DEFINITION of 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 equal allocation of stocks, bonds, gold and cash or Treasury bills.
BREAKING DOWN 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 of 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.
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 percent annual return, for a total return of 2,600 percent. A more standard 60/40 portfolio would have generated a 10.13 percent annual return for a total return of 5,050 percent.
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 13.4 percent, while the permanent portfolio would have declined only 4.5 percent. 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 the Permanent Portfolio
- 25 percent 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 VFINX (Vanguard 500 Index) or FSMKX (Fidelity Spartan 500 Index).
- 25 percent 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 percent in cash to hedge against periods of “tight money” or recession. In this case, “cash” means short-term U.S. Treasury bills.
- 25 percent 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 percent target weights.