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Time to Look Again At Harry Browne's Permanent Portfolio?

|Includes: SPDR Gold Trust ETF (GLD)

Not sure what’s going to happen in the future?  Don’t know if we are in the early stages of an economic recovery and bull market or we are in for a long deflationary recession?  Or maybe our out of control debt and mass printing of money is going to spark a nasty round of inflation.   

If you are not 100% sure what’s going to happen, then join the club.  Neither am I.  Now like many people I do have some opinions.  I strongly suspect that at some point all of this newly printed money that’s piling up will start moving.  And then hold onto your wallet because that $20 bill in there is going to be worth a lot less.  But I am not so arrogant as to believe that I can’t be wrong.  The truth is that there are some pretty smart people out there who think deflation is still our major concern.  And while I definitely am leery whenever the government starts firing up the printing press I will concede that there are a myriad of factors, some of which have not yet played out, that could influence how this is gong to end. 

All of which leads me to believe that the smart move is to invest in a manner that leaves you prepared for any scenario.  Back in the 1980’s the late libertarian economist and perennial presidential candidate Harry Browne caused a small sensation when he (the goldest of gold bugs) told people it was time to start scaling back on gold and diversify their portfolios.  Shortly after he wrote a book that has since been reprinted many times called “Fail Safe Investing.” Thus was born the concept of the Permanent Portfolio. 

The basic premise of Harry's Permanent Portfolio is that you divide your money into two parts.  That which you can afford to take losses on (discretionary investing) and that which you really can't afford any significant losses on (retirement money etc.).  The money you want to be safe but still appreciating in value should be placed in a portfolio divided equally into four asset classes. 

25% Equities

25% Long Term High End Investment Grade Bonds

25% Precious Metals (He favored physical over paper metal.)

25% Cash or Near Equivalent

The theory is that if the static allocations were maintained through frequent rebalancing the investor would have an all weather portfolio that will keep his money safe while providing a moderate return.  Bonds will perform well in a bear market recession when equities generally lag.  And cash and bonds will do well in a deflationary environment while gold and equities will protect you from inflation.  This is not a path to quick wealth.  But it is not a bad plan for investing that part of your money where your risk tolerances are low. 

There have been several studies over the years which have attempted to back test Harry’s theory against historic market performance.  All confirmed that his Permanent Portfolio held up well over the passage of time with only a few down years, the worst being 6% in 1981.  (These studies all predated the crash of ’08.) Those interested in a real world track record or who like myself favor fund investing, may want to look at the history and performance of the Permanent Portfolio Fund (PRPFX). 

PRPFX is a five star conservative allocation fund that follows an investing strategy closely aligned on Harry’s model with a few minor differences.  The holdings of the fund are combined into six different asset classes—gold bullion coins (20%), silver bullion (5%), Swiss Franc denominated bonds (10%), stocks of U.S. and foreign real estate and natural resource company stocks (15%), U.S. aggressive growth stocks (15%), and U.S. Treasuries and high-grade corporate bonds (35%).  

Over the last 10 years PRPFX has been one of the best performing conservative allocation funds with annualized returns beating most other funds in its class and many so called moderate allocation funds.   During the great panic of '08 the fund withstood the financial hurricane with comparatively minor damage, posting an 8% loss for the year (only its fourth down year in 27 years).   In doing so it beat the S&P by about 30 points.  However the fund is not without shortcomings. 

During the bull market of the late 90's it was an under-performer, often barely keeping pace with Treasuries.  This serves as a reminder that this type of investing is not well suited for those who favor trading and the perennial search for the quick buck.  Its heavy emphasis on metals may be a drag on it during bull markets when inflation is low and the dollar strong.  Also I am not happy with the fund’s expenses which have in the last two years declined from outrageous to merely steep.  I would like to see them come down a little more. 

In the final analysis I would not advise putting all of your money into the fund unless you are going very defensive.  But PRPFX is what I call a great sleep at night fund that should provide the investor with a reasonable return over the long term, secure in the knowledge that anything short of nuclear war will not inflict severe losses on his/her money. 

Those who are not happy with the allocations are of course free to create their own Permanent Portfolio by adding some weight to certain asset classes or detracting from others.  The important point is that in a world where the future is perhaps less predictable than at any time in recent memory, the prudent investor should have at least some of his/her money invested in a manner designed to survive and benefit from any economic weather. 

Dsclosures: Long PRPFX and GLD