Harry Browne’s Permanent Portfolio

The Permanent Portfolio often sparks a passionate debate in the Bogleheads forum. For example, this epic 83 page discussion (72 pages here, continued for another 11 pages here). Why does this portfolio generate such an intense dichotomy?

Let’s start with Harry Browne’s own words:

harrybrowne

Harry Browne (1933 -2006)

For the money you need to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio. I call this a “Permanent Portfolio” because once you set it up, you never need to rearrange the investment mix— even if your outlook for the future changes. The portfolio should assure that your wealth will survive any event — including an event that would be devastating to any individual element within the portfolio… It isn’t difficult or complicated to have such a portfolio this safe. You can achieve a great deal of diversification with a surprisingly simple portfolio.”

Portfolio composition

The Permanent Portfolio investment strategy is based on the economic cycle, which is composed of four basic categories:

  1. Prosperity
  2. Inflation
  3. Deflation
  4. Recession

Four asset classes provide a means of profiting during each of these four economic states, without having to forecast or predict their uncertain arrival or duration.

  • Stocks – for profit during periods of general prosperity and/or declining inflation.
  • Gold – for profit during periods of bad inflation; during inflationary episodes gold bullion provides protection against a falling currency and other potential problems.
  • Long Term Bonds – for profit during periods of declining interest rates; and especially during a deflation. Bonds also do reasonably well during prosperity.
  • Cash – During a recession, no particular asset class is going to do well. The cash in a Treasury Money Market Fund offers stability when portfolio asset classes fall in price. It also protects purchasing power during a deflation.

Equal allocations of these four major asset classes comprise the Permanent Portfolio. For US investors, the portfolio would consist of the following portfolio components:

US Permanent Portfolio
USpermport

  • US total stock market: 25%
  • Gold bullion: 25%
  • US long-term treasury bonds: 25%
  • US treasury bills: 25%

 

 

Portfolio characteristics

Let’s compare this portfolio against the characteristics for a “Bogleheads-style” portfolio. The Permanent Portfolio:

  • Uses passive management and does not time the market
  • Is low cost
  • Is simple and widely diversified

All of which align to the Bogleheads-style of investing. So why the malcontent?

First, it holds cash (treasury bills) and long-term bonds, which is not desirable from a Bogleheads approach.

The inclusion of gold is a subject unto itself. To briefly summarize; the use of a commodity for long-term investing is discouraged in Bogleheads-style investing.

Additionally, the Permanent Portfolio is a fixed allocation which does not adjust the stock allocation based on age.

Making Lemonade

Boglehead modifications to the Permanent Portfolio could include the following:

Since a combination of cash and long-term treasuries produces an intermediate-term duration, a Bogleheads-style investor might substitute an intermediate-term treasury bond fund for the fixed income allocation.

A Bogleheads-style investor might reduce the gold allocation and increase the equity allocation.

In Harry Browne’s portfolio theory, these changes in overall portfolio allocation would be implemented through a variable portfolio that could hold any asset class or strategy with capital the investor can afford to lose. (The word “Permanent” was used by Harry Browne to create a contrast with what he called a “Variable” portfolio – money you could afford to lose to speculation. “Permanent” refers to the fixed allocation. See this post.)

Historical performance

Bogleheads forum member Craig Rowland maintains historical performance of the Permanent Portfolio on his website, Crawling Road (1972 – 2012). Data for 2013 is here.

The performance metric is Growth of $10,000, which does not include transaction costs. While purchasing Treasury bills and bonds can be done directly at an auction with zero transaction costs, the purchase of gold bullion can be subject to commissions and premiums over the bullion price.

A Permanent Portfolio can also be constructed using Blackrock iShares ETFs (Exchange Traded Funds).

Permanentportfolio

  • 25% iShares Core S&P Total Market ETF
  • 25% iShares Gold Trust ETF
  • iShares 1-3 yr. Treasury Bond ETF
  • iShares 20+ yr.Treasury Bond ETF

Below is the historical performance of the iShares Blackrock Permanent Portfolio for the time period in which gold bullion ETFs were available (2006). The source for these tables is on Google Drive.

