There are many ways to construct an investment portfolio. My preference is to have your core asset classes be U.S. stocks, international stocks, and U.S. bonds, but there are other ways to construct an asset allocation.
One lazy portfolio that is favored by more conservative or pessimistic investors is the so-called “permanent portfolio.” Its defining characteristic is a high percentage of gold and a relatively low percentage of stocks. Let’s take a look at this portfolio and see if it might be the asset allocation for you.
Harry Browne and the Permanent Portfolio Asset Allocation
Harry Browne wrote “Fail-Save Investing: Lifelong Security in 30 Minutes” in 2001, where he describes the permanent portfolio. He markets the permanent portfolio as one designed to perform well in a wide range of market conditions.
The permanent portfolio proposed by Harry Browne consisted of equal weighting in four asset classes:
- 25% U.S. Stocks
- 25% Treasury Bills
- 25% Long-Term Treasury Bonds
- 25% Gold
Building the Permanent Portfolio with ETFs
The permanent portfolio can be built using index funds at Vanguard or Fidelity:
Permanent Portfolio at Vanguard
- 25% U.S. Stocks: VTI
- 25% Treasury Bills: VGSH
- 25% Long-Term Treasury Bonds: VGLT
- 25% Gold: GLD (run by SPDR, not Vanguard)
Permanent Portfolio at Fidelity
- 25% U.S. Stocks: FSKAX
- 25% Treasury Bills: FUMBX
- 25% Long-Term Treasury Bonds: FNBGX
- 25% Gold: GLD (run by SPDR, not Fidelity)
The Heavy Emphasis on Gold: Libertarian Politics?
Harry Browne’s emphasis on gold may have to do with his libertarian politics, as he was the Libertarian Party’s candidate for president in 1996 and 2000. Libertarians are generally suspicious of the loose monetary policy of the Federal Reserve (e.g. Ron Paul’s call to “End the Fed“). Libertarians often propose a return to the gold standard, which would certainly make gold more valuable than it is today.
Permanent Portfolio Historical Returns
Using historical returns from Portfolio Visualizer, let’s see how the permanent portfolio has done compared to a standard three-fund portfolio of 60% U.S. stocks, 30% international stocks, and 10% total bond market since the publication of Harry Browne’s Fail-Save Investing in 2001 (assuming annual rebalancing):
| Year | Permanent | Three-Fund |
| 2001 | 0.6% | -11.8% |
| 2002 | 6.9% | -16.3% |
| 2003 | 14.5% | 31.3% |
| 2004 | 6.4% | 14.2% |
| 2005 | 8.0% | 8.5% |
| 2006 | 10.9% | 17.7% |
| 2007 | 13.3% | 8.6% |
| 2008 | -0.7% | -34.9% |
| 2009 | 10.5% | 28.8% |
| 2010 | 14.5% | 14.2% |
| 2011 | 10.5% | -3.0% |
| 2012 | 6.8% | 15.6% |
| 2013 | -2.0% | 24.3% |
| 2014 | 9.1% | 6.8% |
| 2015 | -2.9% | -1.1% |
| 2016 | 5.7% | 9.2% |
| 2017 | 8.8% | 12.9% |
| 2001-2017 | 214.9% | 166.6% |
The permanent portfolio actually outperformed the three-fund portfolio from 2001-2017. Of course, using 2001 as a starting date would be the worst possible time for the three-fund portfolio, as that was during the tech crash and the market experienced two crashes during this time period.
Let’s look at the performance of the permanent portfolio versus the three-fund portfolio starting in 1987, when historical data for all asset classes are available on Portfolio Visualizer:
Criticism Of the Permanent Portfolio
Low stock market exposure
The portfolio has a very low exposure to stocks — only 25%. Many portfolios, including target-date funds for younger investors, have up to 90% of their portfolio in stocks. Even investors in retirement should consider holding around 50% of their portfolio in stocks. For most investors, a portfolio with only 25% stocks is too conservative.
No international exposure
Any “permanent” portfolio should have international exposure. For a portfolio to be truly “fail-safe,” it should have exposure to markets outside of the United States. I’m optimistic about the future of the American economy, but it would prudent to have at least some exposure to international stocks.
High emphasis on gold
Gold is probably the most controversial asset class in all of finance. You either love gold, and are affectionately (or pejoratively) called “gold bugs”, or dislike gold, believing that it does not serve any purpose in a portfolio. I am in the latter camp. I don’t believe that gold has long-term value except as an inflation hedge. Your opinion of the permanent portfolio will be highly correlated with your opinion of gold as an asset class.
