Revisiting the Permanent Portfolio

Dear Mr. Market:

It’s been seven years since we last reviewed the Permanent Portfolio. Please click here to view the original article.

Why do we bring up this article now? Lots has changed but lots has not! More than anything we believe that our current environment has so many unknowns embedded in it after one of the wildest rides in stock market history. We won’t dig into the weeds too much but one could easily make the case that any of the following scenarios could take place over the next year:

  1. The Stock Market could absolutely continue to defy odds and climb higher.
  2. We could see another market crash like we saw in the spring this year as there are plenty of issues that have not gone away (Covid-19, political unrest, handcuffed economy, geopolitical concerns)
  3. A deteriorating dollar, inflation on the horizon, a ticking time bomb of debt, and more fear of a prolonged recession, negates any appeal for stocks for quite some time.
  4. We trade up, down, and basically sideways as this market consolidates and digests one of the most tumultuous years in history.

Without rehashing all that has transpired in 2020, we believe that being properly allocated and prepared for just about anything that comes our way seems like a wise way to go. The market is almost always unpredictable but there are times when reading the tea leaves and figuring out clear direction is even more difficult; we believe that’s exactly where we’re at right now.

If you didn’t read our old article from 2013, the basis for the Permanent Portfolio strategy is simple at face value: You divide your portfolio into four distinct and fairly uncorrelated asset classes (Cash, Bonds, Gold, and Stocks). Ideally at any point in most economic cycles one of these asset classes will stink it up but the others could compensate and outperform. During prosperous times Stocks should win. When there is inflation a case can be made for Gold. Should the opposite occur and we get deflation you would ideally see long-term Bonds do well. Lastly, during a severe recession Cash is perhaps your best friend. When coupled together you may never hit a home run but this approach can mitigate disaster and still produce modest long-term returns.

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Investing & Diversification: When Less is More

Dear Mr. Market: download

In many of our letters to you we discuss the ups and downs of the stock market. In doing so, we often times will share basic knowledge and investing reminders to our readers to help guide them. Without question, even a rookie investor will have learned the simple advice of diversifying their portfolio. “Do not put all your eggs in one basket!”

While that “advice” is intuitive and seems to make sense, it’s mainly regurgitated by every financial advisor because of one alarming reason. Yes, on one hand it’s with the intent of managing risk but part of the dark reality is because most people (pros included) don’t know what they’re doing. This last sentence may sound harsh but our job is to be candid and also share ideas and truths that you may need to know yet not always hear elsewhere.

If you stop reading this article right now do yourself a favor and at least spend seven minutes when you have more time. The seven minutes we want you to spend are watching the following clip of Warren Buffett and Charlie Munger. Click here to view it and learn their basic belief that most investors over diversify and are simply “protecting themselves from ignorance”. Continue reading

Manic Market

Dear Mr. Market:51Xur1KZWKL

For some of our newer readers it might serve us well to remind everyone of who you are and what this “Mr. Market” character is all about. If you haven’t read Benjamin Graham’s book, The Intelligent Investor, you need to. Even though it was written in 1949, much of what Graham wrote is still applicable today and it’s simply one of the best books on the stock market ever written. Warren Buffett himself loves the book and says that it changed his life. Here’s a summary from Buffett and his description of our very own “Mr. Market”: Continue reading

Should I convert my IRA to a Roth IRA?

Dear Mr. Market:download-2

With regard to investing, sometimes no action is the proper action…but not always!

Now might be a very good time for a very specific act: converting assets from a traditional IRA to a Roth IRA. Here a few reasons why: Continue reading

Has the Stock Market reached Capitulation?

Dear Mr. Market:Worst Days Ever for S&P 500

We are living in scary times, as investors and as human beings in general. With stock markets cratering and the uncertainty surrounding Coronavirus, it’s hard to remember when things were this bad or uncertain. How and when will things get better?

Regarding the market, there are no absolute rules, but it’s generally agreed investors have to fully capitulate before a bear market downturn can find its low point and eventually turn back the other way. The idea is that all the bad news, expectations and fear have to hit their worst point, so there is finally nothing else to drive the market lower. After that, anything remotely positive or even just “not bad” starts the base for the ensuing bull, and the market can begin climbing again.

