In this chart I am simply tracking 100 dollars’ worth of gold purchased at the end of 1971 and adjusting for inflation. The vertical axis is scaled logarithmically. It is clear that there were plenty of opportunities to lose or make a fortune, making it a risky asset to hold in isolation.
However, we can see that the Permanent Portfolio (using Simba’s backtesting spreadsheet and adjusting for inflation) provided consistent returns. It hugged its CAGR closely, providing relatively consistent gains in purchasing power for the investor. Now, the PP is 25% gold and we just saw how risky gold was in isolation. Would removing gold have made the Permanent Portfolio’s returns even smoother? No.
Although gold was risky in isolation, the PP was riskier without it because gold hedges against unique risks. I would never hold gold in isolation, but I value its role in my portfolio. One must look at the asset class’ contribution to portfolio risk. In the context of the PP, holding gold reduced portfolio risk.
In this post I was very careful to use past tense language, because we are dealing with backtesting. However, the PP was created with macroeconomic principles guiding the asset allocation. The asset classes have correlations that change depending on the economic seasons, and one of the asset classes is usually pulling the portfolio while another acts as a drag on performance. Additionally, the PP was created by Harry Browne in the early 80s, and it has performed as prescribed even after Harry Browne’s death. Thus it would be a mistake to see the portfolio as a backtesting aberration.
The trick is letting the portfolio work, and not getting distracted by the risks/rewards of any individual component. Almost everyone has an asset class they hate in the PP, you just have to plug your nose and buy the package.