The Permanent Portfolio: The Best Wealth Preservation Investment
Contents
- What is a Permanent Portfolio?
- Do You Need to Rebalance?
- Advantages of a Permanent Portfolio
- The One Big Disadvantage of a Permanent Portfolio
- Harry Browne Permanent Portfolio Performance
- The Permanent Portfolio Compared to a Stock-Heavy Portfolio (Or Compared to Warren Buffett’s Investment Approach)
- What Type of Investor is the Permanent Portfolio Strategy Best For?
- How Would the Portfolio Perform in a Dollar Collapse?
- How to Get Started with Building Your Permanent Portfolio
- Option #1: Direct Purchase
- Option #2: ETFs
- Need Help?
What if your investments never lost any value? That they kept growing no matter whether the economy was going gangbusters or in the middle of a crash? That could withstand inflation and catastrophe? Such a portfolio doesn’t exist in real life, but the Permanent Portfolio comes pretty darn close.
In 1970, a colleague of Mark’s named Harry Browne came up with the idea. It was designed to be an “all weather” strategy that could protect your wealth, come what may.
It hasn’t gotten nearly the attention it should have, but its long-term performance is impressive: an 8.5% average return in the 54 years since Browne conceived it.
So could it work for you? Read on to find out.
What is a Permanent Portfolio?
As mentioned, The Permanent Portfolio was developed by investment analyst Harry Browne. It’s based on the economic cycle and has four primary components:
- Prosperity
- Inflation
- Deflation
- Recession
Four asset classes provide a way to profit during each of these four economic states, without needing to forecast or predict when or how long each state will last.
Each element hedges against the others, historically providing a positive rate of return in almost any economy. Here’s how:
They provide strong returns when times are good and inflation is dropping or low. They tend to do badly during recessions and when interest rates are rising.
In a recession, no asset class is likely to do well. Cash is a hedge during deflation and when other parts of the portfolio fall in value.
Do You Need to Rebalance?
Yes, once a year, or more often if you prefer. Simply add up the value of each portion of the Permanent Portfolio and rebalance it. For it to work properly, it’s important to stick to 25% positions in each asset class.
Advantages of a Permanent Portfolio
Now that we’ve talked about how it works as an idea, how can it be made to work for you? Here’s why our clients use it.
- It’s simple. There are only four asset classes which, to keep things easy, can be built with ETFs.
- You don’t have to try and time the market. You might get lucky once or twice, but it’s hard to do consistently.
- It’s resilient. The market can crash and the other elements of the portfolio will pick up the slack, limiting losses.
- Low volatility. You aren’t going to see massive increases, but you won’t see big drawdowns either.
The One Big Disadvantage of a Permanent Portfolio
Of course, like most things in life, the Permanent Portfolio requires certain trade-offs. Specifically:
- It offers lower long-term returns compared to 100% equity portfolios. Stocks have tended to outperform all other asset classes over the long-term. And if you’re young, you may be giving up gains that could bring you a lot more wealth later on.
It’s really a wealth protection strategy. The gains won’t be huge but neither will the losses. And it’s almost boringly consistent…
Harry Browne Permanent Portfolio Performance
Here’s the decade-by-decade historical performance:
Admittedly, this strategy had a terrible year in 2022, falling in value by 11.6%. It’s the worst performance by far in the history of this strategy and the only double-digit loss.
And yes, the Permanent Portfolio still far outperformed the S&P 500 (down 17.8%) or long-term Treasury bonds (down a stunning 29.6%). It also clobbered a 60% / 40% mix of stocks and bonds (down 22.5%).
But in 2023, the Permanent Portfolio recovered, sporting a very respectable 11.4% return.
Now, all that said — the performance of the Permanent Portfolio has gradually dropped over the decades. While it’s experienced only eight losing years out of 53, with the largest loss ever in 2022, four of those losing years occurred in the most recent decade.
We attribute the gradual decline in returns from this strategy mainly to lower interest rates, beginning in the 1990s and especially from 2008-2022, when the Fed kept short-term rates close to zero. This depressed the performance of the cash portion of the portfolio.
