HH The Permanent Portfolio

Returns for the Vanguard family of funds were also shown in the Finpage article.

Diversification and Risk — The Key

Investment strategy involves more than just returns. If your objective were only to maximize return, then you would put all funds into the single asset you expected to outperform all others. Common stocks, as a class, have traditionally outperformed other asset classes. However, a strict return-maximizer would not invest everything into a stock index but would invest into the stock he expected to outperform all others.

We all are averse to risk. We assume risk to achieve higher returns. Diversification reflects the desire for returns but also the desire to limit risk. The proper amount of diversification for an individual depends on how he is wired. Do you prefer to eat well or sleep well? Most of us prefer both, but the world of risk and return does not cooperate willingly.

Risk aversion may be high or low for a particular person. All people are risk averse to various degrees. Regardless of what level or risk aversion we have, it tends to increase over our lifetime. We tend to be more tolerant of risk when young. This higher tolerance is not necessarily due to youthful exuberance, untamed optimism or foolishness. It is rational because bad outcomes at age 30 are easier to recover from than bad outcomes at age 60 or 70.

Time is a great healer for investors. Most investment mistakes can be addressed and corrected if they occur early in your life. Time also allows for career changes if necessary. Time correlates with energy. The young can work two jobs to get back on financial track.

Mistakes made later in life are harder, or impossible, to correct. Because mistakes or upset conditions are harder or impossible to correct with less time, it is rational to become more cautious with age.

The Permanent Portfolio Was Right But Not Permanent

Comments regarding increasing risk aversion with age makes a permanent portfolio problematic. If risk aversion changes over time, so too should your portfolio.Mr. Browne seems to imply such in this quote:

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Wendell Brown 1 year ago Member's comment

What does that righthand column, referring to 'with ST Treasury', mean? Since there are four components and short-term treasury is one of them - and since in the original finpage article the percentage without that qualification is different - I can't figure it out.