A:

A permanent portfolio is a portfolio construction theory devised by free-market investment analyst Harry Browne in the 1980s. Browne constructed what he called the permanent portfolio, which he believed would be a safe and profitable portfolio in any economic climate. Using a variation of efficient market indexing, Browne stated that a portfolio equally split into growth stocks, precious metals, government bonds and Treasury-bills and rebalanced annually would be an ideal investment mixture for investors seeking safety and growth.

Harry Browne argued that the portfolio mix would be profitable in all types of economic situations: growth stocks would prosper in expansionary markets, precious metals in inflationary markets, bonds in recessions and T-bills in depressions. Acting on his beliefs, Browne eventually created what was called the Permanent Portfolio Fund, with an asset mix similar to his theoretical portfolio in 1982: 35% government securities, 20% gold bullion, 15% aggressive growth stocks, 15% real estate and natural resource stocks, 10% Swiss franc bonds and 5% silver bullion. Over a 25-year period, the fund averaged an annual return of 6.38%, only losing money three times. It outperformed the S&P 500 in the years immediately following the dotcom bust.

Although the fund was considered a successful investment for providing investors security with moderate growth, during the 1990s, the Permanent Portfolio Fund badly underperformed compared to the stock market. During that period, it was not uncommon for stocks the appreciate 20-30% annually, while the permanent portfolio rose just over 1% each year. Today, many analysts agree that Browne's permanent portfolio relied too heavily on metals and T-bills and underestimated the growth potential of equities and bonds. (To learn more, read Major Blunders In Portfolio Construction.)

RELATED FAQS
  1. Why is risk return tradeoff important in designing a portfolio?

    Learn how the risk return tradeoff is used in the construction of portfolios, and how modern portfolio theory seeks to diversify ... Read Answer >>
  2. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >>
  3. What does the end of the quarter mean for portfolio management?

    Take a deeper look at why the end of a financial quarter, and all of its accompanying reports, is a significant event for ... Read Answer >>
  4. The BEST definition of a benchmark portfolio is:

    The BEST definition of a benchmark portfolio is: a) A preset list of securities to be used to compare the performance of ... Read Answer >>
  5. How much of a diversified portfolio should be exposed to the metals and mining sector?

    Learn what criteria investors use to determine what percentage of their diversified portfolios should be exposed to the metals ... Read Answer >>
  6. How are negative correlations used in risk management?

    Learn about risk management and how negative correlations between assets are used to diversify and hedge risk associated ... Read Answer >>
Related Articles
  1. Professionals

    The Workings Of Equity Portfolio Management

    Achieve analytical efficiency by applying your evaluation to a key set of stocks.
  2. Investing News

    Brown Advisory: Investment Manager Highlight

    Learn more about Brown Advisory, including products the firm offers, asset classes it covers and background information about key professional team members.
  3. Trading Strategies

    5 Popular Portfolio Types

    Learning how to build these portfolios will increase your investing confidence and give you financial control.
  4. Investing

    What is Portfolio Management?

    Portfolio management is the act of maximizing the return on a portfolio. This is done with trading decisions made for the marketable securities in that portfolio. A portfolio manager, or a team ...
  5. Options & Futures

    Investing 101: Portfolios And Diversification

    It's good to clarify how securities are different from each other, but it's even more important to understand how their different characteristics can work together to accomplish an objective. ...
  6. Term

    Understanding Portfolio Investment

    Portfolio investment involves buying securities with the expectation of earning a return on them.
  7. Personal Finance

    What Exactly Does A Portfolio Analyst Do?

    Portfolio analysts have the exciting role of working between the investment team layers and they touch various aspects of an investment organization.
  8. Personal Finance

    Rebalance Your Portfolio To Stay On Track

    Like a tune-up for a car, this re-alignment should minimize trouble down the road.
  9. Investing Basics

    Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return is any investor's prime goal. The right mix of securities is the key to achieving your optimal asset allocation.
  10. Mutual Funds & ETFs

    Major Blunders In Portfolio Construction

    Do you have the best mix of investments? Find out how to make sure.
RELATED TERMS
  1. Permanent Portfolio

    A portfolio construction theory devised by free-market investment ...
  2. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment ...
  3. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  4. New Mexico State Investment Office Trust

    The New Mexico State Investment Office (SIO) is responsible for ...
  5. Trading Effect

    A measure of performance that examines the difference in returns ...
  6. Capital Growth Strategy

    An asset allocation strategy that seeks to maximize capital appreciation, ...

You May Also Like

Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center