Is It Time For A Permanent Strategy?

By Aaron Levitt | May 07, 2012 AAA

While the worst may be behind us, there is still plenty of uncertainty facing the markets these days. Slowing growth in China, conflict with Iran and the continuing European debt saga are just some of the major headwinds facing the global economy. Add this to continued housing and jobs issues currently affecting the United States, and it's no wonder why investors are getting nervous. 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 various shocks. To that end, an old method of portfolio construction could be the key to a restful night's sleep and long-term consistent returns.

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A Strategy for All Seasons
Investors who worry about the market's continued volatility may want to consider Harry Browne's Permanent Portfolio for their asset allocation mix. At its simplest, Browne's portfolio gave exposure to four distinct asset classes with the idea that the mix was safe and profitable in almost any economic cycle. Historically, the equally weighted group of growth stocks, precious metals, cash and government bonds, have low correlations to each other and they rarely move in tandem. His original concept was that at any given time, a few of these components might underperform, but the other pieces of the puzzle would perform so strongly, that the portfolio would see an overall gain that outpaced any increase in inflation. The idea wasn't to have outrageous returns, but consistently steady ones.

Browne's strategy has lived up to its name since the 1980s. Between 1981 and 2010, the annual average return for the Permanent Portfolio was a juicy 8.4%, and only two years have seen losses. Even during the recent market crash back in 2008, the Permanent Portfolio was able to produce a 1.9% return for the year.

Browne's original mix called for an equal weighting among the four asset classes. Today, the Permanent Portfolio mutual fund (PRPFX) run by Michael Cuggino, uses a slightly different mix of asset classes, including Swiss Francs, real estate holdings and natural resource stocks. Likewise, the new Global X Permanent ETF (ARCA:PERM) tracks a similarly allocated portfolio equally each to four asset class categories. However, the basic principal remains the same: to preserve and increase purchasing power overtime.

SEE: Advantages And Disadvantages Of ETFs

Replicating Browne's Model
Overall, the permanent portfolio represents a great core strategy for investors and Browne's advocacy towards using broad index funds makes replicating it via exchange traded funds both easy and cost effective.

Today, an investor could create Browne's original portfolio by using four broad-based and heavily traded ETFs. The Vanguard Total Stock Market ETF (ARCA:VTI), iShares Barclays 20+ Year Treasury Bond Fund (ARCA:TLT), iShares Barclays 1-3 Year Treasury Bond Fund (ARCA:SHY) and SPDR Gold Trust (ARCA:GLD) can be used as the basic building blocks of the strategy. For those investors wanting to take fund manager Cuggino's lead and add the other pieces to the puzzle, exchange traded funds can also be used.

More than 15% of PRPFX fund is allocated towards natural resource stocks and global real estate securities. These firms with claims to "real assets" can act as inflation hedges as well as provide extra returns in booming markets as demand for their products rise. The Market Vectors RVE Hard Assets Producers ETF (ARCA:HAP) is one of the best broad based natural resources funds and includes weightings in everything from energy to water companies. Likewise, the SPDR Dow Jones Global Real Estate ETF (ARCA:RWO) provides access to both U.S. and international real estate companies.

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 (ARCA:FXF) offer exposure to the Swiss economy.

SEE: Using ETFs To Build A Cost-Effective Portfolio

The Bottom Line
Despite the market's recent gains, there's still uncertainty about the health of the global economy. Harry Browne's Permanent Portfolio could be the answer on how to create a steady core portfolio no matter what the market environment is. The proceeding picks, along with the addition of the ETFS Physical Silver Shares (ARCA:SIVR), are a great way to replicate the strategy.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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