Permanent Portfolio

Harry Browne was a libertarian politician and investment analyst (his life here). In 1998, he wrote a book called Fail-Safe Investing. Tired of so many financial experts, he tried to create an easy method to build and maintain an investment portfolio. He called it Permanent Portfolio.

The basis is really easy: you invest 1/4 of your money in cash (accounts and bonds of less than 1 year), 1/4 in bonds (Treasury bonds with a maturity of 25-30 years or high-grade corporate bonds of similar maturity), 1/4 in gold, and 1/4 in stocks (through a wide index ETF, SP 500 or Wilshire 5000). Once a year, we rebalance to keep the same percentage.

It´s possible to buy physical gold or use an ETF such as GLD. Also, there is an ETF that  exactly tracks this portfolio: PERM, except that instead of 25% of gold, it holds 20% of gold plus 5% of silver. The prospectus can be found here.

But how did this portfolio perform in the past?

We have played around with some figures from 1971 till 2011. The stock market itself made an average annual yield of 11.34%, while the Permanent Portfolio 9,95%. This difference can be offset by a much lower volatility for the second option. Not a single year the PP lost more than 5% with only 3 years with negative returns. However, the stock market had 8 years with losses (some of then as high as 39 and 37%).

In any case, under the present scenario, we are not happy holding bonds, so we try to calculate the PP with no bonds. First, if we've only bought stocks and gold, we would have obtained an annual return of  11.7%.with a maximum yearly loss of 18%, which we think it's acceptable. If we've added cash, the return would have been 10.2% with a maximum loss of 8,4% and only 5 years of minor negative yields. This last modification of the PP (1/3 stocks, 1/3 gold, and 1/3 cash) is a perfect option for safe investors.