titrate down the cash portion, but then you’re left with three risky assets in stock, gold, and 25- to 30-year bonds. (Anyone who doesn’t think long bonds are risky doesn’t understand interest rate risk). Does this raise the expected return? Yes! But it also raises the risk of extended periods of poor performance, or acute periods of terrible performance. The Permanent Portfolio made 1.8% in 2008. It didn’t have a 10-year rolling period since 1972 with real returns below 3%, with all of them falling between 3 and 6.1%. A 60/40 portfolio achieved better returns but with much higher risk, including full decades of negative real return [0].

Ultimately I think your objection to the portfolio is because you think it’s advantageous to take on more risk. For a young investor with high risk tolerance I agree with you, but for older investors and retirees who need to be mindful of sequence of returns risk, and young investors who can’t stomach volatile portfolios, I think it’s an underrated choice.

Even if you’re not convinced by the rest of the argument, consider that holding half your fixed income in cash and the other half in very long bonds tends to produce similar performance to holding it all in intermediate bonds, which is often the recommended duration for an investor’s bond holdings.

[0] https://www.amazon.com/Permanent-Portfolio-Long-Term-Investm...

[koolba]

> Anyone who doesn’t think long bonds are risky doesn’t understand interest rate risk

The past year is a great lesson in what happens to long term bonds when rates finally move.

Though to be fair to Harry, his financial advice was written before zero rate policy. Anybody buying into sub-3% 30-year bonds is either uninformed or has their investments bound by governing rules.

[tornato7]

This is interesting. The antithesis is probably the book Lifecycle Investing [0] which essentially concludes that you should be 2X leveraged stocks in your youth and slowly reduce leverage over time.

0. https://www.lifecycleinvesting.net/

[nly]

So a 50% market drop wipes you out completely? Hrrm, nah

[lmm]

For a few years in your '20s, when your investment is going to be small either way, you presumably haven't got a lot of commitments, and you'll have your whole life to adjust for it if a literal once-in-a-century slump happens to hit at exactly the worst time? I can see the logic.

[kqr]

Reminder: it takes as long to get from 100 to 1,000 as it takes from 10 to 100 -- it is really important to avoid big drawdowns, which 2× leverage is almost sure to produce.

If anything, optimal growth requires fractional leverage, i.e. keeping wealth out of the markets.

[kqr]

> Ultimately I think your objection to the portfolio is because you think it’s advantageous to take on more risk. For a young investor with high risk tolerance I agree with you,

I agree with everything you write except this bit deserves an expansion.

There is a growth-optimal balance between assets and it depends only on the joint probabilities of future returns, which means it's unknowable -- but it also means it depends not at all on the age of the investor. (Which makes sense, if you think about it -- why would the optimal growth rate depend on the age of the person owning the money?)

However, the optimal growth rate is only guaranteed asymptotically, and aiming for it could result in some wild swings up and down before getting there, so for people without infinite time on their hands it makes sense to keep a higher proportion of wealth in low-risk assets.