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An update of my view of bonds and Permanent Portfolio Fund

By Richard J. Maybury


19 August 2011

Dear Friend,

Readers are still worried about the bonds in Permanent Portfolio Fund (PRPFX).

They're being logical. If I expect the dollar to be destroyed, why would I recommend a mutual fund that contains bonds?

One reason is that what I expect and what will actually happen could be two different things. They often are.

Let's look at bonds first, then PRPFX.

My view of bonds

In my EWRs just after 9/11, I advised against bonds. That was one of my biggest misses ever.

I think I've been wrong about bonds ever since I was in kindergarten. I've always hated them, yet over the past 30 years or so they've turned out to be one of the biggest winners in history.

In a world where debasing the currency is considered not fraud but monetary policy, you'd think everyone would be terrified of bonds. Who wants to run the risk of loaning someone dollars each worth one loaf of bread and years later getting back dollars worth one slice? But that is what the investing public has been doing all my life.

When they finally wake up and realize bonds are hoaxes, the panic and loss of capital will be hair raising. But so far their faith is holding. Until the great stampede begins, we will continue living in a world where bonds are highly prized smoke.

In short, the fact that the current has been flowing in the wrong direction for 30 years doesn't mean it's a good idea to swim against it.

My view of PRPFX

The premise of PRPFX is that we cannot predict the future. We might try, but we are often wrong.

Therefore, the fund's strategy is to hold carefully selected assets that are diverse, so that if one category is demolished, others will rise enough to offset the loss.

The day will undoubtedly come when bonds will be wiped out by inflation (or QE, monetary easing or whatever you call it). When this happens, I expect the gold and other non-dollar assets in PRPFX to gain enough value to offset the loss in the bonds. That's the plan, and I have a lot of faith in it. If you haven't reviewed Harry Browne's short book about the Permanent Portfolio strategy, I suggest you do so. (Fail Safe Investing, www.harrybrowne.org)

I have often warned that PRPFX has an inflationary bias. It cannot be perfectly balanced to do equally well in inflation and deflation, so it was deliberately given a tilt toward inflation. The creators saw inflation as the greater long-term threat, and I think they were right.

Sell now, then buy back?

Whenever PRPFX goes flat or falls, some readers want to bail out and go into cash, with the intention of getting back into PRPFX when they think the fund has turned around.

If you can trade in and out — PRPFX to cash to PRPFX to cash, etc. — accurately picking the tops and bottoms in PRPFX, then you should do it.

I can't, and I don't know anyone who can.

But, if you are a speculator who likes risk-taking and wants to trade in and out, you might want to see deflation as a buying opportunity for PRPFX, and inflation as a selling opportunity.

The fund was not designed for this — it's built on a buy-and-hold philosophy — but I think it might be used that way.

But be warned, in my opinion, it's high risk. If you get it wrong, jumping out when you should jump in, or vice versa, you could take a mighty big hit.

One implication of events in July and August 2011…

…is that any possibility of achieving what previous generations called safety was wiped out and may not be back for another 20 years or more.

One of the best things you can do for yourself is stop thinking about safety and start thinking about risk reduction. You cannot get safe, but you can reduce risks.

Speaking as bluntly as I can, you will do yourself a big favor by making your money a secondary consideration and focusing on your physical security. In my opinion, from now on after the events of July and August 2011, any day you aren't attacked by a mob should be counted as a good day. Whether your mutual fund is up or down 5% will become a very minor consideration.

Best of luck to you. Forewarned is forearmed. You are on my mind all the time, and I'm doing my best to keep you physically and financially as healthy as possible.