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Mark Hulbert
May 19, 2010, 12:01 a.m. EDT · Recommend · Post:
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Consequences of heavy volatility
First Take "º
Bull market camp loses a top performer
By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- Would you be interested in an all-weather portfolio that, despite hardly ever changing its composition, performs creditably in almost all market environments?
I thought so -- especially after yet another day of incredible volatility, with the Dow Jones Industrial Average /quotes/comstock/10w!i:dji/delayed (DJIA 10,427, -86.61, -0.82%) reversing from a nearly 100-point gain early in the session to finish down by 115 points.
Well, consider the so-called "Permanent Portfolio" that Harry Browne recommended to his clients in the late 1970s. At the time, of course, Browne was editor of an investment newsletter called "Harry Browne's Special Reports." Several decades later, he became the Libertarian Party's candidate for president. He died in 2006.
Several of the investment books that Browne wrote during the 1970s and 1980s became bestsellers. One, "Why the Best-Laid Investment Plans Usually Go Wrong," published in 1987, was devoted in large part to introducing investors to the virtues of a diversified portfolio whose composition would stay constant year in and year out -- permanent, in other words, except for annual rebalancing.
Though Browne's idea is not new, the markets of late have led to a renewed interest on the part of many investors. First, it was the worst bear market since the Great Depression, being quickly followed by one of the strongest 12-month rallies in history. And then came the "Flash Crash" in which nearly a thousand Dow points vanished in a period of minutes.
Investors are beginning to wonder if the markets are rigged against them.
Browne's idea was to invest in a basket of asset classes, each one of which has a low correlation with the others. As a result, when any one of the asset classes is performing poorly, there is a good chance that the others will at least be holding their own -- if not actually appreciating in value.
The resultant portfolio should provide a decent -- though not spectacular -- return with relatively low volatility along the way.
The basket that Browne recommended was equally divided between stocks, long-term Treasury bonds, gold and Treasury bills. In his 1987 book, he reported that, over the prior 17 years, back to 1970, this portfolio had produced as 12.0% annualized return. This was better than a buy-and-hold in either stocks or bonds, though behind gold.
As Browne wrote, "the gain is remarkable when you consider that the portfolio required virtually no attention by its owner. No attempt was made to outguess the future; no speculative decisions were made or needed."
Browne's approach in the decades since has continued to perform as advertised. Consider the Permanent Portfolio fund /quotes/comstock/10r!prpfx (PRPFX 40.26, -0.22, -0.54%) , which was created in large part out of Browne's work. Its current target allocations are 25% in gold and silver, 35% in U.S. Treasurys, 15% in aggressive growth stocks, 15% in real-estate and natural resource stocks, and 10% in Swiss-franc denominated assets.
This fund over the last 15 years (through Apr. 30) has produced an 8.2% annualized return, which is remarkable given that stocks, gold and bonds did not, individually, do as well: The Wilshire 5000 index gained 7.9% over the same period, the Shearson Lehman Treasury Index produced a 6.3% annualized return, and gold bullion rose at a 7.7% annualized pace.
In fact, the Permanent Portfolio fund has done better over the last 15 years than 74% of the investment advisers I track.
You might therefore want to remember Browne's investment approach as you suffer through yet more of the markets' frightening volatility. His permanent portfolio serves as a reminder that we don't have to be constantly betting on the markets' short-term gyrations, nor suffer from huge losses along the way, in order to produce decent long-term returns.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of investment advisory newsletters. The HFD became a service of MarketWatch in April 2002. In addition to his regular columns for MarketWatch, Hulbert writes a column on investment strategies for the Sunday New York Times, a monthly column for Barron's.com and a column on newsletters for the Journal of the American Association of Individual Investors. Dow Jones and MarketWatch are launching a weekly newsletter, Hulbert on Markets: What's Working This Week.
The bull market today loses a well-known adviser with a stellar track record.
58 min ago1:34 p.m. May 19, 2010 | Comments: 12
- Big John | 8:40 a.m. Today8:40 a.m. May 19, 2010
"Mark Hulbert: A portfolio for all seasons http://on.mktw.net/aR9cHn" 11:22 p.m. EDT, May 18, 2010 from MktwHulbert
"Mark Hulbert: Consequences of heavy volatility http://on.mktw.net/a3zlgZ" 12:15 a.m. EDT, May 18, 2010 from MktwHulbert
"Mark Hulbert: Sentiment picture improves further http://on.mktw.net/9DJHe9" 12:27 a.m. EDT, May 14, 2010 from MktwHulbert
"Mark Hulbert: Debate about May 6 dive misses the point http://on.mktw.net/9YYw5h" 12:05 a.m. EDT, May 12, 2010 from MktwHulbert
"Mark Hulbert: Insiders' response to last week's plunge http://on.mktw.net/aXtdLS" 11:05 p.m. EDT, May 10, 2010 from MktwHulbert
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