November 23, 2017

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Plan for Low-Risk Investing

Stock Strategy

Plan for Low-Risk Investing with the Browne Plan

The simplest way to invest is a Browne Plan. It promises steady capital growth with minimal downside risk, requires no management beyond an annual portfolio review, and frees you from having to make any decisions about what’s happening in the markets.

It’s ideally suited to those who don’t have the skills or the time to manage a family’s investments.

It was designed by the late Harry Browne, an American strategist who strongly tipped gold as an investment one year before Nixon scrapped the gold standard and the metal soared from $35 to $850 – but who also correctly advised a major switch into equities and bonds at the start of their bull markets of the 1980s/90s.

His strategy, for what he called The Permanent Portfolio, could not have been simpler. He said you should invest…

► 25 per cent in equities;
► 25 per cent in bonds;
► 25 per cent in gold; and
► 25 per cent in cash.

Once a year you should re-balance your portfolio by selling some of the assets that have risen strongly in value, switching capital into the underperformers, but only if holdings have gone way out of line – from 25 per cent to above 35 or below 15.

This simple way of investing has proved to be amazingly successful over time.

“Over the last 40 years the strategy has returned between 9 and 10 per cent a year,” two of Browne’s disciples report in a new book*.

“More remarkably, the worst loss it has ever had in a single year was only around -5 per cent.” That happened in 1981. But the following year such a portfolio would have bounced back strongly, rising more than 20 per cent in value.

The table on the following page shows the nominal and real (inflation-adjusted) returns for each of the years since 1972.

The logic behind the strategy is that at least one of the components can be expected to perform strongly in any investment environment. That provides some positive growth in the good years, but also shields the portfolio against losses in kthe bad years.

The authors, Craig Rowland and J M Lawson, identify four different kinds of investment environment:

Prosperity – characterized by rising profits, stable or falling interest rates and widespread optimism – is normally very good for equities. Bonds also do well, but gold lags.

Deflation – when some economic shock such as a credit crisis or market panic sets off a cycle of declining prices, falling interest rates and rising currency value. It’s bad for equities, but very good for high-quality, long-term bonds. Gold only does well if real interest rates are negative.

Inflation – prices rise, sometimes rapidly, because there’s too much money circulating relative to the available supply of goods and services. Interest rates rise in response as lenders demand more to compensate for the reduction in purchasing power of repaid capital. Very bad for bonds, so-so for equities, great for gold.

Recession – if this is of the “tight money” type, where the central bank has raised interest rates to tame inflation, despite a weak economy – the only investment asset that can be relied on is cash.

Luckily such a period “is normally short-lived and one of the other three assets (stocks, bonds or gold) will quickly take up the slack as the economy decides which direction it wants to go… a return to prosperity, inflation, or a descent into a full-blown deflationary depression.”

Compared to standard institutional portfolios containing equities and bonds but no gold or cash, a classical Browne Plan would have underperformed in the 1980s and 90s, outperformed in the 1970s and the Noughties, but delivered remarkably stable returns in real terms across four decades.

Some enthusiasts have experimented with variations on Browne’s principles, using different asset proportions such as higher percentages of equities, tighter annual controls such as rebalancing when holdings exceed 30 per cent or fall below 20 per cent instead of 35/15, or incorporating other assets such as real estate or Swiss francs.

Over time, none seems to have done as well as the original four times 25 per cent equities-bonds-gold-cash formula, with rebalancing at 35/15 per cent.

Annual percentage US returns from a classical Browne Plan

1980

17.6

1990

0.8

2000

3.5

1981

-4.9

1991

12.7

2001

-0.7

1972

18.9

1982

20.2

1992

3.0

2002

4.5

1973

14.5

1983

4.9

1993

11.4

2003

13.4

1974

14.5

1984

3.5

1994

-0.9

2004

7.2

1975

7.0

1985

17.8

1995

19.2

2005

7.8

1976

10.5

1986

17.7

1996

5.6

2006

11.3

1977

4.3

1987

8.1

1997

8.2

2007

11.9

1978

10.5

1988

4.7

1998

11.9

2008

-2.0

1979

36.7

1989

14.0

1999

3.5

2009

12.7

2010

12.0

Average

9.5

2011

13.3

However, as a South African who lives in Thailand, with strong UK connections but few US-based assets, I could not readily and sensibly apply a Browne Plan in its original form because it was designed for Americans, and in some ways would be unsuitable for those of us who are not.

For example, the equity portion may be invested entirely in index funds reflecting Wall Street. “International stock exposure is not that important to US investors, in part because the US stock market includes companies already responsible for about half the world’s economic output,” say Browne’s disciples.

Dubious logic… even more so for Non-Americans. A better choice would be the Vanguard Total World Index exchange-traded fund, whose current holdings are 52 per cent in North America, 25 per cent in Europe, 15 per cent in the Pacific and 9 per cent in Emerging Markets.

A classical Browne Plan also recommends a bonds holding consisting entirely of 25- to 30-year nominal long-term US Treasury stock. International bonds are deemed “not appropriate,” because of the currency, political, default and other risks.

That may be right for Americans, but certainly not for the rest of us. I would favour an internationally-diversified portfolio of “sovereigns” including Treasuries, Bunds, Gilts, Japanese, and perhaps official credits of smaller economies such as Australia, the Netherlands, Singapore. Buy the longest-dated bonds.

more to follow: next article – A powerful protection against catastrophe

CopyRight – OnTarget 2013 by Martin Spring