Many debates seem to eternally rage on in the investing world — passively vs. actively managed funds, stocks vs. bonds, risk vs. security. However, one thing that most experts agree on is that the constant churn of trying to update one’s portfolio to meet market conditions is almost always a losing battle. Finding a course and sticking to it wins out practically every time. To that end emerges the Harry Browne permanent portfolio.
The tides of the financial markets are constantly changing — inflation, deflation, bull markets, bear markets, and so on. Many investors find themselves reacting to these changes, adjusting their portfolios to the current climate, often to their detriment. Solutions like the permanent portfolio propose a different path. In this alternative, you align your portfolio to something that makes sense from the get-go and stays aligned with your goals no matter the fleeting whims of the economic tide.
What Is the Harry Browne Permanent Portfolio?
Harry Browne developed the permanent portfolio as a simple strategy for allocating one’s investments. With just four assets in equal proportion, the permanent portfolio prioritizes simplicity as much as predictability and security.
Amid continuously churning financial markets and a world that is often hard to predict, many strategies take different approaches to managing economic uncertainty. Some strive for outsized growth by taking risks and seeking significant opportunities hidden in plain sight. Others favor broad-market indexes like the S&P 500 to ride the waves of the economic tides, wherever they may lead. Some hyper-cautious investors put all their capital into commodities and cash instruments, preserving the value of their assets at the opportunity cost of growth.
Somewhere between these varied options sit optimistically conservative approaches like the permanent portfolio.
The permanent portfolio blends the capital preservation of cash and commodities with stocks’ and bonds' income and growth potential.
As its name implies, the idea behind the permanent portfolio is to have a strategy you can stick with for the long haul, no matter what. Whether stock prices are rising or falling, in times of economic prosperity or global belt-tightening, the permanent portfolio seeks simple, reliable, modest growth without wagering its principal on a risky bet.
Who Is Harry Browne?
Before committing to a new financial strategy, considering its source is always a wise idea. In the case of the permanent portfolio, that source is Harry Browne. Browne had a storied career as a writer, investing expert, and former US presidential nominee.
Although Harry Browne passed away in 2006, his legacy lives on through his works and timeless personal finance advice. He spent much of his life as a financial advisor, equipping countless individuals to live freer lives empowered by good economic sense.
During his time, Browne published several books on finance and economics, including Fail-Safe Investing: Lifelong Financial Security in 30 Minutes. With this work, Browne first introduced the idea of the permanent portfolio.
Permanent Portfolio Allocation
Even among simple, easily manageable portfolios, the permanent portfolio is relatively straightforward. It requires only four investments, with assets divided into even quarters between them:
- 25% Total Stock Market
- 25% Long Term Bonds
- 25% Cash
- 25% Gold
This allocation is easy to understand, remember, and implement with only four low-cost index funds.
The philosophy behind the portfolio structure is also simple and elegant. There are four essential market conditions that can affect portfolio management: bull markets, bear markets, inflation, and deflation. Each of these conditions can harm or benefit different asset classes differently. For instance, a bull market is, by definition, good for rising stock prices. However, bull markets can negatively impact bonds and commodities.
Harry Browne aimed to cover investors for all four of these conditions in designing the permanent portfolio. That way, no matter what is happening in the economy, at least one portion of the portfolio will have room to grow while others mitigate risk.
Permanent Portfolio vs. Similar Options
The allocation and the philosophy behind the permanent portfolio are pretty similar to options we’ve covered before, including the golden butterfly and the Ray Dalio all-weather portfolio.
To better understand the nuances of these three options, let’s compare all three portfolios side-by-side.
|Golden Butterfly Portfolio
|All Weather Portfolio
The three portfolios divide their components across similar asset classes, though not in entirely the same ways. All include diversified equity investments, but none do so with more than half their assets. In other words, all three options are less aggressive on stock than most portfolios outside the sphere of those in or nearing retirement.
The all-weather, the golden butterfly, and the permanent portfolio all make significant room for bonds and commodities alongside equity investments. This trend is in keeping with the shared philosophy of the three portfolios to maintain exposure to several asset classes to prepare for varying market states.
Uniquely among this class, the permanent portfolio is the only option to equally set all of its allocations at 25% each, giving no preference for one market condition over another. It is also the only of the three portfolios to include cash, which it does in significant proportion.
With the smallest stock component and only cash component, the permanent portfolio is easily the most conservative of these three options.
Philosophy can only get an investor so far without considering real-world performance. Let’s examine how a sample permanent portfolio would have performed over the last ten years and how it stacks up against some of its alternatives.
Data source: calculations and charts from portfoliovisualizer.com with author’s input
The above graph tracks a hypothetical $10,000 investment over the 10-year period from 2013 to the end of 2022. By the end of that period, the permanent portfolio would have earned a cumulative 58.4% return on the initial investment. By comparison, the all-weather and golden butterfly portfolios would have achieved 67.6% and 79.5% growth, respectively. The S&P 500 benchmark achieved 222% growth over the same timeframe.
These performance numbers track pretty consistently with the aggressiveness of each portfolio. With the highest stock allocation, the golden butterfly saw the most long-term growth. The permanent portfolio, with the most cautious distribution overall, saw the least.
However, it is worth noting that long-term growth may not be every investor’s top priority, particularly when comparing conservative portfolio strategies like these. All three portfolios, the permanent in particular, see much less volatility during economically tumultuous times.
Implementing the Permanent Portfolio
For anyone looking to implement a permanent portfolio as part of their investment strategy, it is quite straightforward. There is no right way to invest in a permanent portfolio, but low-cost ETFs for each asset class are a great place to start. The following is one easy example of how investors could build this portfolio:
- 25% Vanguard Total Stock Market (VTI)
- 25% Vanguard Long-Term Treasury ETF (VGLT)
- 25% SPDR Gold Trust (GLD)
- 25% iShares Core Cash ETF (BILL)
There is plenty of room here to customize and tailor the portfolio to individual interests and goals. For instance, using your preferred total stock market index fund over VTI. The only thing essential to building the permanent portfolio is to hold its four main asset class components, all in equal amounts.
Set It and Forget It With the Permanent Portfolio
Every investor will need to decide for themselves what sort of portfolio they’re looking for. Many factors play into this choice, such as the investor’s age, risk tolerance, financial goals, timeline, and personal preference. For those investors seeking stability, predictability, and a little room for steady growth over time, the permanent portfolio may be the right solution.
The permanent portfolio lacks the aggressiveness of many modern portfolios, which heavily prioritize stock over other asset classes, which is the strategy's double-edged sword. An investor looking decades out onto the horizon seeking the most possible growth likely won’t find it here. Instead, what they will find is a simple portfolio that makes sense, weathers the economic storms, and continues offering modest growth year after year.
Sam is the founder of the personal finance and self-improvement blog Smarter and Harder. His mission is to start exciting new conversations that empower people to improve their work, lives, and money, and hopefully have a fantastic time doing it. In all things, he strives to lead with positivity, understanding, and more than a bit of enthusiasm.