Treasury bonds only
The bond portfolio only holds Treasury bonds and does not hold corporate bonds. While corporate bonds are riskier than Treasury bonds because of its credit risk, I believe that a portfolio of Treasury, corporate, and other non-Treasury bonds provides a diversification benefit over Treasury bonds alone.
What The Permanent Portfolio Means To Investors in 2017 and 2018
The permanent portfolio shows that a three-fund portfolio does not perform well in all market conditions. If you select 2001 as the starting point, the permanent portfolio actually outperformed the standard three-fund portfolio.
However, over the past century, the stock market has far outpaced the bond and gold markets. A portfolio that does not hold the majority of its assets in stocks implies a pessimistic view of the future of the global economy.
Conclusion
The “permanent portfolio” of equal parts total stock market, short-term Treasury bills, long-term Treasury bonds, and gold proposed by Harry Browne has declined in popularity over the years. I would not recommend this portfolio for the typical investor because of its high emphasis on gold and low emphasis on stocks. However, very conservative investors and “gold-bugs” can consider this portfolio, as it may be better than a standard three-fund portfolio in more difficult economic conditions.
What do you think? What role do you think gold plays in a typical investor’s portfolio? Would you invest in the permanent portfolio? Comment below!
I think there is a lot to be said for some kind of “permanent portfolio.” Especially when governments start playing with the money supply. Tony Robbins renewed some interest in this.
The biggest issue I have is I cannot imagine taking 25% of my wealth and putting it in Gold. Wow. No dividends. Not a company. Subject to speculative runs and crashes. Nope. Just can’t do it.
Hi Wealthy Doc. What tool do you use to analyze the returns of a given portfolio? For example, how do I determine how the permanent portfolio fared over the last week? Thanks!
I have used Harry Browne’s Permanent Portfolio for my family’s investments for many years and continue to recommend it for a variety of reasons.
Your article fails to even mention of a key component of the Permanent Portfolio (PP): rebalancing. Using Browne’s approach, one invests equally in the four investment classes, and then leaves them alone until at least one class gets more than 10 percentage points away from its target 25% allocation. (Others have run simulations with a more conservative and less stress-inducing 5% band, with only slightly inferior performance. I have used the 5% band.) The PP should also be rebalanced annually, regardless of the 5% or 10% performance bands.) The PP performance data you present does reflect the results of rebalancing, but your article fails to mention its significance and importance.
By avoiding a discussion of rebalancing, or of any of the theory behind Browne’s diversification strategy, you miss several key concepts. First of all, you only presented overall data for PP rather than for its four components. The individual asset classes in the PP obviously perform very different from year to year. It’s easy to scoff at gold ownership; it doesn’t generate income. But a PP investor doesn’t just buy gold, tuck it away, and 30 years later act surprised when he discovers it hasn’t produced any dividends! There are years gold’s value drops significantly, and years gold dramatically outperforms every other asset class. It’s hard to imagine a better diversified portfolio than the PP. Each class performs well in certain economic conditions, and poorly in others. The result is that when rebalancing occurs, you are always selling high and buying low. Not a bad investment strategy for anyone!
Just as importantly, the PP is far safer than 3-Fund, or any other strategy I know of. It’s not impossible to have a losing year; there have been a few; your small 17-year sample shows three losing years. That is a higher percentage of losing years than if you go all the way back to 1972 (the first year you can really compare the PP, since before that the price of gold was fixed). From 1972 to 2000 there were only two losing years out of 29. So from 1972 to 2019, just 5 losers out of 48 years. In other words, PP avoids losing money nearly 90% of the time. Furthermore, the losses are very small; I believe -4% is the worst year (1981) for the PP, which was preceded the previous two years by +39% and +14% gains, and followed in 1982 by +24%. Compare this dependability and peace of mind with 2008’s 3F loss of -35%. How many “traditional” investors developed ulcers and needed anti-anxiety medication during 2008? PP investors just smiled and happily enjoyed their lives.
If you can successfully time the stock market, there’s no question you can outperform the PP. Most people, including nearly all professionals, can’t do so, and for every (lucky) investor who can, there are dozens of fools who went broke trying to do so.
The PP lets you invest (rather than speculate). It lets you spend your time doing things other than worrying about your life savings. And over the long run it performs nearly as well as the S&P 500, assuming you pick the right year for your S&P 500 comparison; there are long stretches, sometimes a decade or more, where the stock market performs very poorly. There is never a period where the PP performs poorly. Never. That’s hard to dismiss.
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