The recent performance of the Permanent Portfolio seems to have stoked some interest in the strategy crafted by Harry Browne. I’ve been noticing more references to the strategy making their way into my daily reading of favorite blogs. Looks like there is even a new book coming out about it, the authors of which have an informative blog I just discovered.
I haven’t given the strategy much thought for quite some time so I read Harry’s book Fail-Safe Investing as a refresher. Only a small portion of the book deals with the composition of the Permanent Portfolio, but it is worth the read if you are not familiar with Harry’s 17 Simple Rules of Financial Safety.
The Permanent Portfolio has three requirements: Safety, Stability, and Simplicity. The allocation is: 25% Stocks, 25% Bonds, 25% Gold, and 25% Cash. Positions are rebalanced on an annual basis when any one of the position’s allocation breaks the range of 15% to 35% of the portfolio. That’s it. The idea is to be able to profit in any of the four major market environments identified by Harry: Prosperity, Inflation, Tight Money or Recession, and Deflation.
So how has this strategy performed? Quite Well:
While not outperforming in total return the Permanent Portfolio was able to capture most of the upside of Stocks, Bonds, and Gold over the last 22 years while experiencing only half the volatility.
Stats by 5 Year Period
Can the Permanent Portfolio be improved?
Considering how well the Permanent Portfolio has done in the past 3 years and noticing too that Stocks, Bonds, and Gold are practically at all-time highs it may feel like a bad time to put this strategy to work. It is hard to resist adding some tweaks to better position the strategy for what you think may be coming in the future. But this can quickly add a layer of speculation violating the core principle of the strategy: understanding the future as uncertain.
The one aspect open to modification is the selection of assets used in each category. Harry emphasized this point as crucial for the success of the portfolio. For the Stocks portion of the portfolio he recommended buying three 100% invested broad-based stock mutual funds to protect against any mistakes any one fund may make. For bonds he suggested buying directly the longest term Treasury bond available and rolling on a regular basis your holdings closest to maturity into the longest term available. For gold he points to buying gold bullion. And for cash only short-term Treasury securities.
The strategy was developed before the time of ETFs. While using ETFs shifts the risks involved, their prevalence and accessibility make it easy to implement the Permanent Portfolio. The above baseline performance history was compiled using an ETF based strategy, simply holding 25% in each; SPY, TLT, GLD, SHY.
Some possible modifications to the base strategy:
- Select multiple ETFs within each asset class to achieve a broader holding base and to reduce tracking and management error.
- Create a more global Permanent Portfolio by including other stock and debt markets from various regions
Any modifications beyond selecting multiple ETFs that fit the requirements for each asset class will push the strategy into what Harry called a Variable Portfolio. The Variable Portfolio is where you speculate with money you can lose. More on this to come.