The ‘Permanent Portfolio’ is the brainchild of Harry Browne who wrote the book ‘fail-safe investing’. ‘Bond king’ Jeffrey Gundlach has recommended it.
What is the Permanent Portfolio?
The Permanent Portfolio comprises 4 assets – stocks, bonds, gold and cash or Treasury bills. It was recently recommended by Bond King Jeffrey Gundlach as a suitable portfolio for the current market environment.
Harry Browne is an investment analyst who came up with the concept of the permanent portfolio in the 1980s. His idea was to build a portfolio that can perform well in all economic conditions because of its extreme diversification. It’s not designed to be the best-performing but the most durable. That’s to say most portfolios will go through periodic losing streaks, perhaps for a year or more. The permanent portfolio is designed to have sufficient weighting in each asset class that it can perform in any environment.
Harry Brown’s Permanent Portfolio includes a 25/25/25/25 weighting of stocks, bonds, gold and cash. Over the long term it has been shown to perform worse than the traditional 60/40 split of equities and bonds but it reduces the downturn during more volatile markets. The permanent portfolio reduces losses in a market downturn because it is heavier in ‘hedging’ elements like gold and cash. However, in strong markets gold and cash tend to underperform stocks and bonds which is what is in the 60/40.
More specifically Browne suggests growth stocks to perform best during a bull market but cash or cash equivalents during bear markets. This has been referred to as a kind of ‘barbell’ approach to investing whereby the portfolio is loaded to benefit from the extremes rather than the most likely ‘middle of the road’ outcome.
Specifically the breakdown of the asset allocation is:
- 25% Growth stocks
- 25% Long term US Treasury bonds
- 25% cash
- 25% precious metals
Who invented it?
He was an American writer, politician and investment advisor and also the Libertarian Party’s candidate in the presidential elections of 1996 and 2000. He has authored 12 books that have sold more than 2 million copies. It was in his book ‘Fail safe investing: Lifelong Financial Security in 30 minutes, published in 2001 in which he introduced the concept of the permanent portfolio.
How to replicate the Permanent Portfolio
The website www.lazyportfolioetf.com attempts to replicate the Permanent portfolio strategy through a 100% ETF asset allocation.
It is a medium risk portfolio that can be replicated with 4 ETFs
Because it uses ETFs, the portfolio is super liquid – meaning you can shut down the whole investment with a couple of clicks without delay or problems with redemptions associated with traditional mutual funds.
The choice of ETF can be tailored to your individual choice – VTI could be switched out with VOO – representing just the S&P 500 rather than the much wider array of smaller cap companies contained in the ‘Total Stock Market’. The bond ETFs are at either end of the spectrum – BIL is used to cover the ultra short term 1-3 month T-Bills, which are the cash equivalent. They earn a better yield than a savings account but are still very liquid and can be housed together with the other ETFs in your portfolio. TLT is the best known ETF representation of long term 20+ treasury bonds. GLD is the gold fund with the most AUM (assets under management) and has very little tracking error with the underlying commodity- but avoids the storage and transportation costs of owning the actual precious metal.
How has the Permanent Portfolio performed over time?
Over the past decade the portfolio has returned a 6.38% compound annual return with a 6.14% standard deviation. The portfolio offered a 1.73% dividend yield in 2019.
As of 31 October 2020, the portfolio has gained +11.2% year-to-date with a maximum drawdown -3.30% including six positive months and 4 negative months.
Here you can see the performance of the Permanent portfolio versus the S&P 500. It overall underperforms the index but significantly reduces volatility – making it an easier long term investment to live with. The assumption is that the portfolio is readjusted at the beginning of each year to refit the original 25:25:25:25 allocations.
Here you can see the hypothetical monthly returns over the past 20 years. Note that
Portfolio Returns, up to December 2007, are simulated. They have been calculated using the historical series of equivalent ETFs / Assets, instead of the actual ETFs of the portfolio.
Why if you are a regular investor – and perhaps with a little less time to allocate to your investing – and inclined towards the ‘lazy / low-cost approach’ would you deviate from a common 60/40 or 50/50 stocks to bonds approach?
We would highly recommend this video with Jeffrey Gundlach (the ‘Bond King’) with Real Vision host Raoul Paul. The interview is a great watch but to find out why Gundlach likes the permanent portfolio, skip to 46:55 - 49:17 in the video.
The permanent portfolio performs best in irregular market environments, where the range of probable outcomes is larger than usual. In essence, if you suspect an extreme outcome – be it a very bullish stock market or a crash where gold might do well – then this is a portfolio that should help you sleep better at night than 60/40.
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