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I am reading a book on an investment strategy proposed by Harry Browne (1999, Fail-Safe Investing: Lifelong Financial Security in 30 minutes, pp. 39–40) known as the "permanent portfolio". He makes the following assumption/statement regarding an economy when he presents his reasoning:

Your portfolio needs to respond well only to those broad movements. And they fit into four general categories:

  1. Prosperity: A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.

  2. Inflation: A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).

  3. Tight money or recession: A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, which usually causes a recession — a period of poor economic conditions.

  4. Deflation: The opposite of inflation. Consumer prices decline and the purchasing power of money grows. In the past, deflation has usually triggered a depression — a prolonged period of very bad economic conditions, as in the 1930s.

Investment prices can be affected by what happens outside the financial system — wars, changes in government policies, new tax rules, civil turmoil, and other matters. But these events have a lasting effect on investments only if they push the economy from one to another of the four environments I've just described.

To what extent is this assumptions "true" or vaild? Are these all the relevant and/or existing states of an economy and are the suggested asset types(stocks,long/short bond and gold) really balancing this in a nice way,theoretically?

Does it have any apparent theoretical drawbacks restriction attention to these four?

I also posted this on the Economics Stack but without luck. I am aware that everyone has to evaluate info using their own logic, hence don't worry about that!

closed as primarily opinion-based by Pete B., Rupert Morrish, Dheer, JoeTaxpayer Jan 25 at 9:37

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  • My two cents is that while true, broad stroke macro statements like these are great for academia but not that realistic for everyday investing. It's just not practical to believe that one is going to be able to identify these trends in a timely fashion and adjust one's holdings to continuously benefit from that analysis. – Bob Baerker Jan 24 at 13:12
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    @BobBaerker the idea is to diversify given these states/phenomena and then fix the weights over the chosen intruments permanently and only do yearly rebalacing. Also I am just tying to verify that the theoretical basics in marco really supports the reasoning he is presenting. Naturally theory will only be theory, but it is still good to have a basis. – Jeaj Jan 24 at 13:25
  • @BobBaerker hence there are no other rather basic and similar concepts that one would learn in a say masters course in macro? that trivially/obviously will have significant impact on a savings startegy that includes the basic instruments(stocks,bond and gold) – Jeaj Jan 24 at 13:27
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    @Bob: re "chosen instruments"... Harry Browne's guidance on assets for each "climate" was 1: Equities, 2: Precious Metals, 3: Short dated bonds or cash, 4: Long dated bonds. There's a nice analysis of how a 4x25% portfolio has performed here: portfoliocharts.com/portfolio/permanent-portfolio – timday Jan 24 at 14:40
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    Another approach that formalizes the idea of a portfolio being robust to different economic environments is Risk Parity, specifically Bridgewater’s All Weather Portfolio formulation. – Camilo Avella Jan 24 at 16:16
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Re "Are these all the relevant and/or existing states of an economy?":

According to this interesting 2015 seekingalpha article "The Permanent Portfolio Is Dead", the PP would not be expected to do well in conditions of "secular stagnation". Since secular stagnation is pretty much defined by an absence of any of the 4 economic conditions in the Harry Browne list, this isn't really surprising.

Re "are the suggested asset types(stocks,long/short bond and gold) really balancing this in a nice way?":

That seekingalpha piece also has some analysis of why the PP has worked in the past (hint: gold), and the performance analysis at PortfolioCharts also demonstrates that it does have some nice properties (or at least it has in the past) compared with other approaches (however also note that the "Golden Butterfly" variant is arguably even better).

  • "Economic contraction and expansion relate to the overall output of all goods and services, while the terms inflation and deflation refer to increasing and decreasing prices of commodities, goods and services in relation to the value of money." is written on en.wikipedia.org/wiki/Economic_expansion. Which I assume is what Harry Browne is refering to aswell above. It seams that these are considered the main movements of an economy, can you think of other phenomena besides these four? secular stagnation looks like somthing that is defined in terms of these.I.e are there any addiational.. – Jeaj Jan 26 at 7:10
  • ..not depending on the four by definition? – Jeaj Jan 26 at 7:11

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