The Permanent Portfolio: Using Allocation to Build and Protect Wealth
by J.M. Lawson and Craig Rowland
Simple, safe and stable: These are the three tenets of the Permanent Portfolio, a strategy invented by the late Harry Browne to help investors grow and protect their life savings no matter what was going on in the markets.
Over the last 40 years, the strategy has returned 9.5% compound annual growth. The worst loss, a drop of 5%, occurred in 1981. In 2008’s financial crisis, the portfolio was down only around 2% for the year. We think that’s pretty impressive for a strategy that appears so startlingly simple on the face of it.
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The Basics
The basic premise of the Permanent Portfolio is this: The economy is always transitioning between four states. If you own an asset that can deal with each of those states, you will achieve powerful diversification. Harry Browne identified those states as:
- prosperity,
- deflation,
- recession and
- inflation.
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Craig Rowland is co-author with J.M. Lawson of the book, “The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy” (John Wiley & Sons, 2012).
Discussion
I became aware of the Permanent Portfolio concept while researching the Permanent Portfolio mutual fund (PRPFX).
Over the next two years, I monitored the performance of the Harry Browne's Permanent Portfolio and observed that it does appear to deliver a good annual return, with reduced volatility.
In late 2011, I dipped my toe into the Portfolio by moving about 2% of my investment inbto four mutual funds. So far so good.
The concept may not be for everyone, but so far I am satisfied with the results.
posted 3 months ago by ED from New Jersey
Have used PRPFX for number of years with better than anticipated results. Also have coupled the underlying core allocations with other stocks, funds and assets with similar results.
Not a panacea, but as part of overall strategy of diversifying, rebalancing when situation warrants leads to positive returns.
Whole-heartedly agree that tinkering with basics can have serious consequences.
posted 3 months ago by Charlie Troell from Texas
some foreign currency in the cash portion might be suitable.
posted 3 months ago by Edward Spitzer from Pennsylvania
The concept is almost foolproof.As stated holding Gold Bullion is important,and tinkering with basics will!!! have serious consequences.
posted 3 months ago by Robert Gilleski from Georgia
Why, with interest rates at historic lows, is this a good time to have 25% of one's portfolio in long bonds?
posted 3 months ago by Edward Reifsnyder from Colorado
Following up on Edward's question - with interest rates at historic lows, is it a good time to have 25% in long bonds and another 25% in cash yielding -0-?
Take a look at where interest rates stood at the beginning of the study period. Gold was also dead and stocks went on a mighty bull run. Those factors may have more to do with the performance of this portfolio.
posted 3 months ago by John from Texas
although I could not see the figure one graph clearly with all the lables the yellow line seems to be better over a very long term over the permanent portfolio line (blue). If that seems to be true would it not be a better investment? (provided one can stomach the ups and downs)
posted 3 months ago by Hemendra Parikh from Indiana
Sticking to a dogmatic purist position on exact instruments for the four asset classes is foolhardy. The concept as a whole is sound but it is marred by the authors' dogmatic purism. VTI, IAU, TLT and SHY seem to be an excellent simple set of four ETFs that would be convenient as well as in keeping with the broad concept of permanent portfolio.
One can certainly experiment even with leveraged ETFs for enhanced effect. And don't call it "tinkering with the basics." What matters is the idea and its effective implementation in consideration of the individual's risk profile. Sticking to a preconceived structure of so-called basics as sacrosanct is dogmatic and thoughtless. Anything that can possibly enhance the concept should be practiced by an investor who alone is the arbiter of what risk he or she wants to take.
At any rate, stop patronizing, in the name of preconceived basics.
posted 3 months ago by Ramesh Patel from Ohio
If you take time to actually read the book, you'll find there are variations including ETF portfolio suggestions and additions (like adding international exposure -- VEU, for example). Just take this as a framework. Like everything else, you have to figure out how to apply this to your personal style and strategy.
Given the high correlations we've seen across ETFs, having a broad-based portfolio that doesn't take much analysis time is attractive.
posted 3 months ago by Bob from Massachusetts
A question more than a comment: Is there a valid reason for putting 25% in long bonds at this point in the interest rate cycle?
posted 3 months ago by Thomas Pruitt from California
IMO, we are going to face a serious devaluation of the dollar resulting from our government's overspending (both parties are to blame so I'm not trying to turn this into a political discussion).
Does anyone want to comment on what devaluation might do to this portfolio concept?
