Permanent Portfolio Revisited
by Addison Wiggin: Buy
tends to correlate with risk, but not always with return. Skydiving
delivers more heart-stopping thrills than chess, but it also produces
more heart-stopping disasters. Driving a Formula 1 race car produces
a lot more million-dollar paydays than sitting in a La-Z-Boy. But
no one ever crashed their La-Z-Boy into a wall and burst into flames.
At least skydivers
and race car drivers understand their risks more or less
and are knowingly accepting these risks in the pursuit of
a particular reward. By contrast, many investors assume risks unwittingly,
and out of all proportion to the potential rewards.
They are driving
race cars, not to win millions of dollars, but to win a $50 gift
card to Dave & Busters. They are tight-rope walking across Iguazu
Falls, not to obtain international acclaim and a possible movie
deal, but simply to get to the other side. Thats not a good
It is important
to understand the risks one is taking
and to be as certain
as possible that the risks and the rewards align intelligently.
carries some degree of risk, the successful investor merely insists
that he receive compensation commensurate with the risk he assumes.
easy to say, but how do we do it? Most of us have a hard enough
time identifying a truly compelling investment opportunity, much
less trying to assess the risks involved. So whats our opportunity?
You dont have to be an expert stock-picker to rack up expert
investment returns. But you do have to build a risk-resistant portfolio
one that is diversified in ways that will provide genuine
protection against severe capital loss.
Portfolio has delivered that kind of protection for more than
In 1981, the
best-selling investment author, Harry Browne, developed a set-it-and-forget-it
strategy he called, simply enough, the Permanent Portfolio. The
strategy is embarrassingly simple consisting of just four
components: gold, bonds, stocks and cash.
The idea was
that at any given time, two or three of these four components might
underperform but the other portfolio components would perform
so strongly, youd get an overall gain that would outpace any
increase in the cost of living.
So during an
inflationary environment like the 1970s, gold would provide the
juice. In prosperous times like the 1990s, stocks would be the engine
that pulls the rest of the train. In a garden-variety recession,
your cash and long-dated Treasury positions would put you in good
stead, while gold and stocks struggled.
the Permanent Portfolio has followed through on its objective admirably.
From 1981-2010, the annual average return was a healthy 8.4%. Only
two years have seen losses, and those were relatively small.
And what about
2008? The Year of Doom? The Permanent Portfolio held its ground,
and then some gaining 1.9%.
Portfolio isnt about trying to catch a wave. Its about
surrendering to the reality that you cant predict the future
and still building up a nice nest egg, whatever the future
brings. Set it and forget it.
No doubt about
it, Harry Brownes Permanent Portfolio has performed brilliantly
during the last 30 years
and perhaps it will continue to do
so. But conditions have changed since 1981. Maybe we should change
with them. Brownes basic strategy remains as valid as ever,
but maybe the components that populate Brownes strategy need
the Permanent Portfolio mutual fund (PRPFX), although based on Brownes
strategy, has tweaked his original allocation somewhat. The mutual
funds allocation is as follows:
20% gold, 5%
silver, 35% US Treasury bonds and bills. 10% Swiss government bonds,
15% aggressive growth stocks, 15% natural resource stocks and/or
real estate stocks.
portfolio has been more volatile than the original, but it has also
delivered greater returns, especially recently. During the last
15 years, for example, PRPFX has not only produced double
the returns of the S&P 500 Index, but it has also outpaced the
returns of that other permanent portfolio, Berkshire Hathaway.
But that was
then. What about now? Is Brownes original allocation still
optimal? Or is the Permanent Portfolio mutual funds allocation
an intelligent refinement? Or should investors be heading in an
even more radical direction?
If, for example,
you are very worried about the future of the US dollar, should you
be allocating portions of the permanent portfolio to foreign stocks
know. But wed like you to tell us. What do you think would
be the ideal permanent portfolio for the next 10, 20 or 30 years?
Here are the
three to five investible assets that means no less than
three and no more than five.
- Do not include
any individual stocks, unless those stocks be an ETF or closed-end
fund. Do not, for example, include Apple Computer as one of your
Permanent Portfolio components (no matter how brilliant that allocation
- Make sure
the assets you select are public securities or indices. That means
they are a mutual fund, ETF, index or commodity.
- Design your
portfolio with the idea that it would be re-balanced annually.
- If youd
care to add a little color behind the thought process that produced
your permanent portfolio, feel free.
We look forward
to your submissions and hope to be publishing many of them in a
future edition of The Daily Reckoning.
with permission from The Daily
Wiggin [send him mail]
is the editorial director and publisher of The Daily Reckoning.
He is the author, with Bill Bonner, of Financial
Reckoning Day: Surviving The Soft Depression of The 21st
Century and the upcoming Empire
of Debt. His
latest book is The
Demise of the Dollar...and Why It's Great for Your Investments.
© 2012 Daily Reckoning
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