Performance Doesn't Matter, Can That Be Right?

Writing for Humble Dollar, Adam Grossman took a look at some of the investing tenets that underlie the Permanent Portfolio. We've looked at the Permanent Portfolio many times over the years for what it teaches about managing risk. The Permanent Portfolio was devised by Harry Browne back in the 1970s and it called for equal, 25% allocations to stocks, long bonds, gold and cash (or cash proxy). The big idea was that no matter how bad it got, at least one of the four would be going up which would mute losses versus something like a 60/40 stock/bond portfolio.

Grossman explored a little more of what Browne might have been thinking about when he created the portfolio, encouraging investors to ask themselves five questions.

  1. How much risk can you afford to take?
  2. How much risk do you need to take?
  3. How much risk are you willing to take?
  4. How much do you care about keeping up with the market?
  5. How important is it to accumulate the absolute maximum number of dollars?

I am most interested in the fourth question about keeping up with the market. Grossman notes that the more you diversify, the greater the difference between the benchmark indexes like the S&P 500 and your portfolio. Someone actually following the Permanent Portfolio to a T will have a much different return stream than the S&P 500 because only 1/4 of their portfolio would be in stocks. In years like 2018 that might be a good thing but in 2019 that might be a bad thing. In reality, it would neither be good or bad, the context of that last sentence was about the emotional response to being up much less than the equity market one year for having so little exposure to it.

Grossman appears to be saying that keeping up with the benchmarks is not very important when considered against "the peace of mind that comes with greater diversification." He's not wrong but I don't totally agree. Without question, a path that gets you to a dollar amount that makes what you want your retirement to be a possibility is more important than performance compared to a benchmark. If you've done some good planning and determine you need $900,000 at age 65 and you get there at 63 or 64 then it doesn't matter whether you outperformed or underperformed, how often you beat the market or lagged, all that matters is that you have a dollar amount that should be workable.

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