Permanent Portfolio Strategy

A permanent portfolio is a portfolio strategy I came across through The Voluntary Life, one of my favorite podcasts. The core tenet is that you put your wealth in diversified asset classes. The Permanent Portfolio strategy was conceived by Harry Browne, who wanted a strategy that works regardless of which specific economic cycle we’re in.

Harry Browne’s Permanent Portfolio

Permanent Portfolio is an investment strategy that was popularized by American investment advisor and author Harry Browne in his book “Fail-Safe Investing: Lifelong Financial Security in 30 Minutes.” The strategy was designed to provide a simple and relatively low-risk approach to investing that would perform well in four fundamental economic conditions:

  • Prosperity
  • Inflation
  • Deflation
  • Recession

How to Structure a Permanent Portfolio

There are many ways one can build their permanent portfolio because of the existence of many asset class options. The Permanent Portfolio is based on the allocation of assets across four different categories:

  • 25% stocks: Ideal during periods of prosperity or declining inflation. This portion is typically invested in a broadly diversified set of stock funds or ETFs to provide exposure to the equity market.
  • 25% precious metals: Beneficial during periods of high inflation and global uncertainty. This part of the portfolio is allocated to assets like gold and silver, which are often seen as a hedge against inflation and currency devaluation.
  • 25% long-term bonds: Offers profit potential as interest rates decline and during deflation. Bonds tend to be less volatile than stocks and can act as a stabilizing force in the portfolio.
  • 25% cash: Valuable during recessionary periods. It can include cash, short-term government bonds, or other liquid and stable assets.

The permanent portfolio strategy aims to balance these four components in equal weights, thereby providing a portfolio that is designed to perform reasonably well in a variety of economic scenarios. The idea is that if one asset class is not performing well, the others may be able to offset the losses.

Permanent Portfolio With Bitcoin

The permanent portfolio with bitcoin is a modified version that includes an allocation to bitcoin. This is based on the notion that bitcoin can serve as a safeguard against inflation and other economic uncertainties, complemented by the stability and diversification offered by the other assets within the portfolio.

A common approach to permanent portfolio is to allocate 10% of your portfolio to bitcoin. Bitcoin is much volatile than other traditional assets. It doesn’t make sense to rebalance too much with bitcoin in your portfolio. However, some investors believe that the potential rewards of investing in Bitcoin outweigh the risks.

Rebalancing Your Portfolio

With Browne’s strategy, you can rebalance every year, or when a specific asset goes below or over a specific band. E.g. stocks have gone up and are now 31% of your portfolio, you sell and buy whatever asset that has dropped. Your specific tax situation is very important when it comes to rebalancing. You want to minimize capital gains tax. Browne suggests that you rebalance your portfolio once a year to maintain the 25% target weights.

It also makes sense to consider moving countries or becoming a perpetual traveler.

Burning Man FIRE

Burning Man FIRE is a financial independence, retire early (FIRE) approach that draws inspiration from the Burning Man ethos of radical self-expression and creativity. This strategy revolves around embracing a more minimalist lifestyle while channeling the majority of your earning into investments so that you can retire early and pursue your passions.

The exact allocation of these asset classes will vary depending on your risk tolerance and investment goals. However, a typical Burning Man FIRE allocation with bitcoin might look something like this:

  • Stocks: 50%
  • Bonds: 10%
  • Cash: 10%
  • Bitcoin: 10%
  • Real estate: 10%
  • Cash: 10%

This allocation would give you a good mix of risk and reward. The stocks would provide the potential for high returns, while the bonds would provide some stability. The cash would be available for emergencies, and the Bitcoin would be a speculative investment.

