When Harry Brown created the Permanent Portfolio, he tried to avoid thinking about the markets, he tried to avoid timing the stock market... He just tried to prepare a combination of assets to weather any possible economic situation (deflation, inflation, growth...). His proposal was 25% stocks, 25% long-term bonds, 25% cash, and 25% gold. So far, his portfolio has done great. His idea was not to beat the SP500, but to soften the drawbacks.
On the left, we can see a chart of a fund called Permanent Portfolio (PRPFX). It is actively managed, so it doesn't track Harry's original allocation to 100%, but it is a pretty good benchmark. Also, you can find an ETF that it's similar to Harry's with the ticker PERM. In both, we see THE BAD MOMENTS ARE NOT SO BAD AND THEY DON'T LAST MUCH.
But every expert tries to customize his portfolio to a certain degree. Some will add silver because they think the gold/silver ratio is very favorable, others REITs to find more uncorrelated assets, and others are not happy holding long-term bonds because of a possible bubble there, so they have removed them from the portfolio creating a triangle with 1/3 stocks, 1/3 cash or short-term bonds, and 1/3 gold. Following the last approach, we have changed the weights of these 3 elements trying to lower the risk (so not 1/3 of each). With our percentages we get very smooth returns.
The chart on the right shows these returns (click on it to enlarge on separate window). But why do we see 3 curves? Harry wanted to rebalance the weights of the components of the portfolio every year. According to our Montecarlo simulations, rebalancing is always good, because it's like cost averaging and historically you get an extra 1% return a year with less standard deviation. That is why, on the graph, we have drawn our modified portfolio with annual rebalancing, without rebalancing, but also we have shown the curve for double the official inflation to make sure we beat the real inflation with our portfolio.
But every expert tries to customize his portfolio to a certain degree. Some will add silver because they think the gold/silver ratio is very favorable, others REITs to find more uncorrelated assets, and others are not happy holding long-term bonds because of a possible bubble there, so they have removed them from the portfolio creating a triangle with 1/3 stocks, 1/3 cash or short-term bonds, and 1/3 gold. Following the last approach, we have changed the weights of these 3 elements trying to lower the risk (so not 1/3 of each). With our percentages we get very smooth returns.
