At our request, William Bernstein, an investment manager at Efficient Portfolio Advisors in Eastford, Conn., reviewed Rep. Paul’s portfolio as set out in the annual disclosure statement. Mr. Bernstein says he has never seen such an extreme bet on economic catastrophe. ”This portfolio is a half-step away from a cellar-full of canned goods and nine-millimeter rounds,” he says.
There are many possible doomsday scenarios for the U.S. economy and financial markets, explains Mr. Bernstein, and Rep. Paul’s portfolio protects against only one of them: unexpected inflation accompanied by a collapse in the value of the dollar. If deflation (to name one other possibility) occurs instead, “this portfolio is at great risk” because of its lack of bonds and high exposure to gold.
Running an investment portfolio that protects against only one bad outcome is like living in California and buying homeowner’s insurance that protects only against earthquakes, says Mr. Bernstein. You also want protection against fire and wind and theft and the full range of risks that houses are prone to.The bumbling Mr. Bernstein fails to consider the first and most important thing in financial planning: looking at the totality of the investor's financial circumstances. Having served in Congress for decades, Ron Paul is entitled to a Congressional pension which caps out at 80% of final year's salary of $174,000, as well as full health care benefits. He's also likely got some Social Security and a Congressional 401(k).
How exactly is a 76-year-old man with a Congressional pension well over $100,000 a year, $500,000 in cash, and full Congressional health care benefits at risk from deflation? In the unlikely event that sound money breaks out, Ron Paul is set for life! Wouldn't it then make sense to use the bulk of Paul's investment assets to protect against the risk of unsound money, especially with serial deficits running around 10% of GDP and the central bank printing trillions of new dollars?
And as for bonds, don't get me started. Treasuries have negative real yield. You lose more in inflation than you are paid in nominal interest. And then the government taxes you on the nominal interest anyway. Sure, you could pick up a little more yield by taking on credit risk, but then if deflation actually does hit, those credit risks are going to default! Ron Paul's decision to hold cash instead of bonds is sound.
UPDATE: I stand corrected. In a selfless and principled move that sets him miles apart from the rest of the scum in Washington (I'm looking at you, Newt Gingrich!), Ron Paul refused his Congressional pension. Still, with a half million in cash and millions in dividend-paying mining stocks, I don't think the deflation boogeyman keeps Ron Paul up at night. And don't forget all that gold that he once had that he mysteriously stopped reporting to the government.