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Dissecting The Permanent Portfolio

The permanent portfolio has a lot to teach about portfolio construction.

Monevator took an in depth look at the permanent portfolio, the Harry Browne idea that would have investors allocate 25% each to equities, long bonds, cash and gold. I’ve written about this strategy quite a few times including looking that the Permanent Portfolio Fund (PRPFX). There was a permanent portfolio ETF from Global X but it closed a while back.

The idea is straight forward, no matter what is going on at least one of the four assets will hold up, hopefully more than one but it creates a defensive quality.

If you do some digging, you will find some very solid results. Where the portfolio was devised in the 1970’s it has of course benefited from the massive decline in interest rates which is now unrepeatable. If interest rates ever go up the portfolio would be adversely affected. If rates hover around here for an extended time, then the result from the long bond portion would be a slight positive but not provide the lift it historically has.

Like with many things, following the permanent portfolio exactly is not something I would recommend but it does offer constructive insight about blending together different asset classes to smooth out the ride which is big part of what I focus on for client accounts.

Equities tend to be the best performing asset most of the time. An investor needing stock market appreciation for their financial plan to work, likely needs more than 25% in equities as cash and bonds are not designed to appreciate in value. The extent to which gold is or is not designed to appreciate in value is at the very least debatable especially considering it has a low to negative correlation to equities and equities tend to be the top performing asset class so putting 25% into something that might have a negative correlation to the top performing asset class may not be a great idea.

The following chart compares the PRPFX to the SPDR S&P 500 (SPY). PRPFX does not strictly adhere to the Browne portfolio but I think can be thought of as a decent proxy.

The chart clearly shows it spared it investors from much of the financial crisis decline. In 2008 the fund was down about 8% versus about 35% for SPY so it was a great place to hide and makes an argument for using it tactically or holding onto it as an alternative investment, the standard deviation per Monevator is very favorable, not as an equity proxy though. I would prefer to build an allocation to alternatives using narrower products, something I have covered already here at TheMaven and will address in the future as well.

In terms of making this actionable, I believe in maintaining a small allocation to gold because it does tend to zig when equities zag. I don’t usually hold other commodities as they tend to be more cyclical due to industrial (metals) and personal (food and energy) consumption, these factors don’t typically engender the emotion that gold does. In the past I have held currency ETFs for clients and would be willing to do so again, maybe soon as we might be starting a longer term run of dollar weakness. (see my post from yesterday about currency ETFs)

As far a equity exposure, a financial plan relying on equity growth needs something of a normal allocation to equities as I say above which I would define for most people as 50-80%. AS high as 80% isn’t right for too many people but probably with in a range even if the median allocation might be closer to 55-65%,

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