Active
Asset Allocation
DOW/GOLD – A 98% FALL COMING
The big Megaphone pattern in the Dow/Gold ratio since 1913 completed on the upside in 1999. Between 1999 and 2011, the ratio crashed by 87%. This is not the end of the down trend. The next big move will at least reach the bottom of the Megaphone. I would be surprised if the ratio doesn’t go well below the 1 level it reached in 1980. More likely is 1 Dow to 1/2 ounce of gold or lower.
As of 1/15/19 Dow/Gold Ratio is 18.48
A fall of that magnitude will involve a stock crash from here of 98% against gold. For the few who will anticipate this fall, it will lead to fortune. But for the 99.5% of investors who will not solve this relatively simple Gordian knot, it will mean misery and the biggest wealth destruction in history.
What is important to understand is that governments and central banks have created a bubble of such proportions that when it pops, it will lead to a wealth destruction and a wealth transfer never before seen in history.
I am here taking the Dow as an example of a stock market but remember that the next crash will be a global phenomenon and no market will escape.
100 years of financial mismanagement has not finished the 5,000 year track record of gold as the only money which has survived in history. The next 4 to 8 years will prove that again.
Harry Browne and the Permanent Portfolio Asset Allocation
There are many ways to construct an investment portfolio. My preference is to have your core asset classes be U.S. stocks, international stocks, and U.S. bonds, but there are other ways to construct an asset allocation. One lazy portfolio that is favored by more conservative or pessimistic investors is the so-called “permanent portfolio.” Its defining characteristic is a high percentage of gold and a relatively low percentage of stocks. Let’s take a look at this portfolio and see if it might be the asset allocation for you. Harry Browne wrote “Fail-Save Investing: Lifelong Security in 30 Minutes” in 2001, where he describes the permanent portfolio. He markets the permanent portfolio as one designed to perform well in a wide range of market conditions. The permanent portfolio proposed by Harry Browne consisted of equal weighting in four asset classes: 25% U.S. Stocks25% Treasury Bills25% Long-Term Treasury Bonds25% Gold
Using historical returns from Portfolio Visualizer, let’s see how the permanent portfolio has done compared to a standard three-fund portfolio of 60% U.S. stocks, 30% international stocks, and 10% total bond market since the publication of Harry Browne’s Fail-Save Investing in 2001 (assuming annual rebalancing):
2001 – 2017
Permanent Portfolio 214.9%Three Fund Portfolio 166.6%
The permanent portfolio actually outperformed the three-fund portfolio from 2001-2017. Of course, using 2001 as a starting date would be the worst possible time for the three-fund portfolio, as that was during the tech crash and the market experienced two crashes during this time period. Let’s look at the performance of the permanent portfolio versus the three-fund portfolio starting in 1987, when historical data for all asset classes are available on Portfolio Visualizer:
Active
Asset Allocation
DYI: Fixed vs. active asset allocation
argument has been going on ever since the modern [or throwback] portfolio
theory [MPT] came into being. Harry
Browne at that time was a pioneer in fixed asset allocation or MPT of its
time. However whether it’s the Permanent
Portfolio allocation [PPA] or the 3 asset allocation as describe in the article
or any other fixed allocations they all suffer from either under or over
allocated during times of high valuation or low valuations.
Simply
put whether Harry’s PPA or some other fixed allocation what would set my hair
on fire is when one or more of the allocations were severely over or
undervalued. Today stocks and a case can
be made for long term bonds of massive overvaluation. Why would I want 25% in stocks with PPA or
God forbid 60% with the 3 asset plan?
Stocks over the long haul returns will be sub atomically low and very
possibly at a loss over the next 7 to 10 years.
Only until valuations improve; providing investors with improved
compounding thus creating gains commensurate with the level of risk. The same can be said of long term bonds.
Valuation
Driven Allocation Formula
DYI’s
allocation only changes based upon our formula for determining our model
portfolio allocation of our four assets.
The formulas are not proprietary just click at the top of the blog for
stocks, bonds, or gold they are all there for you.
If
all three – cash is our default allocation – are at average or fair value at
the same time [a highly unlikely event] then each of the assets would have 25%
in stocks, bonds, cash, gold just like Harry.
With valuations so insane for stocks and bonds our formula has kicked us
out of the stock market [and rightfully so] and almost for long term bonds.
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 01/1/19
DYI’s
goal is to outperform Harry’s Permanent Portfolio and to achieve at least ¾ of
the long term return of any of the other fixed allocations including 100% stock
allocation with significantly less market gyration [except upside volatility which we all love so much].
Why
is Active Asset Allocation So Important?
The
reason active allocation is so important most folks only have a 20 year to 30
year window to put it all together for long term planning such as
retirement. This is important for even
shorter periods of time – 7 to 10 years – saving for a house attempting to have
a massive down payment to relieve the owners of a large mortgage payment.
Those
who do not understand valuations that drive future returns would only have good
or bad luck with their investments. If
this was the late 1970’s future returns would be outstanding for stock and long
term bond investors. Conversely today it
would just be the polar opposite. The
same could be said for gold terrible time to buy in 1980 and a fantastic time
to buy in the late 1990’s all known by monitoring the Dow/Gold
Ratio.
Until
Next Time
DYI
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