Efficient Portfolio Advisors' William Bernstein criticizes Ron Paul's portfolio

In the WSJ blog, on Ron Paul's heavy exposure to gold mining stocks and lack of bonds:

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.


Anonymous said...

Another person who know nothing about Dr. Ron Paul. He has rejected his congreasional pension and health care. His portfolio is strictly based on his belief in sound money. He puts his money where his mouth is. Enough said.

Anonymous said...

@ Anonymous: The media, yet again, does not know how to properly report on a politician that . . . gasps . . . tells the truth and doesn't take advantage of the American tax payer.

Anonymous said...

Ron Paul has 0 risk in his portfolio. The so called risk factor being talked about here would be with someone who doesn't understand the economy and buys into the false Keynesian economics.

When you see the government spending trillions of dollars per year, spending way beyond the amount of money they take in, then it's not a risk.

When you see the trillions and trillions of dollars that we have owed in promises, it's not a risk.

The only way they are at risk is if the US suddenly changes it's policies. Which I'm sure would be fine and dandy for him. At which point, he would obviously sell and rebuild.

Which is why he's up like 350% over the past 10 years or something like that. While the guy being quoted in the article was probably one of the fools telling everyone to buy the day before everything hit the fan, saying everything was fine.

Anonymous said...

Fear oozes from every word.

Wcv said...

Whose every word?

William Bernstein's? Mine?

Fear is for people who can't handle guns and gold.

Mike Dever said...

Ron Paul definitely has a concentrated and risky portfolio. But it's actually not that much riskier than most people's portfolios, which are concentrated in long positions in U.S. stocks and bonds. Diversification is the one true "Free Lunch" of investing. But if a person starts with just considering long stocks, bonds and real estate as being the only portfolio options, then true diversification cannot be achieved. I discuss this throughout my best-selling book and am pleased to provide a complimentary link to the final chapter where I present the performance of a specific "Free Lunch" portfolio at: http://bit.ly/vxDo6v

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