Permanent Portfolio: One Day A Year Retirement Plan

| May 12, 2011 | 0 Comments

The other day I was sipping my morning coffee and reading the Wall Street Journal.  An article about silver had caught my eye.  Something the author wrote jumped off the page and hit me in the face.

What was it?

An outrageous prediction that silver is going to $100 an ounce.  At first, I was shocked by the author’s boldness.  But shock quickly turned to confusion.  You see, the day before I read a different article saying the price of silver is going to collapse.

That got me thinking.

I realized this wasn’t the first time I’d seen two completely opposite predictions about the same investment idea.  I often come across opposing views on the same stock.  One broker will say a stock is a strong buy, while another says it’s a sell.

With all of these different opinions, it makes investing for retirement more difficult.

You’ve probably experienced this with your own portfolio.

Wouldn’t it be great to have a “set and forget” investment strategy?  A strategy that allowed you to save for retirement and enjoy your life?

If you said yes, you’re in luck.  Such a strategy does exist!  It’s called the “Permanent Portfolio”.

This strategy is designed to generate returns outpacing inflation, without all the gyrations of the market.  Over the last ten years, the strategy has returned an average of 11% per year.  During the same time frame, the S&P 500 returned a measly 1.6%!

I’ll tell you how the strategy works in a minute… But first, here are a few words about the mastermind who invented it.

His name is Harry Browne.  Harry was a successful investment advisor with a career spanning 30 years.  He’s written three different books on investing which have sold over two million copies.  And, he also ran for President twice as a member of the Libertarian party.

One of his books, “You Can Profit from a Monetary Crisis”, reached number #1 on the New York Times bestseller list.

In the mid 1980s, Harry had the idea of designing a “rock solid” investment strategy for the average investor.  It had to provide the opportunity for reasonable returns with manageable risk.  It had to protect investors from all possible future economic situations.  And, it would have to be simple to use.

Thus, the Permanent Portfolio was born.

The Permanent Portfolio strategy is designed to provide three key elements.

First, the plan is designed to outperform inflation.  This ensures you won’t lose the purchasing power of your money over time.  Simply stated, if you’re not beating inflation, you’re losing money.  Even if your money is safe and secure in a bank.

Next, the plan allows you to sleep well at night.  You won’t have to worry about losing your retirement savings like many investors did when the market crashed in 2008 and 2009.  This strategy manages your downside risk to ensure you don’t suffer a catastrophic loss.

The last element is music to every investor’s ears… it’s simple to use.  The strategy is so easy to set up, a ten year old can understand it.  And, you don’t have to sit in front of a computer all day watching the market.

The Permanent Portfolio fights off inflation or deflation anytime they rear their ugly head.  And, no matter if times are good or bad, your money will grow.

Here’s how it works…

The Portfolio is divided into four “pockets” of money.  So all you’re doing is investing 25% of your investment dollars into each area.

Sounds easy, right?

The first “pocket” of money is cash.  You want cash in your portfolio as a hedge against periods of recession like we just experienced.  The money market account your brokerage firm offers is ideal for this pocket.

Now let’s move up the investment ladder…

The next step is to put 25% into longer term US Treasury Bonds, one of the safest investments in the world.  Treasury bonds tend to do well during good times and in periods of deflation.  And best of all, they’re backed by the US government.

An easy way to add Treasuries to your portfolio is to buy the iShares 10-20 Year Bond ETF (TLH).  You get a portfolio of Treasuries with a single purchase and you’re being paid a yield over 3.5%.  It’s not a huge yield, but it’s better than the 0% most savings accounts are paying right now.

Now let’s buy some stocks… For this pocket, we want to use a broad based market index.  So go ahead and pick up shares in the S&P 500, an index of (you guessed it), 500 of the largest companies in the US.

There are lots of ways to buy the S&P 500.  The one I like best is the Vanguard S&P 500 Index Fund (VFINX).  This fund’s expense ratio is one of the lowest in the industry.

Now for that last piece of the puzzle…

You can’t have a Permanent Portfolio without gold.

Having gold in your portfolio protects you in case inflation explodes like it did in the late 1970s.  And by owning gold, you’re in great company.  For example, banks in India, China, and Europe are continuing to buy more gold today.  And on the home front, The University of Texas just added $1 billion of gold to its investment portfolio.

The point is to own some gold in your portfolio.  Since we’re keeping things simple, you can own gold by buying shares of the SPDR Gold Shares ETF (GLD).  The ETF tracks the price of gold. By buying shares, you’re participating in the price movement without buying the actual metal.

That’s all there is to it.  You now have a well-diversified portfolio designed to outperform inflation without taking on too much risk.  Who says investing has to be hard?

But you’re not done yet…

You’ll need to manage your portfolio going forward.  The good news it’s easy to do and won’t take you more than 15 minutes a year.

Once a year, you’ll need to rebalance your investment account using the “twenty five percent rule”.  So you’ll be doing some buying and some selling of your investments.  The idea is to make sure you have 25% of each investment across the board.

If you’re looking for a simple yet effective way to grow your retirement account, take a look at the Permanent Portfolio.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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