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 ofstocks, 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 stock-bond 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—meaning rising prices—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 of stocks-to-bonds 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.
Example 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 Admiral Shares (VFIAX).
- 25% in long-term U.S. Treasury bonds, which do well during times of prosperity and during times of deflation—or lower prices—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.
FAQs
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 stock-bond portfolio.
Is the permanent portfolio a good investment? ›
The Permanent Portfolio, which launched in 1982, has longevity in its favor. Over the past 15 years, its return was significantly higher than its Morningstar category, Conservative Allocation. Alternatives play a prominent role in the strategy. The top holdings are gold coins, gold bullion and silver bullion.
Is the golden butterfly better than the permanent portfolio? ›
Golden Butterfly vs Permanent Portfolio
Both portfolios perform admirably when compared to historical data, but when subjected to backtesting, it turns out that the Golden Butterfly slightly but significantly outperforms the Permanent Portfolio on CAGR and risk-adjusted return.
What is a portfolio and example? ›
A portfolio is a set of pictures by someone, or photographs of examples of their work, which they use when entering competitions or applying for work. After dinner that evening, Edith showed them a portfolio of her own political cartoons.
What are the advantages and disadvantages of portfolio investment? ›
Portfolio investment is important for several reasons:
- Diversification. The primary advantage of portfolio investment is diversification. ...
- Potential for higher returns. While diversification mitigates risk, portfolio investment also offers the potential for greater returns. ...
- Tailoring to your needs. ...
- Fixed deposit.
So for example, you might hold two mutual funds, one representing the total U.S. stock market and the other representing the U.S. bond market. Then you might also invest directly in Treasury bills and gold bullion bars or coins. Once you have your permanent portfolio set up, managing it is fairly straightforward.
What is the withdrawal rate for permanent portfolio? ›
The 4% rule states that you withdraw no more than 4% of your starting balance each year in retirement, adjusted each year for inflation. This doesn't guarantee you won't run out of money, but it does help your portfolio withstand market downturns by limiting how much is withdrawn.
Who is the most successful long-term investor? ›
Warren Buffet
Warren Buffett is widely considered the greatest investor in the world. Born in 1930 in Omaha, Nebraska, Buffett began investing at a young age and became the chairman and CEO of Berkshire Hathaway, one of the world's largest and most successful investment firms.
Who has the most successful stock portfolio? ›
Warren Buffett's value investing prowess made him one of the wealthiest and most successful investors of all time. If you want to invest like Buffett, you don't have to guess too hard. Buffett's company, Berkshire Hathaway (BRK. A, BRK.
How much gold should I have in my portfolio? ›
Experts typically recommend devoting between 5% to 10% of your portfolio to it. "This amount aims to balance the benefits of diversification with the unique risks and fluctuations of the gold market," says Nicholas Ganesh, manager at Endeavor Metals Group.
How to build a diversified portfolio. A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds.
What is portfolio risk? ›
Portfolio risk refers to potential value fluctuations, leading to reduced returns or losses. Primary types of portfolio risk include market, liquidity, credit, inflation, reinvestment, currency, concentration, and political risks.
What is the purpose of a portfolio? ›
A portfolio is a compilation of work samples and professional documentation that serves as evidence of your skills and accomplishments. Many people choose to create and house their portfolio online, though some may still prefer a physical collection.
What are the cons of portfolios? ›
Disadvantages of a portfolio
Faculty time required to prepare the portfolio assignment and assist students as they prepare them. Logistics are challenging. Students must retain and compile their own work, usually outside of class. Motivating students to take the portfolio seriously may be difficult.
What is the downside risk of a portfolio? ›
Downside risk is an estimation of a security's potential loss in value if market conditions precipitate a decline in that security's price. Depending on the measure used, downside risk explains a worst-case scenario for an investment and indicates how much the investor stands to lose.
What are investors always told to do? ›
A universal rule that most young investors know is diversification, i.e. don't put all of your investing capital into one name. Diversification is a good rule of thumb, but it can also diminish your profits when one of your picks makes a big move while other names don't.
Which portfolio is best for investment? ›
An aggressive portfolio is ideal for someone with high risk tolerance and a lot of time to invest, while a conservative portfolio is better for someone with low risk tolerance and a short amount of time. A model portfolio doesn't necessarily make it the right portfolio for you.
What is the safest investment of all time? ›
The concept of the "safest investment" can vary depending on individual perspectives and economic contexts. But generally, cash and government bonds—particularly U.S. Treasury securities—are often considered among the safest investment options available. This is because there is minimal risk of loss.
Is my portfolio beating the market? ›
To "beat the market" means achieving a higher return on your investments than the overall performance of a designated benchmark. Outperforming a benchmark requires a combination of securities that are within the benchmark or applicable to the benchmark.
What is the difference between all weather portfolio and permanent portfolio? ›
The biggest difference between the All-Weather portfolio and the Permanent portfolio is the large portion of the cash that the Permanent portfolio holds. The 25% in cash that the Permanent portfolio allocated causes it to have a lower drawdown than the All-Weather portfolio.
