Investors often are tempted to change their investments over time, to sell one stock in favor of another or to choose one type of income investment over another.
Why not own all of them? That’s the idea of the permanent portfolio. Why not invest in a specific set of investments at specific levels and never sell?
It can be done. There are various types of mutual funds out there offering some variation on the idea.
Usually. it’s a mix of stocks, bonds, cash and, maybe, gold. Usually, there are stiff fees involved in owning the fund, too, which works against long-term compound growth.
While there are mathematical arguments in favor of the simplified permanent portfolio, the weakness over time is apparent. Never adjusting a portfolio over time means never reducing its volatility.
Don’t misunderstand. Volatility is a great thing in a long-term portfolio. If you are contributing steadily to your investment funds, the fact that some of your investments have fallen means you get to buy more at a lower price.
Reversion to the mean works both ways. Stocks that fall also rise. Bonds go out of favor then resurge.
A better permanent portfolio is a bit more complex than two or three investments types, however, and it usually doesn’t have much cash.
For instance, if you are young and just starting out, your long-term portfolio might have mostly U.S. and foreign stocks and very little in the way of dividend stock and bonds.
What makes it “permanent” in a sense is that your mixture of each asset class need only change every five to 10 years. When you enter your late 40s or early 50s, for instance, the idea of a major stock decline might keep you up at night.
In that case, ease back on stocks — but stay in them. You might not want to see your balance dip by 20% in a big market setback. But you’re also not done contributing, and a correction or two might help you down the line, at 65 or 70.
Only when you are certain that volatility is no longer in your interest, when you are certain that income is your goal, should you move toward a mostly fixed-income portfolio.
You’ll lose the ups and downs, but you’ll also forgo future growth and compounding. In the best of worlds, your balance is high enough that you don’t care about growth and instead worry about taxes and charitable giving.
That’s a good problem to have, and you can have it by making early decisions on saving, prudent, low-cost investing and the choice to create a long-term, permanent portfolio.
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