Permanent Portfolio Analysis for week ending 1/26/07
The Permanent Portfolio concept was originally developed by the late Harry Browne ref: http://www.harrybrowne.org/ and is thoroughly documented in his book "Fail Safe Investing". I recommend that all readers purchase a copy of his work through links at his web site as this will help to explain what I'm doing.
As I am an active Investor, I wanted to expand on Harry's concepts and try to figure out a good way to invest in the plan, rather than dump all my funds into an equal distribution of stocks, bonds, gold and cash right-off-the-bat I needed a way to determine when would be the "best" time to acquire these investments. In particular, I wish to identify entry and exit points for my investments based on a simple analysis of the major investment categories outlined in Harry's book as a way to keep the portfolio balanced.
In summary, Harry admitted that he did not actually know what was going to happen in the markets (refreshing) so he recommended a balanced portfolio consisting of 25% allocations to Gold, Cash, Stocks and Bonds. His research indicated that this balanced/permanent portfolio would approach yields of a fairly consistent 8% annual return on your investment portfolio. It's really very simple though there are no guarantees. Purchase and read the book. It can be downloaded through links found at http://www.harrybrowne.org/.
Furthermore, I am in no way associated with the late Harry Browne, his estate or his business interests. I am an investor in the Permanent Portfolio of Funds: http://www.permanentportfoliofunds.com/ of which Harry was a Director but my analysis is my own and based on data that I have collected independently and from public sources.
With all that said, let's get on with it!
I want to buy relatively low and sell relatively high. I'm a spry 50-year-old with a decent income and I'm working so I'm not selling right now, just buying. What's there to buy? It seems that almost everything is overpriced relative to its median. So I've got to try to figure out what are the best "deals" and go after them while simultaneously trying to maintain a 25% balance in gold, cash, stocks and bonds... The Mogambo Guru would say I'm crazy! Why buy anything but Gold? Well, for starters, because I don't know what our totally irresponsible government is going to do next. I don't know if we are going to experience prosperity, depression or runaway inflation. I also am not locked into any particular train of thought though I can share the following:
I am bullish gold: The great inflation has already occurred and those dollars will come home to roost eventually.
I am bearish the stock market: I'm ready to pull-the-trigger as soon as stock prices come down significantly. I've got cash ready to roll but I've got to see a 25%+ drop in the S&P500 before I'm ready to invest.
Bonds: I buy long US government bonds (TLT or the real thing) when they are cheap with high pay-out rates. The Bond market is a no-brainer as far as I'm concerned. It has traded in a fairly uniform manner forever and if you buy low you'll get decent interest that is guaranteed based on the fact that the government will simply tax its citizens to pay the debt.
Cash is cash and is not really covered here. I personally invest in T-bills and explore some foreign currencies. If there is nothing to buy at a bargain I'm buying short-term T-Bills. That's the case right now.
Gold (Currently Bullish):
Gold is getting close to the "shed" region. I'm not buying right now. I am bullish on gold so I always buy when the price gets close to the 180-day Moving Average and I back up the truck and load it when the "Accum" trigger is hit, now at -.38 (close minus the 180-day moving average). If you are building your portfolio, you might want to wait for the next dip.
FYI, I use CEF as a proxy for Gold (even though it includes silver) as GLD does not have a data history that's sufficient to get a good long-term reading from my sources for statistical purposes but I buy the metal.
Bonds (Currently Neutral):
Bonds are retreating and are moving towards an "accumulate" trigger. It is not in accumulate territory yet so unless you are eager to accumulate now, better to wait a while to see what happens. I am neutral on Bonds so I always buy when the "Accum" trigger is hit and the price is below the Median, now at -.56 (close minus the 180-day moving average) and 10.25 respectively. If you are just starting to build your portfolio, now is an OK time to accumulate bonds but there may be some downside remaining.
FYI, I use RYGBX as a proxy for the 20-year+ long government bond as TLT does not have a data history that's sufficient to get a good long-term reading from my sources for statistical purposes, but I buy TLT and/or actual 30-year U.S. government bonds.
Stocks (Currently Bearish):
Stocks have also retreated from recent highs and are now out of the "shed" region. It is a long way from accumulate territory so unless you are eager to accumulate now, better to wait a while to see what happens. I am bearish on Stocks so I always buy when the "Accum" trigger is hit and the price is below the Median, now at -.89 (close minus the 180-day moving average) and 17.66 respectively. If you are just starting to build your portfolio, now is an OK time to accumulate stocks but there is some downside remaining. In fact, I will not be buying the S&P500 until we see a retreat significantly below current levels. That doesn't mean I'm not buying stocks at all. I am speculating on both the defense and oil sectors at this time.
Note: I use SWPIX as a proxy for the S&P500 for convenience as it has fairly long history available. I buy many different S&P500 proxies.
I am not doing anything right now except accumulating short-term T-Bills and waiting for Gold, Stocks and Bonds to become a little more reasonable. However, if you are just starting out now to build your Permanent Investment Portfolio, long-term bonds would be a good place to start right now.