What if there was an investing plan that got positive returns in almost every one of the last 40 years and grew your wealth by 9% annually at much lower risk than standard stock-and-bond portfolios? And what if it was easy to implement, requiring only four funds and occasional rebalancing?
Actually, such a plan does exist. Created by the late Harry Browne, it’s called the Permanent Portfolio. It divides your holdings into four equal pieces (25% each) of stocks, long-term U.S. Treasuries, cash, and gold.
It sounds almost too good to true, but it’s having a revival now, and one of its most persuasive proponents, Craig Rowland, says it really works. He laid out why in a 2012 book co-written with J.M. Lawson, The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy.
Tellingly, Rowland is not a professional investor, but was a software entrepreneur who sold two companies to Cisco Systems (CSCO).
“I got to see what happens with money when people get a windfall,” he told me in an interview. “…The financial industry moved in…and I saw people losing millions of dollars.”
Rowland was determined to avoid that fate, so he did a lot of research, unconstrained by the conventional wisdom that pervades the financial services industry and the media. And then he came across Harry Browne’s writing.
Browne, who died in 2006, was one of the original gold bugs, with a series of books in the 1970s extolling precious metals and cautioning investors about currency devaluation. (He also was the Libertarian Party’s presidential candidate in 1996 and 2000). Browne was the Peter Schiff of his day, repeatedly warning about the dangers of inflation.
But when Fed chairman Paul Volcker wrung inflation out of the economy, Browne shifted gears. Starting in the 1980s, he developed the idea of a permanent portfolio that would preserve and grow wealth in good times and bad.
The concept is easy, and so is the execution, especially with exchange traded funds (ETFs). But it can be counterintuitive and demands subtle thinking, not investors’ strong suit.
Browne’s highly original insight was to link specific asset classes with four basic economic conditions:
- Prosperity is good for stocks and bonds.
- Recession is good for cash.
- Deflation is good for bonds and cash.
- Inflation is good for gold.
And since you can’t really predict which of those conditions will prevail at any time, why not buy all the asset classes in equal proportions? Some will go up while others go down, but the part that goes up tends to push the whole portfolio higher.
Using Volatility to Get a Smooth Ride
“…The Permanent Portfolio seeks to increase volatility in each asset class in order to achieve stability across the whole portfolio,” Rowland and Lawson wrote. “This zigging and zagging among the assets typically cancels out and translates into a steady rate of overall growth…. Only total portfolio performance matters….”
“I really want the volatility of the individual assets…because I want a smooth ride,” Rowland told me.
For example, gold was the only asset class to post a positive real return in the inflation-racked 1970s and also led the field during the lost decade of the 2000s. But it did terribly in the two-decade-long bull market of 1980-1999, when stocks and bonds set the pace.
Altogether, Rowland has calculated the Permanent Portfolio would have earned 9.5% annually from 1972 to 2011 — or almost 5% a year after inflation — with a standard deviation (a measure of volatility) below 8%. That’s why it suffered only seven years of negative real returns in the four decades he tracked.
A simple ETF version of Rowland’s Permanent Portfolio would comprise:
- 25% Vanguard Total Stock Market (VTI)
- 25% iShares Barclays 20+ Year Treasury Bond (TLT)
- 25% SPDR Barclays 1-3 Month T-Bill (BIL)
- 25% ETFS Physical Swiss Gold Shares (SGOL)
Actually, Rowland says owning physical gold and buying 30-year Treasuries through Treasury Direct is even better than the SGOL and TLT ETFs.
Ideally, you should hold each asset until it reaches 35% of your portfolio on the upside and 15% on the downside, and then buy or sell enough to get back to even keel. Dividends should go directly into the cash account and not be reinvested.
An actively managed mutual fund, Permanent Portfolio (PRPFX), which I own, and the Global X Permanent ETF (PERM) both track different versions of the portfolio, and their expenses are higher than owning the separate ETFs.
Who would do best with this approach? “I think the portfolio is suitable for everyone,” said Rowland, who at 41 is semi-retired and says he invests his own money this way.
I think it’s a particularly good fit for retirees looking to grow and preserve their capital so they don’t outlive their money. Also, it lets them dip into the big cash position for living expenses when stocks are in the tank.
But I believe younger investors need more growth, and so they need to own more stock. There are other simple investing philosophies that produce even better returns with somewhat more risk over long periods of time.
And Permanent Portfolio investors have to swallow losses from some assets, like gold this year, which caused the PP to lose 4.5% by June 30, despite a 15% gain by the Dow Jones Industrial Average.
“Each year in the portfolio there’s always one that’s a total dog…,” Rowland acknowledged.
That’s tough for many investors to stomach. But after living through two stock market crashes and a lost decade, many investors would probably give up some short-term gains for fewer anxiety attacks and more sleep.