Permanent Portfolio Returns: Steady Or Risky?

Apr. 23, 2012 11:16 AM ETGLD, SHY, SPY, TLT11 Comments
Shaun Connell profile picture
Shaun Connell

Over the last 10 years, the "permanent portfolio" strategy made popular by libertarian investor Harry Browne several decades ago has had quite a heyday, earning insane amounts more than any U.S. stock market index.

The goal of the strategy was to essentially give the investor the ability to mess with his or her portfolio once per year, and then ignore it from that point onward. The idea was that a portfolio that has certain assets would be able to survive just about anything.

Although a little arbitrary, Browne decided to keep the portfolio incredibly simple and made it 25% stocks, 25% cash, 25% bonds, and 25% gold.

If you believe the end of the dollar is near, but don't want to bet the farm on any particular time frame, then this portfolio is likely for you.

This is enough to give a lot of investors an upset stomach because it essentially ignores the old idea that since equities make more money than most asset classes over time, we should put more toward equities. So does it work?

Why The Four-Way Allocation?

Browne's reasoning was fairly simple: He wanted the portfolio to be prepared to handle spikes in inflation, recessions, prosperity, stagflation, and depression.

Stocks are added for prosperity. Cash is added for depression. Bonds are added for recession. Gold is added for inflation.

Did it "work"? That depends on your measure of success. Browne's purpose wasn't to make as much as possible, but instead to provide investors with an incredibly boring, simple portfolio that does fine over time without fear of getting obliterated. By that standard, it's done wonderful.

Permanent Portfolio Returns

So far, it's done great, earning about the same amount as the stock market since the late 1970s - but with less risk. It's not sexy, though, during times of prosperity.

While Harry Browne's permanent portfolio performed well in the 1980s, during the 1990s growth boom the portfolio only returned modest results, barely keeping up with inflation. The stock market was exploding at the time.

Deciding to stick with a permanent portfolio has the downside of missing out on potential short-term gains. This is one reason, in recent interviews, the mutual fund manager of the similarly named Permanent Portfolio Fund has warned that people might jump from his mutual fund whenever it looks like "good times" are back.

A Case Study: Criag Rowland

More recently, financial author Craig Rowland revisited the permanent portfolio. He allocated his portfolio the way he should have: 25% stocks, 25% long term treasury bonds, 25% gold bullion, and 25% cash.

He believed this portfolio would be optimal through what he considered all possible market conditions: prosperity, inflation, deflation, and recession.

The results, measured from 1972 through 2008, show that the permanent portfolio wins the race against holding 100% stocks. A 100% stock-invested portfolio had a compound annual growth rate of 9.2% over the period studied, while Rowland's permanent portfolio had a compound annual growth rate of 9.7%.

So if two investors were to each invest $100,000 in 1972, one into all stocks and the other into Rowland's permanent portfolio, the investor who chose the permanent portfolio would be almost $50,000 richer than the investor who chose all stocks.

Of course, timing is kind of important as well -- stocks have had a bad decade, and bonds and gold have done fantastic for the last 10 years.

Options For Investors

Investors looking to invest in the style of Browne have plenty of options -- more than even when Browne was still alive.

The Permanent Portfolio Fund (PRPFX) is an entire mutual fund based on a similar strategy, only it also invests in silver, has specific stock picks, and has more money in actual stocks. Still, it's the closest portfolio to the permanent portfolio available as a mutual fund.

Other options would be mixing up different ETFs like the SPDR Gold Trust GLD, the SPDR S&P 500 Trust SPY, the iShares Barclays 20+ Year Treasury Bond TLT, and the iShares Barclays 1-3 Year Treasury Bond SHY with 25% each, and rebalancing regularly. This provides for permanent portfolio returns without the need to invest in the mutual fund or even hold physical gold -- even though holding physical gold is probably a good idea.

There's even talk about a Permanent Portfolio ETF set to mimic Browne's strategy with fewer fees.

The portfolio is often seen as a bearish portfolio, but it's really not -- it's more of a skeptic's portfolio. If you're looking for a bearish portfolio, then Ron Paul's portfolio could do the trick.

The permanent portfolio strategy is less volatile and less risky than most portfolio makeups, and should be seen as a good option for people building portfolios who are looking for a focus on security over risky profits.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am long PRPFX and own gold, and may be adding to my holdings over the next 72 hours.

This article was written by

Shaun Connell profile picture
I'm a 33-year-old semi-retiree, enjoying some time to pursue passion projects after hustling with 18-20 hour workdays for years. After having a medical scare a few years ago had me hospitalized, I decided it was time to sell the business and focus more on putting my money to work for me rather than the other way around. I now spend most of my time reading, writing, and enjoying life.

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