November 16, 2011: Too Conservative?

The Permanent Portfolio can appear too conservative for many investors because of its 25% allocation to T-Bills. However, it is important to realize that all of your finances can be seen as a single portfolio, especially with the PP.

Traditional investment advice usually advocates building up a solid emergency fund that can be used as a buffer to pay bills if unemployment strikes. This emergency fund is usually conceptualized as a totally separate portfolio from one’s long-term investments.

For example, an investor might claim to have an 80/20 stock bond portfolio because they have $80,000 in stocks and $20,000 in a total bond market fund. Even if they have another $20,000 in emergency funds they don’t include this when citing their asset allocation.

Many Permanent Portfolio investors, myself included, choose to forego the separate emergency fund because we essentially have an emergency portfolio. Most emergency funds are in short-term bonds, and the Permanent Portfolio already includes a 25% allocation to T-Bills. It essentially has an emergency fund built into the portfolio.

For maximum liquidity, I think it makes sense to allocate a portion of the recommended 25% T-Bills into an FDIC insured savings account. FDIC savings accounts are slightly riskier than T-Bills when it comes to default risk, but they are extremely accessible.

For example, I think a 100K Permanent Portfolio’s cash position could easily be:

• $8,000 in T-Bills held at Broker A
• $8,000 in T-Bills held at Broker B
• $4,500 in FDIC savings at Bank A
• $4,500 in FDIC savings at Bank B

The savings accounts offer the same protection from rising interest rates that T-Bills do, but with greater accessibility. If an emergency occurs, you might not have time to immediately sell your T-Bills on the secondary market and gather the proceeds. I think this kind of mix gives investors the best of both worlds.

Although the Permanent Portfolio appears simple at first glance, I am still amazed by its tremendous flexibility. Harry Browne’s PP is more than a portfolio; it is a financial lifestyle. There are many benefits to the allocation that do not reveal themselves at first glance, and the built in emergency fund is just one of them.

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