Financially reviewed by Patrick Flood, CFA.
The Harry Browne Permanent Portfolio is a simple, straightforward portfolio consisting of 4 equally-weighted assets. Here we’ll look at its components, historical performance, and the best ETFs to use in its implementation.
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What is the Permanent Portfolio?
The Permanent Portfolio is a simple 4-slice portfolio created by Harry Browne in the 1980’s and presented in his book Fail-Safe Investing in 2001. It looks like this:
- 25% Total US Stock Market
- 25% Long-Term Bonds
- 25% Cash
- 25% Gold
Not unlike the All Weather Portfolio, the Permanent Portfolio was designed to be a simple, diversified portfolio that could perform well in all economic conditions. Browne called it the Permanent Portfolio because, in his words, “once you set it up, you never need to rearrange the investment mix— even if your outlook for the future changes.”
Having only 4 assets at equal weights, it is easily accessible and understandable. Those 4 assets’ expected behaviors correspond to 4 economic climates as follows:
- Stocks – economic expansion
- Bonds – deflation
- Cash – economic recession
- Gold – inflation
Permanent Portfolio Review
I concede that Harry Browne’s Permanent Portfolio is indeed simple and diversified, and the concept sounds nice on paper. But I have a few problems with it.
First, there’s the relatively low allocation to stocks. We know that equities are usually the primary driver of a portfolio’s returns. At just 25%, the Permanent Portfolio doesn’t give enough room for stocks to shine.
Secondly, 25% of the portfolio is in cash. I’ll be the first to admit that cash is an oft-overlooked investment, but giving it 1/4 of the portfolio creates a significant opportunity cost in my opinion, especially when considering economic depressions are the least likely environment of the 4 aforementioned economic climates and young investors with a long horizon probably shouldn’t be holding cash. As such, I would think it’s intuitive to lower the allocation to cash, creating room for more stocks and/or more bonds. In fairness, cash is a decent inflation hedge.
Thirdly, there are no international (ex-US) holdings. International stocks and bonds have just recently become “accepted” diversification-boosting holdings in the last 25 years or so. Prior to that, they weren’t popular among institutional investors, so it makes sense that Browne didn’t include any when he designed the Permanent Portfolio in the 1980’s. Ideally I’d probably like to see at least an 80/20 split for both stocks and bonds between the US and ex-US assets.
Similarly, 25% to gold is much too high for my tastes. If you’ve read any of my other posts on portfolios that utilize gold, you know I’m not a fan of the metal. It has a nonnegative correlation to stocks, albeit low/small, is much more volatile than bonds, is not a value-producing asset (it has a real expected return of zero), and has not been a reliable inflation hedge historically. While it has offered protection in some inflationary periods in the past, we can’t reliably predict how gold will behave in the future.
I suspect the large emphasis on gold may be due at least partially to Harry Browne’s being the Libertarian Party presidential nominee in both 1996 and 2000. The Libertarian Party platform has a historical distrust of US monetary policy by the Federal Reserve and a suggestion of returning to the gold standard, wherein money is based on a fixed amount of physical gold.
Speaking of US monetary policy, your excitement – or lack thereof – over gold likely also depends on your view of it. I’m personally of the mind that monetary policy in the United States is a fundamentally different beast post-Volcker (1982), allowing us to [hopefully] avoid a hyperinflationary environment like we saw in the late 1970’s, when bonds suffered and gold did well.
In my opinion, similar to my point about the cash position above, in a long-term investment portfolio with an investment horizon of 20+ years, holding gold only creates an opportunity cost where you could have held something else in its place. That said, I’ll concede that it may offer a short-term diversification benefit, making for safer withdrawal rates in retirement, so adopting the Permanent Portfolio may very well be a prudent move at or near retirement, or for a risk-averse investor who wants to cover all bases for all environments to minimize volatility and risk, but even then I’d probably suggest the All Weather Portfolio or the Golden Butterfly Portfolio for that prescription. We can explore some comparisons of these below.
