The (Nearly) Permanent Portfolio: A Case for Stocks

I collect antique clocks and currently own 15 of them. I have a vague idea of how much I paid for them and, for the most part, I believe that they are now worth more than I paid for them; yet, I wouldn't be surprised to find out that they have depreciated in value since I bought them or that I paid too much for a few of them. I never worry about losing money on my clocks. I'm not sure that I'll ever sell them.

What if we apply the techniques for collecting clocks or books or paintings or baseball cards to collecting shares of stocks? We will be as smart as we can be about which stocks we buy and when we buy them, but once we have purchased them, let's make a pact that we aren't going to check our portfolio balance many times per day (yikes, I'm guilty of that one), and let's not worry about whether our stocks decline in value, because we plan to keep them, as I plan to keep my clocks, forever (almost). If the stocks we own go down in value, we might just add to our positions. Holding onto stocks despite short-term fluctuations in the markets was the popular investment strategy during the past couple of generations, and it worked pretty well for long-term wealth building. It used to be called buy-and-hold investing, and if you pay attention to the financial media, you would know that buy-and-hold is dead because of the lost decade for stocks, when we had two painful bubbles, the Internet and housing disasters. Those are scary things, right?

When most investors think that buy-and-hold is dead as an investing technique, it's the best time for us to employ the strategy anew. Sure, I love to trade on the intermediate time-frame, which for me means weeks or months; still, I have a group of stocks that I bought at what I think are fair valuations, and I plan to keep them forever (almost). Some of the stocks in my permanent portfolio are Bank of America (BAC), Alcoa (AA), Cisco (CSCO), the utility PP&L (PPL), and General Electric (GE). I bought all of these stocks in layers, building up a position by buying a few hundred shares at a time and over the course of several months or even years to ensure that I bought the shares at a reasonable average price. They all pays dividends, and all will probably increase those dividends over the next few years. I bought the shares when stocks were largely out of favor, so I am almost guaranteed capital appreciation over the long term. I am still buying these stocks when I can on dips to add to my (nearly) permanent portfolio.

Now what do I mean by nearly permanent and almost forever? Let's go back to my clock collection. What if suddenly, strange as it might sound, everyone wanted antique wall clocks? Suppose that someone came up to me and offered for my clock collection double or even triple what I thought it was worth. I like my clocks, but I would sell them, let the market for clocks calm down a bit, and then start collecting again. That's exactly what we should do with our (nearly) permanent portfolio. Eventually, and I mean maybe not for ten years, there will be a new bubble in stocks. Your mechanic, your hair-dresser, your child's school teacher, your neighbor, and people you meet walking their pit bulls in your neighborhood will all be talking about stocks, and their voices will tremble with maniacal excitement. When everyone is enthusiastic about buying stocks (not just a few of us, as it stands now),  I will sell my (nearly) permanent portfolio, just as I would my clock collection in a similar scenario. I will put my money in bonds or cash and wait for the bubble to pop; then I will start all over again.

PPL is a solid utility company that you can own for years.

Perhaps I will say a few words about the stocks in my (nearly) permanent portfolio. I have written previously about GE, BAC, and AA. Cisco Systems (CSCO) is a formerly-beloved, now-thoroughly-hated tech stock that provides the infrastructure for the Internet; it currently pays a pathetic quarterly dividend of 6 cents, but the dividend and stock price have plenty of room to grow. PP&L Corporation (PPL) is a utility that currently trades around $28 and boasts a quarterly dividend of $0.35, which amounts to, at the current share price, an annual yield of 5%. Both CSCO and PPL deserve more of our time, but we will save those words for a different day.

Have you noticed that most people aren't investing in stocks now? People look at you funny if you talk about stocks, as though you should not be talking about money when so few have enough of it after the great recession of the past few years. That disdain for building wealth will fade in the coming years, and when people become interested in saving for retirement again and the stock market is reaching new all-time highs, you'll want to make sure that you already own the shares that you will gladly sell them.