Hi Doug,
I don't put 100% of my money into anything. Whether it is cash, gold, stocks or pork bellies. I just don't have that much faith in any one asset to make such a bet because the world is just so unpredictable.
I don't know who Prechter is (he appears to be an Elliot Wave guy), but I just don't think fortune telling is a profitable investment strategy and I don't care who is doing it. You need to be diversified at all times because nobody knows what the future brings. If Prechter told people to stay out of the market the past year he was horribly wrong for instance. In December of 2008 I was encouraging readers to rebalance back into stocks if their allocation needed it.
https://web.archive.org/web/20160324133 ... rebalance/
If you are overweight on your bonds in the portfolio (e.g. they exceed 30-35% of your holdings), you should consider selling them down to 25% and using the proceeds to bulk up the other parts of your portfolio that are below the 25% allocation band (such as your stocks, cash and gold).
For those thinking their bonds have done great and don’t intend to rebalance, all I can say is be careful. It’s tough to sell a winning asset, but at any time your bond gains could be eroded as interest rates whipsaw upwards. If economist Higgs is right, the inflation we see could be quite bad. Instead of 30-40% profits in your bonds, you could be staring at 30-40% losses or worse.
By not rebalancing, you may miss out on large gains in your other assets by having too much of your money tied up in your current winners. Imagine missing out on a 20%, 30% or higher gain next year in stocks if the markets recover and things work out.
YES, I know that sounds impossible right now. But it’s happened before and YES it usually does it after a bad market crash.
Gains like I just mentioned happened after the early 1970’s recession (1975 +37%, 1976 +24%), after the recession in the early 1980’s (1982 +21%, 1983 +22%), after the early 1990’s recession (1991 +31%), after the early 2000’s Internet bust (2003 +29%) and they even happened during the 1930’s Great Depression (1933 +54%, 1935 +47%, 1936 +34%, 1938 +31%).
Yet, I'm not coming off as a fortune teller. This is just good strategy without needing to predict the future.
Does asset price matter? Sure. But you know the problem is you just don't know what the best price was until well after the fact (as in years). In March 2009 there were tons of investing gurus telling people that stocks were still priced too high. But look what happened! It may be that three of the four assets are too high now, but how do we know that? Maybe stocks could go up another 40% from here? Maybe bonds will have a 2008 redux. Inflation could come on strong and gold could go up to $2000 an ounce. Who knows?
The Permanent Portfolio does not guarantee anything (who does in investing?), but it has a long empirical track record of doing just fine through a variety of good and bad markets. I feel very comfortable having my life savings invested in it as I eat my own dog food. I've seen it work well personally. For me, if it ain't broke I'm not going to go fix it.
I should probably talk about this more in the future, but the 4x25 split is safer than many other portfolio allocations I've come across. The four asset classes it holds are radically different in how they respond to economic changes than a simple stock/bond split or market timing schemes. The odds of all four of the asset classes falling significantly in price at the same time, I feel, is very low. If it were to happen, I doubt it would last very long before economic forces cause one or more of them to rebound strongly back.
But even if this does happen, what is to say that other strategies wouldn't be impacted just as bad if not worse? If the stocks and bonds in the PP are being cratered for instance, then most other portfolio allocations are surely hurting just as bad.