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Harry Browne’s Permanent Portfolio

This article was written by in Investing. 21 comments.

This is a guest article by Jacob, creator of the personal finance blog, My Personal Finance Journey. In the article, Jacob analyzes the Permanent Portfolio, a theory presented by Harry Browne, to determine whether investing along the theory’s guidelines can help investors beat the stock market.

Investors in general always seem to be on the lookout for a sure-fire strategy that they can use to outperform the market. Unfortunately, the reality is that these strategies are difficult-to-impossible to find. For this reason, I personally invest in a portfolio of passively managed low-cost index mutual funds from various asset classes and rebalance back to my asset allocation targets periodically.

Since my investing strategy does not take up too much time to maintain each month (in fact, individual stock investors might even call it “boring”), I am constantly interested in learning about new investing techniques and analyzing them to see if they have any merit.

One of these techniques/strategies I’ve learned about and analyzed over the past few months is The Permanent Portfolio created by Harry Browne in his book, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes.

What is the Permanent Portfolio?

The goal of The Permanent Portfolio is to provide safety and stability in any economic climate to the money you cannot afford to lose. This is accomplished by selecting various investment components in such a way that at least one asset class is favored in any economic climate. The Portfolio components are as follows, each carrying equal weight for as long as you hold the Portfolio, employing annual re-balancing:

  • 25% in stocks, which do well in times of prosperity.
  • 25% in gold, which does well in times of inflation.
  • 25% in bonds, which increase in price during times of deflation.
  • 25% in cash, which does well in times of tight money/recession.

Existing studies on the Permanent Portfolio

There have been many studies that have looked at this type of investing over the past 5 years. Overall, the conclusions and opinions from these existing studies are mixed. Craig from Crawling Road saw enough evidence from his study of the efficacy of The Permanent Portfolio, and he appears to have adopted it successfully to his investing strategy.

On the other hand, William Bernstein and Geoff Considine feel that while The Permanent Portfolio strategy itself has merit, individual investors who flock to this strategy are most likely “chasing returns” and probably lack the discipline to stick to the allocation dictated over the long-term, causing failure/loss of money to occur. This is due to the fact that the portfolio could be essentially flat-lined while the overall stock market is increasing 20%! An investor must have the discipline to stick to the strategy in these sorts of times.

I was not ready to automatically execute The Permanent Portfolio strategy for my own investing after reading the existing studies above for the following reasons:

  1. The use of raw index prices in existing studies is not ideal. I would want to still see good performance and risk trends when common investment vehicles (ETFs or index funds) are used exclusively to construct the portfolio.
  2. Use of physical gold metal holdings in existing studies is not ideal. Since the studies discussed above used gold market prices, I’d want to perform my own analysis using an index fund or ETF to see how performance held up without the use of physical metal.
  3. Permanent Portfolio performance comparison against a more aggressive stock asset allocation. In the existing studies, the most aggressive asset allocation that was compared against The Permanent Portfolio was a 60% equity, 40% bond asset mix. However, for a younger person such as me who can take on more risk, I would be curious to see how the performance compares to a more aggressive equity asset allocation, such as 75% equity, 25% fixed income.
  4. Use of yearly rebalancing in existing studies is not ideal. I currently employ monthly portfolio analysis (and rebalancing if needed), and as such, I’d be interested to find out how The Permanent Portfolio fairs using monthly rebalancing analysis.

Refined Permanent Portfolio performance analysis

In order to address the four considerations in the previous section, I set about defining the financial instruments that would construct The “Refined” Permanent Portfolio, a hypothetical portfolio consisting of a $10,000 starting value. The components I selected are shown below.

  • 25% in stocks – Vanguard S&P 500 Index Fund (ticker symbol: VFINX).
  • 25% in gold. Vanguard Precious Metals and Mining Fund (ticker symbol: VGPMX).
  • 25% in bonds. Vanguard Long-Term Treasury Fund (ticker symbol: VUSTX).
  • 25% in cash. Vanguard Short-Term Federal Fund (ticker symbol: VSGBX).

The table below summarizes the performance of the Refined Permanent Portfolio described above over the last 20 years (ending the beginning of October 2011) compared to a 100% stock and a 75% stock, 25% bond portfolio. The historical prices data source is Yahoo Finance. Monthly rebalancing is performed to maintain the appropriate asset allocation targets.

Permanent Portfolio Performance Table

Examining the table above, it can be seen that the Refined Permanent Portfolio does indeed outperform both the 100% stock and the stock/bond portfolios by a significant margin, as evidenced by nearly a 60% improvement in return on your original investment (20-year overall ROI), along with exhibiting 30-70% lower risk (lower standard deviation of annual returns).