Advantages of a Permanent Portfolio

A permanent portfolio has a number of advantages. These include:

  • A permanent portfolio translates into profit for investors, regardless of the economic cycle. For example, according to the Harry Browne permanent portfolio:
    • Treasury bills would perform well during a depression.
    • Bonds would excel in recessions.
    • Growth stocks would thrive in expansionary markets.
    • Cash would be valuable in depression.
    • Precious metals such as gold would shine in inflationary markets.
  • A permanent portfolio reduces losses and minimizes the impact of market volatility, while still increasing in value over the long term.
  • A permanent portfolio is easy to manage. Once you have set up your portfolio, you only need to rebalance it once a year.

Disadvantages of Permanent Portfolio

  • Although cash is expected to perform well during a depression, holding onto cash might prevent investors from capitalizing on other growth opportunities.
  • A permanent portfolio follows a relatively rigid investment strategy, potentially causing investors to overlook alternative investment avenues.
  • The permanent portfolio strategy proposed by Harry Browne primarily focused on US stocks, excluding emerging markets due to their relatively new presence in his time.
  • Stocks historically tend to outpace other assets in terms of growth over time. With only a 25% allocation to stocks, investors could potentially miss out on significant stock market growth.

Permanent Portfolio Performance

The Permanent Portfolio has generally outperformed inflation and produced positive returns over the long term. According to the Bogleheads website, it averaged a 7.2% annual return since 1970, compared to 6.8% for the S&P 500, and exceeded inflation by 1.4% annually. Still, past performance doesn’t guarantee future results, especially in volatile market periods.

Permanent Portfolio Alternatives

While the permanent portfolio is a well-known and popular investment strategy, there are several alternative portfolio approaches that investors might consider. Here are a few alternatives to the permanent portfolio:

  • Traditional 60/40 Portfolio: A balanced mix of 60% stocks and 40% bonds for steady growth and stability.
  • Dividend Growth Portfolio: Stocks of companies with consistent dividend growth for income and potential appreciation.
  • All-Weather Portfolio: Diversified assets (stocks, bonds, gold, commodities) for various economic cycles.
  • Tactical Asset Allocation: Adjusting allocations based on current market conditions.
  • Value Investing Portfolio: Undervalued stocks selected for potential future growth.
  • Global Equities Portfolio: Diversified mix of international stocks for exposure to global markets.

The Permanent Portfolio: A Long-Term Investment Strategy

By maintaining a consistent allocation across these four categories, the portfolio is intended to provide a balanced exposure to different economic conditions while minimizing the overall risk. It’s important to note that the Permanent Portfolio is a long-term strategy and may not perform optimally in all market environments. While the Permanent Portfolio has gained a following, it’s worth remembering that no investment strategy is guaranteed to be successful.

Further Reading About Permanent Portfolio

Permanent Portfolio FAQs

What is a permanent portfolio?

Permanent Portfolio is an investment strategy that aims to protect and grow your money in an unpredictable world by diversifying across various economic conditions, including inflation, deflation, prosperity, and recession.

What is a permanent portfolio fund?

A permanent portfolio fund is a mutual fund that follows the investment strategy of Harry Browne's Permanent Portfolio. This strategy invests 25% of your money in each of the following asset classes: stocks, bonds, cash and precious metals.

What is Bogleheads permanent portfolio?

The Bogleheads Permanent Portfolio is a tax-efficient variation of Harry Browne's Permanent Portfolio for US investors. It allocates 25% to each of these assets:

  • Total US stock market: Stocks of all sizes and sectors.
  • Total US bond market: Bonds of various maturities and credit ratings.
  • Intermediate-term TIPS: These are Treasury Inflation-Protected Securities, which means that their payments are adjusted for inflation.
  • Cash: Money market funds and short-term investments.

Faith is our financial analyst with over 6 years of experience in the sector. She is also an experienced trader. Her specialty is in cryptocurrencies, stocks, and forex trading. Besides, she is keen on breaking down investment opportunities and fintech issues for investors to make an informed decision. Her work is available in leading sites such as Invezz, FXAudit, Macrostreet, and rkdream. She holds an MBA and BSc degree in finance.