What Is a Permanent Portfolio?

The permanent portfolio is an investment portfolio designed to perform well in all economic conditions. It was devised by free-market investment analyst, Harry Browne, in the 1980s. The permanent portfolio is composed of an equal allocation of stocks, bonds, gold, and cash, or Treasury bills.

Key Takeaways

  • The objective of a permanent portfolio is to perform well in any economic condition through diversity.
  • A permanent portfolio is composed of equal parts stocks, bonds, gold, and cash.
  • Historical performance has shown a permanent portfolio to perform well in the long-term but not as well as a traditional 60/40 portfolio.
  • The advantage is that a permanent portfolio reduces losses in market downturns, which may be beneficial for certain investors.

Understanding a Permanent Portfolio

The permanent portfolio was constructed by Harry Browne to be what he believed would be a safe and profitable portfolio in any economic climate. Using a variation on efficient market indexing, Browne stated that a portfolio equally split between growth stocks, precious metals, government bonds, and Treasury bills would be an ideal investment mixture for investors seeking safety and growth.

Advantages and Disadvantages of a Permanent Portfolio

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 Treasury bills in depressions.

Browne eventually created what was called the Permanent Portfolio Fund, with an asset mix similar to his theoretical portfolio in 1982. From 1976 to 2016, a hypothetical permanent portfolio would have generated an 8.65% annual return, for a total return of 2,600%. A more standard 60/40 portfolio would have generated a 10.13% annual return for a total return of 5,050%.

The permanent portfolio did have some advantages during this period, though. The 60/40 portfolio had a standard deviation of 9.6, compared with 7.2 for the permanent portfolio. During the October 1987 market crash, the 60/40 portfolio would have declined in value by 13.4%, while the permanent portfolio would have declined by only 4.5%. The permanent portfolio would have generated lower returns over the long term, but it would have been a much smoother ride. That makes the permanent portfolio an appealing option to risk-averse investors.

Construction of a Permanent Portfolio

There are many ways in which one can construct a permanent portfolio, given the multitude of investment opportunities available. Below is one suggestion on how to achieve this balanced mix:

  • 25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as the Vanguard 500 Index Fund (VFINX).
  • 25% in long-term U.S. Treasury bonds, which do well during times of prosperity and during times of deflation (but which do poorly during other economic cycles).
  • 25% in cash to hedge against periods of “tight money” or recession. In this case, “cash” means short-term U.S. Treasury bills.
  • 25% in precious metals (gold) to provide protection during periods of inflation. Browne recommends gold bullion coins.

Browne recommends rebalancing the portfolio once a year to maintain the 25% target weights.