Jay O'Keefe's Investment Letters

Letter 2     
October 27, 2007

The Permanent Portfolio

The Permanent Portfolio Concept
I hope you have carefully read FailSafe Investing by Harry Browne.  If you haven¡¯t, you will be at a disadvantage as you proceed through this course.  As we learned from Browne¡¯s book, he divides a portfolio into two divisions, (1) the permanent portfolio, and (2) the variable portfolio. 

The permanent portfolio employs a strategy which protects you in all economic climates (sometimes referred to as an ¡°all weather¡± strategy).  It protects against inflation and deflation, booms, recessions, depressions, etc.  The permanent portfolio is diversified into four equal parts: cash (T-bills), long term treasury bonds, growth stocks and gold.  This simple plan has been back tested for forty years, and has produced an average gain of over 9% per year, with very low downside risk.  This is easily visualized from the chart in the book.

The variable portfolio contains all other investments you own outside the permanent portfolio, and can be anything, stocks, bonds, commodities, precious metals, real estate, currencies, collectables, antiques¡­..on and on.  The variable portfolio will be the speculative, higher risk, part of your investments.  One of the things we will be learning in this course (hopefully) is how to select investments for the variable portfolio.  Our objective for it will be to out perform the permanent portfolio, while taking greater risk.
KEY POINT: Deciding how to divide ones invested assets between the permanent and variable portfolios is the single best strategy for controlling your risk level to fit your risk profile that I have ever found.  The lower your tolerance for risk, the higher percentage you should invest in the permanent portfolio.  For maximum safety, you would invest 100% in the permanent portfolio, and none in the variable portfolio.  Some investors will risk up to 75% or 80% in the variable portfolio, others only 10% to 20%, some 50% in each portfolio, etc.  

The Permanent Portfolio Fund
Fortunately a publicly traded open-end mutual fund, which employs Harry Browne¡¯s strategy, has been established.  In fact, he was instrumental in starting it in 1983.  The symbol for the fund is PRPFX.  It has averaged over 9.5% per year since its inception.  The web site for this fund is www.permanentportfoliofunds.com.  You can read about it there, and download application forms.  I do not know of a safer mutual fund with this kind of return.

A Picture is Worth 1000 Words
Let¡¯s do a little homework.  If you make the effort to do this, I believe you will be glad you did.

  1. Go to www.bigcharts.com and click on Basic Chart.
  2. Save that page in your favorites if you haven't already.
  3. Enter PRPFX under symbol, select 5 years under Time, select daily under Frequency, then click ¡°Draw Chart.¡±
  4. Print the chart out (I suggest black and white, and 1 page only).
  5. Then take a straight edge and draw a diagonal line across the bottoms.
  6. Then draw a line parallel going thru the first two tops and the last top at the upper right.

These parallel lines define the trend channel of a five-year bull market in this fund (actually, the fund has been in a bull market for most of the last 25 years).  It has gained over 13.5% per year during these last 5 years.¡¡

Just glancing at this chart you can see that you could have bought it a number of times when it touched the lower trend channel, and sold near the upper trend channel.  This could have increased your return to between 17% and 20% per year.  We will discuss this in a future lesson.  This is not a good time to get into that.  What I wanted you to see is how appropriate this fund is for your low risk money.  You might like to print out a long term chart on PRPFX.  You can do that by selecting ¡°all data¡± under Time, and see the chart all the way back to 1983.

Present Allocation of PRPFX
When you invest in PRPFX, you don¡¯t have to make any investment decisions.  The fund managers do that, and it has some excellent managers.  They have slightly modified Harry Browne¡¯s original allocation of four equal parts described above.  Here is how PRPFX was allocated the last time I checked (and it¡¯s hardly changed over the last three years):

  • 20% gold
  •   5% silver
  • 16% growth stocks
  • 17% real estate & natural resource stocks
  • 20% treasury bills
  • 22% long term treasury bonds 
That¡¯s it for letter 2.  You¡¯re thinking about how much you¡¯re going to commit to your investment program, and how much you can add at regular intervals.  You¡¯re considering what your risk profile should be, and therefore how much of your portfolio should be invested in PRPFX, and how much in the variable (speculative) portfolio.
Before I close, I want to drop in some investment wisdom.  Forty years ago, I heard John Templeton say during a television interview, ¡°Never invest with borrowed money.¡±  I¡¯ve heard other great investors say that.  It almost always ends in tears.  I tried it in the 1970s.  It ended in tears¡­.my tears¡­.and oh yes, we lost all the financial assets we had at the time.  It¡¯s quite clear in my mind¡­NEVER INVEST WITH BORROWED MONEY.


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"Well done, good and faithful servant; you were faithful over a few things,
I will make you ruler over many things.  Enter into the joy of your lord"
(Mt. 25:21 NKJV)

If you have not been faithful in the unrighteous mammon, who will commit to your trust to true riches?" (Lk. 16:11 NKJV)

The Apostle Paul wrote, "Now godliness with contentment is great gain. We brought nothing into the world and it is certain that neither can we take anything out. So having food and clothing we will be content with that. But those who want to get rich fall into temptation and a snare and into many foolish and harmful desires, that plunge people into ruin and loss; because the love of money is a root of all kinds of evil; in their greediness some have been led away from the faith and have impaled themselves on many distresses." (1 Tim. 6:6-10 NKJV)

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The information in these letters is the responsibility of Mr. E. Jay O'Keefe, but all your decisions are your own responsibility.

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