Ramesh, thanks for your comment. I ordered the book as a result of reading your post.
posted 3 months ago by William from Florida
I would think a more balanced bond portfolio portion would be prudent at this stage of the interest rate cycle.
posted 3 months ago by John from Texas
I thought interest rates were going to rise 2-3 years ago but stayed with intermediate and short term investment grade bonds, Tips, and high yield bonds. All pretty good. Also GLD ETF and good dividend equities. My motivation was the most uncertainty I have seen in my 78 years. I agree with most of the repondents that L.T.Bonds do not look prudent at this time but what do I know. Explain to me why TIPS have done so well with low inflation.
posted 3 months ago by Patrick Roszel from Kansas
At almost any point on the curve, even though stocks have wide swings, they are worth more than the total portfolio .
posted 3 months ago by Carmen Putrino from California
There are two very important considerations in the use of this approach. The portfolio must be rebalanced whenever it deviates significantly from equal weighting and the approach is a long term approach. It is this latter element that makes bonds appropriate regardless of the level of current interest rates. What is lost by the bonds as interest rates increase are made back when interest rates come back down. This is proven by the behavior of bonds fron 1977 to 1990, a period of first risen and then falling interest rates. This is not a portfolio approach that encourages market timing which has never been proven to be effective.
posted 3 months ago by Richard Paul from Connecticut
Hemendra, click on the graph to enlarge. It will then have a tab to click that will give a full page graph. You and Carmen are right about the stocks. Bonds did not do a lot worse than the permanent line at the end altho it was about 5 years behind most of the time. Cash was the big drag; growth to 80000 over 40 years with everything else north of 300000. I have a hard time understanding the program when gold bullion is specified but an ETF is suggested.
posted 3 months ago by Leamon Lorance from Indiana
I have had part of my portfolio invested in PRPFX for two years. That is not long enough to reach any conclusions based on results. However, I can say that PRPFX seems to be uncorrelated with everything else.
I am concerned about the 25% in bonds. I would not be surprised to see a 20 year long bear market in bonds considering the present interest rates. I understand the theory that a long term bear market in bonds will be offset by a following long term bull market. However, my life expectancy is only 20 years.
posted 3 months ago by James Moule from California
This is worth looking at. I know that it does not comply with the rules of the strategy but putting money into bonds when interest rates are at record highs bothers me. A book about this is written by these authors: The Permanent Portfolio published by Wiley for those who want more.
posted 2 months ago by John Heryer from Missouri
Correction: Interest rates at record lows and bond prices at record highs. OOPHs!
posted 2 months ago by John Heryer from Missouri
A total return table is presented in the article which includes the PRPFX fund but does not include return figures for the 4 part, frequently re-ballanced implementation suggested in the article. That would be nice to have to supplement the chart.
posted 2 months ago by Albert Meyer from New York
The variable missing here is life expectancy. You may not live long enough to see the long term benefits of such a strategy.
posted 2 months ago by Wilford Poe from Florida
This is a very interesting strategy and reminds me of another that is built on a timing strategy using 5 category ETFs that are either fully invested or in cash depending upon the 200 day moving average. The author Mebane Faber also has a book "Ivy League Portfolio' and a website 'World Beta/timing' that tracts 5 sample ETFs. This model is based on his research paper which is also posted. Curious to hear the comments on this one.
http://www.mebanefaber.com/timing-model/
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461
posted 2 months ago by Douglas Kuntzelman from Oklahoma
How do we know the 40 year measurement period wasn't cherry picked?
posted 2 months ago by Elliot Cohen from Pennsylvania
Regarding data - their blog at
http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/
gives much more insight into the data used - seems very fair.
posted 2 months ago by Albert Meyer from New York
You really have to read the entire book to see that not only is the data valid, but the premise of this strategy is really pretty bulletproof. This portfolio lost 2% in 2008. How did you all do? Despite our having undergone a lost decade in the market, following 2 decades of a stock and bond bull market, this portfolio still provided a real return after inflation of at least 3% each year. How? Well, it caught the rise in gold, as well as bonds. It does work-buy the book. I wish it was around 20 years ago, so I didn't have to figure out all this stuff by myself.
posted 2 months ago by Donald Goldmacher from California
It looks like PRPFX took about a 14% drawdown from 1-1-2008 thru April 2009. That's quite a bit more than the historical drawdown in the book.
posted 2 months ago by William Kloss from Florida
