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. 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 >>
Related Articles
  1. Financial Advisor

    5 Popular Portfolio Types

    Learning how to build these portfolios will increase your investing confidence and give you financial control.
  2. Financial Advisor

    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 ...
  3. Investing

    Understanding Portfolio Investment

    Portfolio investment involves buying securities with the expectation of earning a return on them.
  4. 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.
  5. Insurance

    How Good An Investment Is Life Insurance?

    Compared to other options, does it ever make sense to include cash-value life insurance in your investment portfolio? A look at the pros and cons.
  6. Financial Advisor

    Preparing For a Career as a Portfolio Manager

    Find out what it takes to win a spot in one of the most coveted financial careers.
  7. Investing

    Major Blunders In Portfolio Construction

    Do you have the best mix of investments? Find out how to make sure.
  8. Investing

    Mutual Fund Tune-Up Delivers High-Powered Performance

    Rebalancing your portfolio will protect you from risk and ensure that your investments are performing at their best.
  9. Managing Wealth

    Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return with the right mix of securities is the key to achieving your optimal asset allocation.
  10. Investing

    Top Uses For Bonds

    Find out what bonds can do for your investment portfolio.
RELATED TERMS
  1. Permanent Portfolio

    A portfolio construction theory devised by free-market investment ...
  2. New Mexico State Investment Office Trust

    The New Mexico State Investment Office (SIO) is responsible for ...
  3. Permanent Current Asset

    The minimum amount of current assets a company needs to continue ...
  4. Permanent Income Hypothesis

    A theory of consumer spending which states that people will spend ...
  5. Modern Portfolio Theory - MPT

    A theory on how risk-averse investors can construct portfolios ...
  6. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
Hot Definitions
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  2. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  3. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  4. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  5. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
  6. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
Trading Center