The dilemma is that no one sounds an “all-clear” signal to let you know when that point has been reached. Think about the low point of the last bear, March of 2009. President Obama was freshly inaugurated (cause for optimism or pessimism, depending on your political leaning). Chrysler, GM, and Ford were near bankruptcy. Unemployment was climbing. A massive stimulus package had just been signed, but no on knew how effective it might be. Investors wondered if their portfolios would ever recover to where they had been. Those were troubling times, but we all know the market turned sharply upward that month and the bull continued for 11 years. It’s all much more clear looking back in the rearview mirror but at the time it was certainly not so.

Returns 1,3,5,& 10 years after Worst Days

Stock Market returns 1,3,5, and 10 years after Worst 1 Days Ever

There is no saying what will bring about capitulation with the current market. In our last column we noted how drawn out the 2000-2002 bear was. Things could get worse before they hit their inflection point. But it will come…if it hasn’t already. Yesterday was the third worst day in the history of the stock market and many threw in the towel. We’ve also advised that panic is never a strategy, and keeping your head as an investor right now is absolutely the right thing to do. One cannot change the past or the fact that this event took on disastrous proportions that nobody could have imagined. This is different than a standard bear market in that it’s more like an unforeseen natural disaster but in this case one that is not specific to some other part of the world; it’s truly global and caught the entire globe flat footed.

Human instinct is to seek shelter when danger is imminent, and that gives us the urge to abandon our better instincts. Sell all your stocks! Go to cash! End the pain! This might provide short-term comfort or relief, but assuming you need some amount of growth to reach your goals, you now have the dilemma of when and how to get back in.

We would advise staying the course, while being prudent. Strategic rebalancing can make sense, but not drastic changes to your allocation. If you have a plan in place that you felt good about during the market highs a month ago, stick to it, and revisit it if needed. Heavyweight boxing champ Mike Tyson famously said, “Everyone has a plan until they get punched in the face.” The market is definitely throwing some serious punches right now. How will you answer the bell?

Lastly, we’re seeing two sets of behaviors right now; one group of people is scrambling to buy toilet paper while another is doing whatever they can to buy stocks. Mark our words in that this will be an inflection point and one where your decisions/behavior today will truly impact where you sit 10 years from now.

Keep Calm and Invest On

Dear Mr. Market:Unknown-4

We always chide you for having such a volatile temper. Your unpredictability is both alluring yet often makes the most intelligent person seem like an imbecile. What’s your next move? Who will you reward in 2020 and who will you punish?

As an investor, it’s always hard when the market is volatile. Do what you must to relax – deep breathing, a nice long walk, maybe yoga. Try to ignore the talking heads on the financial news channels. You’ll get through this. Now is not the time for rash action based on emotion.

What’s that you say? You’re not worried? Hasn’t the market been up nicely for the last year?

Of course it has, and that soothed a lot of the fears stock investors had coming off a rough end to 2018. But it actually has been volatile. It’s just that upside volatility naturally feels a lot better than downside! However, both can lead to bad decision making.

Think about how you feel as an investor today, as compared to a year ago. Odds are that last year you were questioning having too much stock exposure, and now you may be wishing you had more. Both extremes can be dangerous. Imagine you gave into your fear during the late 2018 correction, and lightened up on stocks “just to wait for more clarity,” or something along those lines. The S&P 500 zoomed out of the gates in early 2019 and was up over 20% by the end of July! Then it finished up better than 30% for the full year. Giving in to fear and waiting for clarity would have kept you from participating in that upside.

Now imagine you were a disciplined investor, following an asset allocation plan for the long-run. Say your target is 70% stocks / 30% bonds, and you (or your advisor) rebalance toward that allocation at set intervals or deviations. After December 2018, you (or your advisor) would have taken money from bonds and added to stocks, since the 70/30 balance would have been out of whack. Yes, you would have added to stocks during a period of high uncertainty! In hindsight it would have looked like a great timing move, but in reality it would have been simple discipline.