Permanent Portfolio Performance vs. S&P 500
Going back to 1987, we can compare the Permanent Portfolio to the S&P 500 index:
As we’d expect, the Permanent Portfolio does a great job of mitigating volatility and drawdowns and achieves a much greater risk-adjusted return than the S&P 500, but the S&P 500 has delivered a much greater return over that time period. Drawdowns are considerably smaller for the Permanent Portfolio:
Permanent Portfolio vs. Golden Butterfly Portfolio
The Golden Butterfly Portfolio simply takes those same assets in the Permanent Portfolio and specifically adds Small Cap Value, a move that I’m a fan of. This invariably makes it comparatively more “aggressive” than the Permanent Portfolio, but we’re still talking about a relatively low-volatility, all-seasons portfolio.
In taking up a larger stock position, we’re also tilting toward an expansionary economic environment. I’m okay with this; the economy grows more than it declines. Your adoption thereof may depend on your economic outlook. We’re also simultaneously decreasing the allocations to cash and gold, which should also bode well for higher returns.
Here’s some backtesting comparing the two:
As we’d expect, going back to 1978, we see a greater CAGR and Sharpe for the Golden Butterfly, with slightly more volatility. This is a clear win for the Golden Butterfly Portfolio in my mind.
Permanent Portfolio vs. All Weather Portfolio
Compared to Ray Dalio’s All Weather Portfolio, we’re talking about more gold, more cash, less stocks, and less treasuries with the Permanent Portfolio. Like the Permanent Portfolio, the All Weather Portfolio is designed to “weather” any storm by utilizing diversification.
Interestingly, like Browne, Dalio also chooses to be market-agnostic with the All Weather Portfolio, admitting that we don’t know what the future will hold, yet the allocations therein are obviously very different.
With data for the Commodities sector only going back to 2007, here’s what the comparison looks like through the end of 2019:
Results have been pretty close for that time period. The All Weather Portfolio still wins out on CAGR and risk-adjusted return (Sharpe), with volatility being nearly identical.
Let’s explore an alternative. If you’re like me, you might replace Commodities in the All Weather Portfolio with Utilities (I delved into this here). Making that change, we can get data going back to 1992, and the results are more telling:
The All Weather beats the Permanent Portfolio handily on CAGR and risk-adjusted return (Sharpe), and with only slightly more volatility.
Permanent Portfolio ETF Pie for M1 Finance
M1 Finance is a great fit for the Permanent Portfolio thanks to its zero transaction fees, dynamic rebalancing for new deposits, and one-click manual rebalancing. I wrote a comprehensive review of M1 Finance here.
Utilizing mostly low-cost Vanguard funds, we can construct the Permanent Portfolio pie for M1 Finance with the following ETF’s:
- VTI – 25%
- VGLT – 25%
- VGSH – 25%
- SGOL – 25%
Taking the Permanent Portfolio International
As I noted earlier, the Permanent Portfolio doesn’t have any international exposure. Taking the stocks global simply requires replacing VTI (Vanguard’s total US stock market) with VT (Vanguard’s total world stock market). The portfolio and subsequent pie then look like this:
- VT – 25%
- VGLT – 25%
- VGSH – 25%
- SGOL – 25%
Leveraged Permanent Portfolio
What about creating a leveraged Permanent Portfolio? The Permanent Portfolio itself isn’t super impressive in my opinion. But, as with the All Weather Portfolio, levering up those same assets may enhance returns while maintaining a reasonable risk profile similar to that of a 100% stocks position.
Just remember that using leverage – especially in the form of leveraged ETFs – increases portfolio risk and the potential for greater returns, but also the potential for greater losses. Do your own due diligence and read the fine print on these products.
Having 25% cash and 25% long bonds is roughly the same as 50% intermediate bonds. Ideally, a 3x leveraged Permanent Portfolio would look like this:
- 25% 3x U.S. Stocks
- 50% 3x Intermediate Bonds
- 25% 3x Gold
Unfortunately, there are now no 3x gold ETFs available after UGLD went away. The next best option is UGL, which is 2x gold. Using that, we can achieve the intended exposure at 2.67x leverage like this:
UPRO – 22%
TYD – 45%
UGL – 33%
You can add this pie to your portfolio on M1 Finance using this link.
Here’s how this would have worked out historically going back to 1987 versus the Permanent Portfolio and the S&P 500:
Interestingly, the leveraged version achieved higher general and risk-adjusted returns than the “normal” unleveraged Permanent Portfolio and the S&P 500.
You can add this pie to your portfolio on M1 Finance using this link.
Disclosures: I am long UPRO.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.