Essentially, The Permanent Portfolio resulted in overall greater returns because it is insulated against the big decreases in price stemming from the often-volatile stock market. This phenomenon is best illustrated by the graph below, which shows the investment value growth of a $10,000 starting investment in the Refined Permanent Portfolio (blue plot) vs. a 100% stock portfolio (red plot).

The enhanced stability of the Permanent Portfolio was especially apparent in the 1997-2002 time frame (see black square in graph below), when the 100% stock portfolio first increased by more than 100%, only to then decrease nearly 50% in one to two years. The Permanent Portfolio was protected from this huge swing in prices, effectively preserving investor capital.

Permanent Portfolio Graph

Should investors incorporate the Permanent Portfolio?

Because of the consistency of the Permanent Portfolio over the past 50 years in either being competitive with or exceeding the long-term returns obtained using traditional stock/fixed income portfolios, I am convinced that The Permanent Portfolio will continue to perform well over the long-term.

However, I believe that investors should only adopt the strategy in full if the following conditions are true.

  • They will truly stick with it over the 20 years needed to obtain results competitive with or beating stocks, or
  • If they are merely looking for a conservative (not market-beating) strategy to preserve capital and stay ahead of inflation (which coincidentally, is the true goal for The Permanent Portfolio).

However, honestly, I feel that few investors (myself included) will have the resolve to stick with the strategy for the long-term, for the reasons mentioned below.

  • The majority of investors that are interested in The Permanent Portfolio at the current time are simply looking at it as a possible way to “beat the market,” and not as a method to preserve capital, as it is truly intended.
  • The Permanent Portfolio strategy’s returns have a low correlation with the returns of the stock market (a correlation coefficient of 0.58), meaning that if you employ this strategy, you’ll only enjoy any gains happening in the stock market about half the time. (Tthink about completely being excluded from the euphoria of the increase in the stock market in the late 1990’s. Would you be OK with that?) In my opinion, the low correlation of The Permanent Portfolio with the stock market makes it nearly impossible for investors looking to aggressively grow their money to stay with The Permanent Portfolio strategy.

Instead, most investors would be better served by sticking with an investing strategy using and a more “traditional” asset allocation that has a slightly higher correlation with the overall market.

Do you think that the Permanent Portfolio will continue to perform well in the next 20 years? Do you feel you’d have the discipline to stick with the strategy, even if it meant underperforming the rest of the market for long periods of time?

The complete set of calculations of the historical performance of the “Refined” Permanent Portfolio, correlation coefficients matrices, and price history of the proposed index mutual fund Permanent Portfolio is included in this Google Docs Spreadsheet.

Published or updated February 27, 2012.

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About the author

Jacob is the creator of the personal finance blog, My Personal Finance Journey. Jacob is studying towards his PhD in Chemical Engineering. View all articles by .

{ 21 comments… read them below or add one }

avatar 1 Anonymous

I don’t think the Harry Brown Portfolio is bad, and certainly better than what most have (no proper asset allocation at all).

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avatar 2 Anonymous

I agree IJ! The Permanent Portfolio definitely had an appeal to me, so I had a lot of fun doing this analysis. At the end, I didn’t think it was quite right for me due to the tracking error, but as you said, investors could do far worse! :)

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avatar 3 Anonymous

I am actually a fan of the Permanent Portfolio if you can stand the tracking error. I do have one quibble with your analysis, however. I don’t think the precious metals and mining fund is a good proxy for gold. For one, it invests in mining stocks and doesn’t hold any actual metal. Second, it holds miners who produce a wide variety of precious metals, not just gold. I believe platinum is a big part of its portfolio. GLD would be a better proxy, however, it admittedly hasn’t been around very long. I would like to see the analysis above but with a better proxy for the gold asset class.

There’s also a Permanent Portfolio mutual fund (PRPFX) that uses a newer incarnation of Harry Browne’s Permanent Portfolio. It, too, has performed well. But I wonder how much of that is due to the fact that the past decade has essentially been a golden age for this sort of strategy. Had this study been conducted in the early 90’s, you probably would have come to a different conclusion.

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avatar 4 Anonymous

Thanks for reading Kyle and for sharing your thoughts!

Agreed – the Vanguard precious metals and mining fund is FAR from a perfect proxy. However, since one of the requirements for this analysis/backtest was that there had to be 20 years of historical data, I was somewhat more limited to what I could choose. The gold ETFs, IAU and GLD, only had data back to around 2004. Those are probably what I would choose today if I were to construct the Permanent Portfolio.