Unknown-6That brings us to today. The market has been up and worries seem low. Likely your stock allocation has gotten out of whack again, but this time to the upside. What is the prudent investor to do? Again, ignore emotion and follow your plan. If this means selling stocks to rebalance, so be it. Maybe your gut says, “let the winners keep running.” You could do that, but ask yourself how good your gut has been at timing the market in the past.

From an investor psychology standpoint, staying disciplined when things feel comfortable can be a good exercise for when the market inevitably goes a little haywire. Warren Buffett is credited with saying, “Be greedy when others are fearful, and fearful when others are greedy.” Good advice…but if you focus more on discipline than market timing, your decision-making will not be driven by either extreme.

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December to Remember

Dear Mr. Market:Unknown-4

Periodically we write you “letters” about a whole host of topics. Last December we wrote one about Santa delivering us a massive lump of coal instead of what historically can be a friendly month with regards to stock market returns.

When you hear a “December to remember” what do you think of? For many it may be a cheesy commercial from Lexus; for us it’s a reminder that we’re still breathing after the worst December the stock market we’ve seen in over 80 years! As we’ve stated many times, however, people tend to have awfully short memories. It’s amazing how a strong January and a very decent year (at least in Large Cap stocks) has basically erased any notion that there could be trouble on the horizon. Seeing the market recover as sharply as it did last year was the worst thing that could happen for people.

Why? Continue reading

Don’t belittle your IRA Beneficiaries

Dear Mr. Market:

download“In this world nothing can be said to be certain, except death and taxes.” – Ben Franklin

“When it comes to divide an estate, the politest men quarrel.” – Ralph Waldo Emerson

As Mr. Franklin notes, none of us will live forever. And if you have ever been part of a contentious division of estate assets, you surely know Mr. Emerson’s quote to be true. You can’t avoid death, but with some careful planning on your retirement accounts, your heirs can avoid (needlessly large) taxes and the quarreling. The key is setting up beneficiaries, and setting them up correctly. Continue reading

Black Monday Revisited?

Dear Mr. Market:Unknown

When we reminisce and think of some of your worst days it would be natural to assume it was sometime during the Great Depression. Believe it or not the worst drop in stock market history (at least percentage wise) was not in 1929 but rather on October 19, 1987.

Click here to see what happened on that day, which is now known as Black Monday.

There were a number of issues underneath the surface that led to that bloodbath of a day but what amplified things was the early practice of program trading. Computers were programmed to execute trades after being triggered by certain conditions and this literally made human traders almost worthless as automation took over!

Two years ago, on the 30th anniversary of Black Monday, we wrote an article and calculated what a drop would be in today’s stock market. Click here to check it out. On that day it would have been equivalent to about a -5,094 points drop in the Dow Jones Industrial Average. If it happened this coming Monday…we would see the Dow Jones go from about 26,965 to 21,033 for a drop of -5,932 points.

Are you ready and what would you do? How is your current portfolio positioned in the event of something even half of that type of drop? We’re not trying to be “doom and gloom” financial advisors but we’re also not so oblivious or positive that we’re “running East in search of a sunset”.

All this being said, get your plan in place now and prepare yourself for such an event. Even if you just let your mind get in front of it and don’t make any portfolio changes, your emotions will at least be more in check. History and reality tells us, however, that most people will read this and not prepare any differently.

PS- Don’t be “most people”!

 

Learn the ABCDs of Medicare!

Dear Mr. Market:Understanding Medicare: The ABCDs

One thing any of our readers will know if that we don’t pretend that we (or anyone) owns a crystal ball. The only thing we can promise you about tomorrow is that the day ends in the letter “y”.

One other thing that we know will happen…God willing…is that you will eventually retire or be 65 and eligible for Medicare. In advance of National Medicare Education Week we are doing two things:

(1) We’re sharing this article written by Steven Stasioski and,

(2) We’re happy to announce a free educational event where we’ll be addressing the ins and outs of Medicare. On October 17, 2019 at 6:30pm you can join Matt Pixa from My Portfolio Guide and Steven Stasioski from SCS Tax & Insurance Services at the Seal Beach Yacht Club. Bring your appetite and questions for a great evening of education and camaraderie. RSVP via email at matt@myportfolioguide.com or call (562)799-5595.

Now…on to the article! Continue reading