craigr's  Instablog

It was almost four years ago when a poster started an innocent looking thread on the excellent Bogleheads Forum.

That thread, about a strategy called the Permanent Portfolio, quickly grew into a massive in-depth discussion of Harry Browne's investment strategy.

If you have the time to read a 72 page long thread, it will answer many questions about the Permanent Portfolio:
Updated Modification of Harry Browne Permanent Portfolio

This thread eventually became so large that it was a problem for the forum software and had to be locked. A new thread was started to continue it here:

Harry Browne Permanent Portfolio Discussion (Cont.)

It also was the inspiration for the starting of our own forum that would deal specifically with this portfolio idea:

The Permanent Portfolio Forum

Here is my first response to that original thread years ago and I still agree with everything posted. The Permanent Portfolio has helped guide me through the most volatile markets I've ever personally witnessed in my nearly 20 years of investing. I am happy to have found it: Thread response to proposed Permanent Portfolio modifications below...

Ok, Here is my Harry Browne Permanent Portfolio brain dump:

allenmickers wrote:I am by far not qualified to modify Harry Browne's Permanent Portfolio, but I believe he is dead and I wanted to see what I could come up with.His basic premise is 25% Gold, 25% Bonds 25% Cash 25% Equities. The long term performance has been about 9% annualized gains with very low Std Dev.

I've read all of Harry Browne's books and many of his news letters. The portfolio was created in the late 1970's as a way for him and his subscribers to diversify away from hard assets that did well during that decade. He advocated his simple approach for the next 30 years. From 1972-2007 the results are: CAGR: 10.02% Std. Dev: 8.43 YTD in 2008 the portfolio is up almost 4% in these turbulent markets.

I dont particularly care for the specific allocation as theres no way I would put 25% of my assets into shiny metal. It ignores REITs and TIPS (Which didnt exist when he created the portfolio).

Harry Browne was certainly aware of both REITs and TIPS. He just didn't think they belonged in the permanent portfolio. He discussed REITs in the 1980s and also knew about TIPS in the 1990's but just didn't like them over gold for inflation protection.

25% For Inflation:10% Gold 10% US TIPs 5% Foreign TIPs (not technically correlated with US Inflation)

I would disagree with this approach. Harry Browne would never substitute any asset for gold for inflation protection. He specifically stated on more than one occasion that inflation indexed bonds are not a substitute for gold for inflation protection or other currency problems. You will enjoy this show where he talks about avoiding TIPS and investment risk:

04-10-24.mp3

Gold gets a bad rap around here. It has plusses and minuses just like any asset. It's absolutely horrible to hold when the markets are doing well and there is no inflation. However when inflation gets over 5% or other problems come around that appear to affect the local currency then it takes off like a rocket. TIPS simply do not, and cannot, react this way due to their own limitations. He discusses why using gold for inflation protection is important and why you should only hold Treasury bonds to avoid credit risk (seems appropriate for today's market) in this show:

05-04-17.mp3

But remember that gold and the other assets need to be rebalanced for the portfolio to work. Gold has an expected real return of 0% if you just hold it and never sell. For it to work in the portfolio you need to stick to the rebalancing bands just as you do for the stock and bond portions. The rebalancing bands advocated are to sell down to 25% any asset that goes up to 35% of the portfolio. You should buy any asset back up to 25% if it ever falls to 15% of the value of the portfolio. You can do it more frequently, but keep in mind the rebalancing costs involved.

25% for Deflation/Devaluation of USD15% Cash in Foreign Currency 10% Foreign Bonds (5% TIPS 5% General Sovereign Bonds)

During deflation your dollars are becoming more valuable against every other currency. You wouldn't want to hold foreign currency in this situation. Cash and long-term bonds will do well. Stocks and gold will do poorly under bad deflation. TIPS are not a substitute for nominal bonds during deflation.

30% Bull market20% Equities (split US and international) 10% REIT (split US and International)

Harry Browne recommended that your stock holdings should be just a simple S&P 500 index fund. Early on (1970's, 1980's) he advocated other simpler funds before indexing became widely available and affordable for most people. In the 1990's he was squarely in the indexing camp though. Intl. holdings could be indexed as well, but it should come out of your 25% equity holding according to his 1989 book. Of course we'll never know, but I suspect that today he'd just advocate a TSM fund as long as it is an index with low costs.

Harry Browne didn't consider real estate specifically a good investment. He considered it a speculation. Moreover, he thought it straddled the stock/inflation protection part of the portfolio. Again, in his 1989 book if I recall he said if you wanted to use REITs it should come out of the stock and gold allocations to get your percentage. However, he always said that real estate can perform inconsistently based on the economy and is not an asset he considers particularly useful for the portfolio.

25% Bear Market25% Long Term T-Bonds

Are you referring to recession here? Harry Browne always advocated 25% allocations to cash for recessions. I found that better performance and identical volatility could be obtained by substituting a Treasury Short-Term bond fund for a Treasury Bill money market fund. This is the only change I've found that produced a positive result without negative impacts on diversification of the strategy.

Perhaps a modification to cover any scenario could be:20% Inflation 20% Devaluation

Inflation and devaluation are technically the same thing. Although since we don't have a gold standard any longer the term "devaluation" is anachronistic because the dollar isn't commodity based and can't be devalued against any particular measure of value officially.

To be completely honest if we were in a long bull market, this post wouldnt exist, however I am a relatively new and young investor looking for long term returns and when I run across concepts like this Permanent Portfolio that seem reasonable, I like to explore them.

The Permanent Portfolio concept is unorthodox but is soundly thought out. It is designed to have consistent and reasonable performance with little chance for a big loss. The worst losing year it had was 1981 where it lost somewhere around 4%. There were one or two other years where it lost around 1%. The CAGR over the past 36 years has been about 10% which is quite good considering the low volatility involved. Even if I exclude the first couple years because of the crazy gold market and start in 1975 you still have a CAGR of almost 10%. Fail-Safe investing is a condensed version of his 40 years of investing experience. It's one of my most favorite investing books.

The other book I really enjoy is "Why the best laid investment plans usually go wrong". You can buy it used for about $0.34! This book is huge, but it spends 1/3rd of the time blowing holes in virtually all investing bunk (timing, chart reading, predictions, insider information, stock tips, etc.). It is worth the price just for that alone. The last two parts of the book talk about the Permanent Portfolio concept, why it works and how to implement it. The information is dated in some parts now. For instance, the mutual funds and stocks recommended were supplanted with his advice to just use index funds (which weren't commonly available back in 1987). However, most of the information is just as applicable today as it was back then. I'd highly recommend getting that book if you enjoyed Fail-Safe Investing. BTW.

I recommend listening to all of his archived investment shows. They all contain excellent and balanced information. He is not a speculator at all. He advocates a balanced, simple and diversified portfolio and not trying to time the markets. He was a Diehard before there were Diehards. These shows were recorded in 2004-2005. It's fun listening to them because he talks about things that, at the time, seemed remote. Such as not relying on real estate investing or your home equity because prices could come down. Or only buying Treasury bonds and not buying munis or corporate bonds because during flights to safety people want Treasuries. Or how gold can outperform all other inflation hedges when the time comes. Etc.

I'm a firm advocate of Harry Browne's 16 Golden Rules of Financial Safety (also available in his radio show). If more people followed this advice they would have far fewer problems with their investments.

Disclosure: I am long VTI.

Additional disclosure: I run the Permanent Portfolio which is long stocks, bonds, cash and gold.