The Permanent Portfolio

After discovering that long bonds and gold provide robust diversification with respect to the stock market, I needed to find a portfolio that synthesized these findings into an elegant package.

I was fortunate enough to stumble upon the Permanent Portfolio, created by Harry Browne. Harry Browne was a successful speculator in the 1970s, but after much reflection he realized he had gotten lucky. His experience led him to believe that financial markets were unpredictable and he wanted to create a portfolio that reflected that assumption. Guessing where the economy was headed seemed like a foolish thing to do with money that he wanted to preserve. He wanted a portfolio that could grow during times of inflation, deflation, prosperity, or recession.

These desires led him to create what he called a Permanent Portfolio. It is called the Permanent Portfolio (PP) because it is an allocation that is timeless. The goal is to not favor any of the economic environments, but to profit from all of them.

Most importantly, the PP was designed to rarely lose money. In the past 38 years, the PP has endured only 4 years with losses. The biggest loss for a year was 5.17% in 1981. Incredibly, through out this same time period the PP has grown at a compound annual growth rate of 9.22%. This competes with the 9.92% compound annual growth rate of stocks. Stocks were much riskier, losing money 10 of the past 38 years. The worst year for stocks was 2008, where they lost 37.04% of their value.It is time to quit teasing, and break down the asset allocation.

The portfolio consists of:
  • 25% Stocks
  • 25% Long Term Treasuries (20-30 years)
  • 25% Gold
  • 25% T-Bills
At first glance the allocation appears speculative, risky, foolish, and overly simplified. Many investors would gag upon looking at it.

“Only 25% equities? That’s too conservative. We all know stocks are the best asset class for the long run!”

“Long term treasury bonds? Intermediate term bonds offer similar yield with lower volatility! Why would I take on that much unnecessary duration risk?”

“25% Gold? I’m an investor, not a speculator! How can a bunch of shiny bricks with negative yield help me build wealth over the long run?”

“25% T-bills? That is the last straw. Cash is the worst asset class ever, I’m trying to build wealth not watch the government inflate it all away!”

When most investors look at the Permanent Portfolio, they see the asset classes in isolation. They fail to see how the different asset classes work together in the portfolio. Each asset classes has such extreme strengths and weaknesses, it would be crazy to hold any of them on their own. However, I propose that the assets be seen as a recipe for consistent inflation adjusted returns.

I wonder what these investors think when faced with a cookie recipe of:
  • Flour
  • Butter
  • Sugar
  • Chocolate Chips
  • Baking Soda
  • Salt
“Ugh! Flour? That’s disgusting. Flour tastes horrible. Why would I want a cookie with flour? Just give me some chocolate chips. Everything else in there is gross!”

Everyone knows that cookies are delicious, and the investor that looks at the ingredients in isolation is missing out. The PP is like a cookie because the components that comprise it are so extreme and none of them are good on their own. However, the different asset classes perfectly complement each other, creating a well-balanced portfolio. In fact, I find the risk adjusted returns quite delicious.

To understand the balance, let’s look at the macro economic factors that affect the economy. The economy can have inflation, deflation, prosperity or recession. The PP exploits each of the cycles through its asset allocation.

  • Inflationary risks not compensated for in bond yields favor gold as an alternative currency.
  • Deflationary risks favor the fixed payments of long-term government bonds.
  • Prosperity fuels corporate profit growth, translating into higher stock prices and dividend payouts.
  • Recessions caused by aggressive Fed tightening favor T-Bills.



As expectations regarding the future direction of the black dot change, asset markets respond. Through its asset allocation, the Permanent Portfolio ensures that you always hold an asset that fundamentally benefits from changes in sentiment for both directions on both axes.

Usually, one or two of the asset classes is doing phenomenally while the others lag behind. However, the PP doesn't try to predict which one will shine. So when any asset class takes up as much as 35% of the portfolio because of an incredible run, the gains are distributed back into the other assets bringing everything back to 25% weightings. This rebalancing ensures that the portfolio is ready for any economic condition. The rebalancing action is why the portfolios assets cannot be viewed in isolation. Through rebalancing, the individual assets function as a team where different assets carry the weight during different cycles.

When you buy the Permanent Portfolio you are embracing the unpredictability inherent in financial markets. Rather than trying to make extreme bets about the macroeconomic future, you have diversified yourself into a relatively neutral position. When I fall asleep at night there is no asset class that I am rooting for and I have no predictions about which asset class will outperform the others.

Many people see the 25% gold position and mistakenly think I am some sort of a gold bug with apocalyptic assumptions. But honestly, what kind of a gold bug would buy a 30 year Treasury bond? If you want to be more realistic, I am equal parts stock bug, bond bug, gold bug, and cash bug, or as I like to call it: diversified.

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1 comment:

  1. "Everyone knows that cookies are delicious, and the investor that looks at the ingredients in isolation is missing out. The PP is like a cookie because the components that comprise it are so extreme and none of them are good on their own. However, the different asset classes perfectly complement each other, creating a well-balanced portfolio. In fact, I find the risk adjusted returns quite delicious. "

    This is such a delightful analogy! I like the comparison to baking/cookies - For a long time I was also one of the ingredient pickers (And clearly I am biased that way towards stocks, especially regarding the long-run fallacy we've talked about). I think this is one of the strongest arguments against a stock (or stock/bond) only portfolio... But I'm also glad you had a more in-depth analysis of why you chose each particular asset class.

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