How to Invest in Bonds for Deflation Protection

The four asset classes in a Permanent Portfolio include stocks, bonds, cash and gold. Each asset class hedges against one of the four economic conditions: inflation, deflation, prosperity and recession. We initially invest 25% each into each asset class and then rebalance the whole portfolio when one of the asset classes reaches a 35% or 15% rebalancing trigger. Using the Permanent Portfolio Investment Strategy provides us with these benefits:

Great returns: it gained over 8% per year over the last 40 years with low volatility.

Diversification: using multiple asset classes helps mitigate risk as we are not putting all of our eggs in one basket.

Economic condition allocation: each asset class behaves differently depending on what is happening in our economy. Stocks are for prosperity, bonds are for deflation, gold is for inflation and cash is for recession.

Low cost: we can implement the Permanent Portfolio with an annual cost of only 0.15% vs. the industry average of 1.03%. This puts more money in your pocket and less in theirs.

Reduces investing fear and greed: because we are using a systematic approach to investing, we are taking emotions out of the equation. Emotions are your biggest barrier to investing success.

No market timing or guessing which asset class will outperform. It doesn’t get any easier than this.

Easy to manage: the Permanent Portfolio is a low maintenance strategy; it will take you only a few minutes each year to self-manage your investments.
We only buy long-term nominal treasury bonds with maturities of 25 or more years for the Permanent Portfolio. No TIPS, corporate, municipal or foreign bonds.We use treasuries for safety reasons and they help mitigate the following risks:

No default risk. Governments can print more money to pay their obligations.

No call risk. These bonds are not callable like some corporate or municipal bonds can be.

No currency risk as these bonds are denominated in your local currency.

No outside political risk.
We hold these treasury bonds until they reach 20 years left to maturity. We then sell them and then buy new long-term bonds. While we hold the bonds they are paying us interest income. We allocate this earned interest income to our Cash asset class. There is an inverse relationship between bond prices and interest rates. When interest rates go up, bond prices go down. And vice versa. We hold bonds for deflation protection. Interest rates fall during a deflation which cause bond prices to rise. If this bond buying and selling seems too complicated for you, explore using the iShares TLT which is a low-cost long-term treasury bond exchange traded fund (ETF). If you live outside the USA, you should be able to find an equivalent for your country. I hold the bonds directly and don’t use a fund.

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