The Permanent Portfolio: A Conservative Long-Term Investing Strategy
The late investment writer Harry Browne was a contrarian. That is, he disagreed with most people when it came to investing. He had a crazy idea — come up with a portfolio that only needed to be rebalanced, and that’s it. Never change allocation, ever. It would always have the same amount of the same assets no matter what the economy was doing.
The goal was to build a “fail safe” portfolio that would survive even the darkest economy — while also profiting during prosperous times. He called it the “permanent portfolio”, and in the last decade, the portfolio has absolutely skyrocketed even while the economy stumbled — creating many fans for the strategy.
How the Permanent Portfolio Strategy Works
The basic idea is that some asset types perform well during certain economic environments. Some assets perform better during inflation, some better during prosperity, some better during recession, and some during depression.
Because of this, the strategy employs four basic asset types in the portfolio:
Interest-Bearing Cash: Does well during recession.
Government Bonds: Do well during deflation.
Company Stocks: Do well during prosperity.
Precious Metals: Do well during inflation/fear.
The strategy then originally takes the world’s most simple route and puts each asset class in the portfolio at 25% each. That’s right. The 25% in gold and silver bit is enough to give most traditional investment advisors a hernia, but that’s what’s in the portfolio.
Does the Strategy Work?
Believe it or not, the strategy works fantastically — sometimes. During the 90s, it struggled on, but during the last decade — what some are calling the “lost decade” for traditional investors — the portfolio has done incredibly well, making many of its investors much richer because of it.
The Permanent Portfolio Fund — a mutual fund once managed by Browne himself before his death — has outperformed the stock market by about 9%. Perhaps more importantly, it rarely loses money — it’s much, much, much less volatile than the stock market, and has had fewer down years. Again, that’s with a boring portfolio that’s extremely conservative and boring.
Is This the Best Strategy?
Probably not. But it’s up there. I’m a fan of the strategy, though I would probably have it mixed with more stocks and less cash — just to increase the long-term profits while sacrificing a little non-volatility. Still, that’s just me.
Either way, this should be a lesson of why asset allocation is always important — if you allocate correctly, you can make money pretty much no matter what.
About the Author: Shaun Connell is the editor of Live Gold Prices where he writes about gold and silver prices. As a disclaimer, he has part of his portfolio in the Permanent Portfolio Fund.
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