If you’re interested though, I read that the Permanent Portfolio still fared well when Crawling Road did the backtesting analysis using gold market prices. Just click the link in the article above to view Crawling Road’s results if you’d like to read all the details.

Your last comment relating to how well this strategy has been doing in the past decade and whether it will continue to perform well was a topic of discussion I found quite frequently in researching for this post. I’d be curious to hear your take on the issue of future performance if you get a chance!

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avatar 5 Anonymous

Gold outperformed during the 20 year period you examined. How does this portfolio do over periods of 30, 40, or 50 years? Remember that the inflation adjusted high for gold is still around $2300/oz.

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avatar 6 Anonymous

Very good question Josh. Thanks for reading!

In the “Craig from Crawling Road” link above, he actually analyzes the performance of the Permanent Portfolio from 1974-2008 using a mix of raw index data and gold market prices (I changed these to using actual mutual funds in my analysis to try to further convince myself of the strategy).

He shows a nice table of compound annual growth rates and the overall growth of a $10k starting investment. He finds that Permanent Portfolio produces an annual growth rate of 9.3% vs. 9.9% for a 100% stock portfolio. He basically concludes that the returns are competitive, especially given the lower volatility of the Permanent Portfolio.

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avatar 7 Ceecee

I don’t think I’d be able to stick with it if stocks began to really take off—–unless I were on a remote island and never watched the financial news!

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avatar 8 Anonymous

Thanks for reading Ceecee. That was basically my conclusion with this as well. If the stock market was taking off each week that I tuned in to Google Finance, I might not have the resolve to stick with this strategy.

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avatar 9 Anonymous

I see a lot of appeal in the Permanent Portfolio. Wall Street pushes stocks and bonds relentlessly because the commissions are so good. So most of us develop a slanted view of what sorts of asset classes make sense for the long-term investor. By adding gold and cash to the mix, Browne performed a great service, in my assessment.

However, I question whether the 25 percent allocations in each of the four asset classes are the right ones. Couldn’t there be five asset classes, including one that Browne has not focused on because his own understanding is not perfect. Couldn’t it be that it should be 50 percent stocks and 20, 15, 15 in the other three asset classes he identifies?

My take is that the state of knowledge of how investing works is not nearly as developed today as we like to think it is. I think Browne was on to something important but that it is too early in the game to be too precise about the components of a true Permanent Portfolio. I think the idea merits much more debate and that we will be able to refine it and thereby improve it over time.


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avatar 10 Anonymous

Thanks as always for reading Rob!

What’s your take on this strategy compared to Valuation Informed Indexing? Do you think the level of risk is equivalent, or still more so than VII? I’d be curious to hear your opinion.

I agree though. I really admire Harry Browne for coming up with such a seemingly simplistic yet well thought asset allocation. I really like how he had the foresight to pick different asset classes so that one class is doing well in any economic environment.

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avatar 11 Anonymous

That’s a super question, Jacob.

I used Valuation-Informed Indexing for my own retirement plan after giving serious consideration to going with a Permanent Portfolio approach. The thing that held me back from going with PP was more emotional than rational. I couldn’t bear the thought of putting 25 percent of my money in an asset class (gold) that possibly wouldn’t be producing gains for a long time. I did put a small amount of money in gold. But I couldn’t pull the trigger on a 25 percent allocation.

Now that I’ve taken the VII path, I am probably the last person whose opinion should count on which approach is superior. I now have a strong bias toward VII after having devoted 10 years of my life to developing it and promoting it.

My bottom line is that Harry Browne was onto something important and we need to be thinking more seriously about what he was trying to do. VII tries to do some of the same things. I am certain that Browne’s work influenced me. But I think the question of which approach is ultimately superior is something that will have to be revealed in time.


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avatar 12 Anonymous

Well said Rob! That’s cool to hear that Browne’s work influenced your investing path. It will be interesting to see how the PP does going forward.

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avatar 13 Anonymous

“individual investors who flock to this strategy are most likely “chasing returns” and probably lack the discipline to stick to the allocation dictated over the long-term”

The argument that this strategy would be hard to stick to can apply to any strategy. Many people tend to buy high and sell low with a stock-heavy investment strategy because they are also chasing returns.

I have a similar “overdiversified” strategy but I adjust the percentages in each type of fund depending on my take with regard to economic trends. My spreadsheet keeps me honest in following it although I strayed a little bit when the market tanked in 2008.

