from Sovereign Man:
As Mark Twain is purported to have once said, “Predictions are hard, especially about the future.”
And with this principle in mind, libertarian Harry Browne advocated a four-factor portfolio to protect investors “no matter what the future brings”.
Such a portfolio would have to cater to at least four separate economic outcomes:
- Prosperity: a period during which living standards are rising and the economy is growing;
- Inflation: a period during which consumer prices are rising;
- Recession: a period during which the growth is slowing (or negative);
- Deflation: a period in which consumer prices are declining.
Only four types of investments would cover all these separate bases in Browne’s so-called ‘Permanent Portfolio’.
For example, stocks would thrive during a period of prosperity. But during deflation and recession, stock prices fall… so cash would be one of the best assets to hold.
Bonds perform reasonably well during periods of prosperity, but also during recession and deflation.
But during periods of intense inflation, gold perform exceptionally well, unlike cash, which loses value.
Harry Browne’s idea was simple: allocate 25% of an investment portfolio to each investment – cash, gold, bonds, and stocks– and keep the money parked there forever.
The idea worked.
For the nearly three decades between January 1970 and December 1998, the portfolio delivered average returns of 9.9% per annum, a comfortable 4.5% per year above inflation.
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