While the worst may be behind the stock market, there is still a level of uneasiness with money managers. Another round of quantitative easing is in the cards, debt problems still plague Europe, and poor weather is wreaking havoc with the commodities markets. There is certainly a lot to be worried about, and this fear has many investors looking for the best portfolio mix to steadily grow their assets, while protecting against crises. They may find the desired mix in an old method of portfolio construction.

IN PICTURES: 7 Forehead-Slapping Stock Blunders


Harry Browne
The permanent portfolio method of portfolio construction was created by free-market investment analyst and a two-time Libertarian Party candidate for President, Harry Browne, in the 1980s. Browne's portfolio gave exposure to growth stocks, precious metals, cash and government bonds, with the idea that the mix was safe and profitable in almost any economic cycle. Historically, these asset classes have low correlations to each other, and they rarely move in tandem. By exploiting this fact, Browne was able to create a portfolio of various moving parts that has produced an after-tax gains of 9.34% over the past ten years, compared to the 1.59% loss by SPDR S&P 500 (NYSE:SPY).

Browne's original mix called for an equal weighting among the four asset classes. Today, the Permanent Portfolio mutual fund (NASDAQ:PRPFX) is currently run by Michael Cuggino, and it uses a slightly different mix of asset classes. However, the basic principal is the same. From 2003 to 2009, the original mix of U.S. bonds and dollar denominated assets - gold, growth stocks, natural resources, real estate, Swiss Francs and silver - has produced an annual return of 8.92%

Replicating the Strategy
The permanent portfolio represents a great core strategy for investors. With the birth and wide adoption of exchange traded funds, investors can replicate Browne's model easily. This also allows investors to tweak the portfolio as they see fit. The portfolio is not a trading vehicle, but should be rebalanced about every six months to keep the percentages in check. Browne advised having a separate "speculative portfolio" for individual stocks and side bets.

Allowing for gains in prosperous times, the fund allocates a 15% weighting towards growth stocks. Browne advocated using an indexing strategy rather than individual stock picking. Investors can add the iShares S&P 500 Growth Index (NYSE:IVW), which follows the 308 growth stocks within the S&P 500. The Vanguard Small Cap Growth ETF (NYSE:VBK) can be used to add higher growth small-caps. (For related reading, take a look at How to Play the Small-Cap Comeback)

Acting as an inflation hedge, the portfolio weights 25% to precious metals. The new ETFS Physical Precious Metal Basket (NASDAQ:GLTR) holds gold, silver, platinum and palladium. This gives investors easy access to not only the hot gold market, but also the industrial demand for silver and palladium.

Fifteen percent of the portfolio is domiciled in natural resource stocks and real estate. The Market Vectors RVE Hard Assets Producers ETF (NYSE:HAP) is one of the best broad based natural resources funds, with weightings in everything from energy to water companies. The SPDR Dow Jones International Real Estate (NYSE:RWX) is the most traded international REIT fund and can be used for a proxy for the sector.

For the 35% devoted to bonds and treasuries, many permanent portfolio followers believe in owning a ladder of individual U.S. Treasury bonds. The only ETF that does this is the PowerShares 1-30 Laddered Treasury (NYSE:PLW), which owns bonds from the entire yield curve spectrum. Investors can also use the popular iShares Barclays Aggregate Bond (NYSE:AGG) as a substitute.

Finally, nearly 10% is allocated towards Swiss assets, which are seen as another "safe haven". Both the iShares MSCI Switzerland Index (NYSE:EWL) and CurrencyShares Swiss Franc Trust (NYSE:FXF) offer exposure to the Swiss economy.

Bottom Line
Despite the market's recent gains, there's still uncertainty about the health of the global economy. Many are looking for ways to play it safe, while still participating in any upswing in the markets. The answer could lie with exchange traded funds. And Harry Browne's permanent portfolio model can help you choose the best ETFs to create a steady, core portfolio. (For related reading, take a look at Permanent Portfolio Locks In Long-Term Profits.)


Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
  6. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
  10. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Lion economies

    A nickname given to Africa's growing economies.
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!