For this reason, while the long-term (50-year) average return of the Permanent Portfolio is nearly 9%, going forward, we believe 7% or slightly less might be more realistic.
The Permanent Portfolio Compared to a Stock-Heavy Portfolio (Or Compared to Warren Buffett’s Investment Approach)
While 7% is still an exceptionally good risk-weighted return, it pales in comparison to a long-term portfolio of stocks, which since 1872 has generated a compound annual growth rate (CAGR) of 9.2% annually. This is a powerful argument for simply buying index funds that passively follow a market index; typically, the S&P 500.
That’s the approach Warren Buffett, the most successful investor in history, recommends for most investors. He believes long-term ownership of stocks is the closest thing there is to a guaranteed winning investment strategy in the financial markets.
While it’s hard to disagree with that, a portfolio made up of just stocks is far more volatile than the Permanent Portfolio. For instance, if your grandparents had purchased a stock portfolio matching the S&P 500 in August 1929 (just before the stock market meltdown that resulted in an 86% loss in this index), they wouldn’t have broken even until 35 years later in October 1964.
Factor in inflation and they wouldn’t have broken even until December 1968. Three decades is a long time to wait for your portfolio to recover!
What Type of Investor is the Permanent Portfolio Strategy Best For?
No investment strategy is right for everyone. So after reading all of this, you’re probably wondering if the Permanent Portfolio is right for you.
When clients ask us about it, here’s what we say:
If wealth preservation (especially against inflation) is your primary concern, then a strategy like this is worth talking to your investment advisor about.
If maximum growth is your priority, you can handle big gains and big drops, and you can ride out a long market crash, then consider more aggressive investment classes like equities.
Here’s one other way to think about it.
We sometimes ask clients to split their wealth into two imaginary piles:
- Wealth they can afford to lose.
- Wealth they can’t afford to lose.
For wealth you can afford to lose, feel free to invest it in whatever asset class which you feel gives you the best return in line with the risks you’re willing to take.
But for wealth you can’t afford to lose, the best solution we’ve found is the Permanent Portfolio.
How Would the Portfolio Perform in a Dollar Collapse?
Some critics have noted that gold is the only one of the four investment classes not denominated in dollars. They ask: if the dollar were to collapse in value, wouldn’t the value of the Permanent Portfolio collapse as well?
Not necessarily.
In a dollar collapse scenario, it’s likely the gold component would go a long way toward balancing out losses in the other three portfolio components. More than that, during a hyperinflationary economy, investors will often purchase stocks as a way to shield themselves from price increases in goods and services. Interest rates will rise as well, increasing the performance of the cash share of the portfolio.
How to Get Started with Building Your Permanent Portfolio
There are two ways to build a Permanent Portfolio.
Option #1: Direct Purchase
Stocks: Purchase a no-load S&P 500 Index fund.
Gold: Purchase physical American Eagles from the local coin dealer or an online service like the one operated by our long-time friends, Asset Strategies International. For convenience, lower fees and better tax treatment, you can also buy a gold ETF that gives you exposure to the metal. (That said, you do introduce a level of risk with this substitution strategy. Do what feels best for your situation.)
Bonds: You can get these from Treasury Direct.
Cash: The simplest way is to buy 28-day Treasury bills, rolling them over every month. This can also be done through Treasury Direct.
Option #2: ETFs
An easier way to buy a Permanent Portfolio is to buy ETFs directly for each component.
Simply buy ETFs that track the S&P 500, gold, short-term Treasury bills, and long-term Treasury bonds, respectively. Then rebalance your holdings annually.
Need help?
In this article, I’ve outlined some of the tools we use to help our clients build strong wealth protection plans that include both asset protection and estate planning.
But what works for you will depend on your goals and the specifics of your situation. This is not a space where one-size-fits-all.
If you’d like to see if The Nestmann Group can help you develop a bespoke plan that meets your needs, the first step is to book in a free no-obligation consultation with one of our Associates. Feel free to do so here.
About The Author
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We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
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