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. What is the difference between the cost of capital and the discount rate?

    Learn about the differences between the cost of capital and the discount rate as they relate to estimating a required return ...
  2. How does the market share of a few companies affect the Herfindahl-Hirschman Index ...

    Learn how the market share of a few firms affects the Herfindahl-Hirschman Index calculation and why the index jumps as market ...
  3. What does the rule of 70 indicate about a country's future economic growth?

    Find out more about the rule of 70, what it measures and what it indicates about a country's future economic growth rate.
  4. How is the rule of 70 related to the growth rate of a variable?

    Find out more about the rule of 70, what it is used for and how it is related to the growth rate of a variable.
RELATED TERMS
  1. Cape Cod Method

    A method used to calculate loss reserves that uses weights proportional ...
  2. Kenney Rule

    A ratio of an insurance company’s unearned premiums to its policyholders’ ...
  3. Discounted Future Earnings

    A method of valuation to estimate the value of a firm.
  4. Altman Z-Score

    The output of a credit-strength test that gauges a publicly traded ...
  5. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
  6. Gross Exposure

    The absolute level of a fund's investments.

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    Top 4 ETFs That Will Help Diversify ...

  2. Chart Advisor

    Silver Stocks Facing Major Resistance

  3. Chart Advisor

    Commodity Traders are Watching These ...

  4. Chart Advisor

    Copper Is Headed For A Pullback

  5. Mutual Funds & ETFs

    Top Commodities ETFs for Your Retirement ...

Trading Center