The iShares funds can be held at Fidelity, or  TD Ameritrade,  which offer no-commission purchases and sales of the iShares Total stock market ETF, (Fidelity), the iShares Russell 3000 ETF (Ameritrade), the iShares 20+ Treasury bond ETF, and the iShares 1-3 years Treasury bond ETF. The gold ETF is the only holding that would incur a commission.

ETFs will also incur spread and premium/discount costs.

iShares Permanent Portfolio Returns

Year Total Market (ITOT) Gold (IAU) Long Treasury (TLT) T-Bill (SHY) Permanent Portfolio
2013 32.67% -27.94% -13.91% 0.23% -2.24%
2012 15.98% 8.37% 3.25% 0.31% 6.98%
2011 1.55% 5.66% 33.60% 1.43% 10.56%
2010 16.15% 27.94% 9.26% 2.22% 13.89%
2009 27.06% 23.46% -21.53% 0.54% 7.38%
2008 -36.78% 5.45% 33.77% 6.64% 2.27%
2007 5.26% 30.95% 10.14% 7.30% 13.41%
2006 15.13% 22.33% 0.85% 3.84% 10.54%

iShares Compound Annual Growth Rate (CAGR)

iShares CAGR Std dev
3yr CAGR 4.96% 6.60%
5yr CAGR 7.18% 6.02%
8yr CAGR 7.72% 5.55%

Below is the historical performance of a Vanguard Permanent Portfolio for the time period in which gold bullion ETFs were available (2005). The source for these tables is in the Google Drive file mentioned above.

Since Vanguard has closed its treasury money market fund, the short-term Treasury fund is used in place of T-bills. The gold ETF (GLD) is not a Vanguard fund and would therefore incur commission and transaction costs.

Vanguard Permanent Portfolio Returns

Year TSM (VTSMX) SPDR (GLD) Long Treasury (VUSTX) Short Treasury (VIFTX) PP with ST Treasury
2013 33.35% -28.09% -13.03% -0.10% -1.97%
2012 16.25% 5.26% 3.47% 0.69% 6.42%
2011 0.96% 11.20% 29.28% 2.26% 10.93%
2010 17.09% 27.25% 8.93% 2.64% 13.98%
2009 28.70% 27.12% -12.05% 1.44% 11.30%
2008 -37.04% 2.99% 22.52% 6.68% -1.21%
2007 5.49% 31.07% 9.24% 7.89% 13.42%
2006 15.51% 23.44% 1.74% 3.77% 11.12%
2005 5.98% 16.65% 6.61% 1.77% 7.75%

Vanguard Compound Annual Growth Rate (CAGR)

Vanguard CAGR Std dev
3yr CAGR 4.99% 6.54%
5yr CAGR 7.98% 6.26%
8yr CAGR 7.83% 6.34%
9yr CAGR 7.82% 5.93%

 Is the Permanent Portfolio Right for You?

The Permanent Portfolio has over 30 years of empirical evidence supporting the approach of a simple, diversified portfolio. Why is it so controversial? There are two major sticking points.

First, the use of gold as an investment. Holding a commodity which also serves as a currency is the single most intensive point of contention in the Bogleheads forum.

The second point comes down to the willingness of investors to persevere for the long-term. According to this article by William Bernstein,

And therein lies the real problem with the TPP [Theoretical Permanent Portfolio]: because of its huge tracking error relative to more conventional portfolios, it attracts assets and adherents during crises, then sheds them in better times. There’s nothing wrong with Harry’s portfolio—nothing at all—but there’s everything wrong with his followers, who seem, on average, to chase performance the way dogs chase cars…

Many investors currently have the Harry Browne portfolio. The 1990s stampede of assets out of PRPFX  [a mutual based on a variant of the Harry Browne portfolio] and the more recent stampede back in suggest that few will turn out to have the Harry Browne right stuff.

For further reading: Craig Rowland & J. M. Lawson are the authors of The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy, which updates the portfolio idea with modern funds and other topics without turning it into a commercial. The book answers almost every possible question there is about the Permanent Portfolio and is one of Taylor Larimore’s Investment Gems.

Comments to this article are contained in the post:
Blog: Harry Browne's Permanent Portfolio

From the Permanent Portfolio Discussion Forum:

Comments to this article are contained in the post:
Bogle blog post on the Permanent Portfolio Discussion Forum


 – Thanks to Barry Barnitz for providing oversight in the writing of this article.