Diversification, it turns out, means different things to different investors. For many, it speaks to creating a portfolio with stocks from different sectors, such as technology companies, utilities or consumer goods. For others, it means combining different kinds of stocks, such as large-cap, small-cap or growth.
However, for savvy investors, those that are prepared for any economic environment, true diversification means creating a portfolio that holds investments in several different, or non-correlated markets, such as the stock market, commodities market, precious metals market, bond market and the real estate market.
For example, one particular mutual fund that follows this investment strategy holds 20% of its assets in gold bullion and coins, 5% in silver bullion, 10% in Swiss franc assets, 15% in the stocks of U.S. and foreign real estate and natural-resource companies, 15% in U.S. aggressive growth stocks, and 35% in cash and U.S. Treasury securities. These target percentages are fixed, thus creating what is described as a "permanent portfolio." According to Investment News, "The Permanent Portfolio Family of Funds, with $230 million in assets, stresses an investment approach that minimizes risk."
The fund-Permanent Portfolio Fund (PRPFX)-is managed by Michael J. Cuggino, President and CEO of Pacific Heights Asset Management LLC, which manages the Permanent Portfolio Family of Funds, a family of no-load mutual funds based in San Francisco, California. Cuggino maintains that this unusual but disciplined diversification strategy aims to protect the fund, even in volatile markets. "This fund," he says, "first and foremost seeks to preserve our investors" capital in down markets while also providing for appreciation in healthier markets." Each asset class in the fund has its own special merits:
Gold, for example, has traditionally been considered an excellent hedge against inflation and a safe haven in times of economic and geopolitical instability;
Because the Swiss tend to protect their currency rather than inflate it, Swiss Francs have held their value over a long period of time, thereby providing a great hedge against the potential for a weakening U.S. dollar;
Real estate in the form of "REITs" (Real Estate Investment Trusts) offers the potential for total return (capital appreciation and dividends), during periods of increasing inflation;
Investments in silver and in the stocks of natural resource and commodity companies provide protection against inflation and exposure to improving economic conditions;
The growth stocks held by the fund are chosen from U.S. industry sectors that are expected to grow aggressively over the long term; and
U.S. Treasury securities provide safety and liquidity of principal, as well as an income stream for investors.
As with any mutual fund, this one was designed to meet a particular investment objective. In a recent interview, Cuggino said that the job of the fund was to preserve capital and grow with low risk, allowing an investor to use the fund for that portion of their wealth that they want to preserve.
To learn more, call the fund's Shareholder Services Office at (800) 531-5142, or visit the fund's Web site at www.permanentportfoliofunds.com.
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