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avatar 14 Anonymous

You make a valid point UH2L.

Shown below is my thought process for why I was thinking that people would have more trouble sticking with the Permanent Portfolio. Have a look and let me know if I missed something or there are any holes in the logic-train. I’d be curious to learn more about your take on this issue.

With the stock heavy allocation, an investor runs the risk of wavering from the strategy when stocks are going down (because their portfolio is generally decreasing). But with the Permanent Portfolio, it’d seem like you’d add the other risk of an investor wavering from the strategy when the overall stock market is increasing, but their specific portfolio is staying the same. This would be coupled to the risk of the investor wavering from the strategy if their portfolio decreases overall.

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avatar 15 Anonymous

Hmm, the end of that chart seems concerning to the PP strategy. If you take a look at the beginning, the PP returns seem uncorrlated to the stock market, but at the end it starts to follow it every cycle up and down. Perhaps some of the assests have lost their traditional decorrelation with the stock market. Especially gold with the rise of ETFs allow much more leveraged speculation than simplying buying bullion could have allowed.

Though I wonder if the dollar cost averaging approach, or investing in small amounts over time produce different results. Since that’s much closer to how most people invest.

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avatar 16 Anonymous

Great thoughts on both accounts csdx!

I’ve made myself a note to run an analysis at some point for the PP using monthly dollar cost averaging. I believe that I didn’t think to include it in this analysis since I thought of this as a more “first pass” approach. But, it’d be worthwhile the check that! Good point.

Regarding recent performance of the PP, you’re right that the decorrelation is not as drastic as it was in the early 2000’s. However, I believe the PP still has had an effect in recent years of taking out some of the volatility of the stock market.

Listed below are the annual returns from 2008-2011 for the 100% stock portfolio on the graph vs. the PP. As you can see, some of the annual returns compared to the 100% stock portfolio are quite different.

100% stock portfolio Annual Returns
2008 – (-36%)
2009 – 9.9%
2010 – 16.4%
2011 – 6.6%

Permanent Portfolio Annual Returns –
2008 – (-25%)
2009 – 23.6%
2010 – 17.8%
2011 – 5.7%

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avatar 17 Anonymous

“25%” is obviously made up because it’s a nice, round number.

Also the time period you are studying was very good for gold. That’s surely going to throw the numbers way off. You need to study multiple periods, or even better, do a Monte Carlo simulation.

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avatar 18 Anonymous

Also, I wonder how this would integrate with the idea that your ability to earn a salary is part of your portfolio?
25% is your salary
25% is real estate – owning your house
25% is stocks
25% is bonds
One problem with this would be rebalancing. Maybe you could sell options on your house and/or future salary, and use the proceeds to buy stocks and bonds?

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avatar 19 Anonymous

@ Integrating salary and home ownership in to the asset allocation – From what I’ve read so far, trying to integrate the amount of equity you have in your home and your salary is a highly complex task – mainly because of the reason you mentioned (it’s hard to rebalance).

Because of this, I don’t take salary and home ownership in to consideration specifically in my overall asset allocation. However, I do have a general level that I try to target.

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avatar 20 Anonymous

Thanks for reading Steve. It was noted several times by other sites I read while researching for this article that the time I considered was especially good for gold.

You might be interested in the work that Crawling Road did in the “Craig from Crawling Road” link above. He actually analyzes the performance of the Permanent Portfolio from 1974-2008 vs a 100% stock portfolio and basically concludes that the returns are competitive, especially given the lower volatility of the Permanent Portfolio.

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avatar 21 Anonymous

I started using the Permanent Portfolio in Aug 2011, around the time you tried a test run. It’s not always beaten the market since.. and even in 2013, it has returned negative. But I’ve stuck with it to this day although I’ve made some modifications like you did by substituting certain assets and one even using leveraged ETFs (plz reply if you want the details.)

As a previous commenter said, diversification is a guarantee of mediocre returns and I couldn’t agree more. But although being undiversified may lead to greater returns, you also have a higher probability of losing money.. and the whole point of the Permanent Portfolio is to make this a remote possibility while growing your money faster than inflation in the long run.

As for correlations, I will only trust them with a grain of salt. Two assets with a long term correlation of -0.3 is likely to be negatively correlated over the long run but I won’t optimize and micromanage my weights by taking that -0.3 figure too literally. Correlations over the short and medium run can differ greatly from the long-term correlations. And during times of crisis, correlations can tend to behave in very unexpected ways (look back at the LTCM disaster in 1998 and the 2008 financial crisis for examples.)

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