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I heard an expression the other day when it comes to dealing with tough times: ‘work the difficulty’.
The stock market is a tough place right now. How can we turn this to our advantage?
It’s time, I think, to start thinking about Harry Browne again, despite the fact he’s been dead for nearly 20 years.
You probably don’t know Harry.
He was an investment advisor and, once, a Libertarian candidate for US President.
All that is mostly forgotten.
Harry’s contribution to the investment literature that lingers on is a strategy he called the ‘Permanent Portfolio’.
The idea behind this is to give market timing and forecasts the flick and simply protect yourself come what may.
You know the list of potential scenarios the world can throw at us: deflation, inflation, crashes, bubbles, war, recession — or boom times.
For the Permanent Portfolio Harry advised putting 25% of your wealth in the big four asset classes: bonds, stocks, gold and cash.
This sounds simple in the abstract. However, consider that Harry created the strategy in the 1970s.
That meant the gold allocation was effectively a dud between 1980–2000.
Harry had to defend that choice for 20 years! Along the way he said simply, ‘Gold will have its day again’.
Don’t take this lightly.
This demanded the individual investor keep allocating to gold for a long time on the assumption Harry’s strategy would pay off.
And, to his credit. Harry was right.
For an American investor, gold has been a good hold for the last 20 years, especially while US stocks struggled from 2000–2010.
We can look at this another way too.
After the 2008 crisis, many investors thought US bonds would be a terrible place to invest.
The Fed’s response — QE — was said to put the US dollar at risk and toast the bond market from the inflationary money printing.
Except that didn’t happen.
There was little inflation between 2010 and 2020. Bonds were a good hold.
Part of the appeal of the Permanent Portfolio is that it protects you from avoiding an asset class on flawed assumptions and bad predictions.
There’s an ETF that creates the Permanent Portfolio strategy on the US markets with the ticker PRPFX.
It’s up 11.6% over the last year. That’s a good return in the context of the markets recently.
Today, bonds might be terrible now, but gold, stocks and cash are going OK.
Don’t forget a further benefit of this.
There’s no agonising over the direction of shares, worrying about potential crashes or overthinking current events.
Here’s a thought: imagine Harry was still alive. Would bitcoin be in his Permanent Portfolio today?
And, assuming we can only keep four sectors, would it replace gold…or cash?
I can’t speak for Harry, but bitcoin — to my mind — has a role in every investor’s portfolio. It’s in mine, anyway.
And it’s doing a fine job right now of going up while most of my shares tread water.
I bring the Permanent Portfolio to your attention for another reason.
It places your eyesight much further ahead than today’s headlines.
It demands you keep allocating to assets that aren’t performing today but, should history be any guide, will hold you in good stead somewhere down the line.
History says that investors that continue to buy the share market in a bear phase will come out ahead eventually.
Bear markets, in hindsight, usually look like bargain hunting opportunities.
But they never feel good!
A strategy like the Permanent Portfolio helps to strip some of the emotion away from it all.
Harry Browne was an American.
It’s not completely clear that the Permanent Portfolio is as neat a fit for Aussie investors due to quirks and differences between Australia’s capital markets and America’s.
But I like the general principles. I happen to specialise in small-cap stocks.
These have been a tough space to operate in, for quite some time now.
However, if you think along the lines of the Permanent Portfolio, you should consider continuing to seek opportunities in this space, alongside shares in general.
The share market is under pressure today. Will that be the case in 2025 or 2026? I don’t know, but I doubt it.
My suggestion?
Follow the lead from Harry’s thinking. Consider allocating to shares despite the headlines, bad sentiment and doom and gloomers.
You don’t have to go ‘all in’ — keep the weighting to where you can sleep at night.
Dollar cost averaging in a downturn can potentially set up handsome returns in the future.
The world changes all the time. Our biggest enemy is usually ourselves.
Harry Browne knew this instinctively — and created a very effective way of dealing with it.
Best wishes,
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Callum Newman,
Editor, Money Morning
