Permanent Portfolio: Safe, Stable and Simple?

permanent portfolio

Let me first say that I’m not an investor. I own no stocks, no shares in mutual or index funds. Nothing. All I have is some money in two pension funds, which will probably be returned to me before I am vested. So why has the Permanent Portfolio caught this non-investor’s eye?

The main reason I don’t invest is that I want to pay off debt first. Rather than chase something that might earn me 5% interest, I’ll take the sure bet by paying off the student loans at 5% interest. This is a can’t lose investment in yourself, but that’s another story.

The other main reason I don’t invest is that I don’t know anything about it. Even worse, I don’t believe I could ever truly know enough to be confident. I am a pretty obsessive person when it comes to data and tracking, and I’d probably lose my mind the second I bought some stock.

Plus, all the monkey business I see in the markets, from robot trading to position manipulation and margin calls, it’s enough to make me feel like the deck is stacked.

It’s no secret that I favor simplicity over most things. That’s because my time is my most valuable asset. If it’s going to take me hours of research and worrying each month to make a couple hundred bucks, I’d rather do something easier. The Permanent Portfolio, which according to one of its founders Harry Browne focuses on “safety, stability, and simplicity,” does seem to offer hope to people like me.

What is the Permanent Portfolio?

First, this article is not about the mutual fund of the same name that is based on the diversification and asset allocation ratio of Browne’s idea.

According to J.D. Roth at Get Rich Slowly, who has researched this, the Permanent Portfolio is taking your investment money and dividing it four ways:

  • 25% in U.S. stocks, to provide a strong return during times of prosperity […]
  • 25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles). […]
  • 25% in cash in order to hedge against periods of “tight money” or recession. […]
  • 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation. Browne recommends gold bullion coins. […]

 

To add, Crawling Road says:

  1. The portfolio should provide wide and true diversification.
  2. The portfolio should be simple and not require a lot of maintenance or monitoring.
  3. The portfolio should allow you to grow and protect your money no matter what happens.

In a nutshell, the Permanent Portfolio fully embraces the investing doctrine of diversification.

Is the Permanent Portfolio Safe and Stable?

When investing, I think people are more sensitive to losing money than making it. I recently read an anecdote from a study that said it is more painful to lose $100 than it is joyous to make $100.

The main purpose behind the Permanent Portfolio is that you “set it and forget it” as Ron Popeil would say. So it must be safe if it runs on autopilot, right? I’m not going to pretend like I can answer that for you, though there are legions of loyal followers of the plan that can do that for me.

The idea is that if one of your asset classes is having a rough spell, one or more of the others will be doing well enough to cancel it out and keep you on track. The Permanent Portfolio, as J.D. Roth says, is about defensive investing. If you use it, you shouldn’t be daytrading or trying to chase the latest hot stock from Mad Money.

This strategy would work best for people who have a lower risk tolerance, and aren’t investing for quick gains. A Permanent Portfolio acolyte is more interested in weathering storms, guarding what they have, and being satisfied with measured and stable gains.

It’s hard to say if the results are stable, but the mutual fund by the same name had some solid gains during the recession when others were foundering. Since this article talks about DIY investing, it is hard to know how it truly performs. We have to take the word of the practitioners.

Also, its stability is what pushed many investors away in the 1990s, and into the arms of the dotcom bubble. Those who stuck with Browne’s idea came out alright.

Is the Permanent Portfolio Simple?

On its face it seems so easy that a beginning investor could jump right in. Putting 25% in cash and gold bullion coins is very easy to do. I would recommend just keeping them both in your home until they get to be so much that a bank is needed. The stock allocation can be accomplished with an index fund that follows the S&P 500. The Treasury Bonds are also easy enough to buy.

So there you go. No research needed once you determine the best fund and where you are going to get your gold bullion from (I personally prefer silver because it’s cheaper and can be a divisible form of currency if the economy were to collapse).

Browne advocates rebalancing your portfolio once per year. That’s a maintenance plan even I can adhere to!

Is the Permanent Portfolio Right for Me?

Only you can answer this question for yourself. I plan to order Browne’s short book Fail Safe Investing to give this a deeper look, but on its face, the Permanent Portfolio is very appealing.

It looks easy to understand, easy to implement, and is designed to keep you from meddling with your investments.

Most of the people who lose money do so because they allow emotion to cloud their investing. I feel I would do the same. At least with this strategy I can manipulate myself into engaging in safe and rational investing that makes sense.

Have any of you looked into the Permanent Portfolio for your own investing? What are your thoughts?

 

You May Also Like

The Other One Percent (Who WILL Hurt You)

Talk About Money: How to Do It the Right Way

Related Posts Plugin for WordPress, Blogger...

34 thoughts on “Permanent Portfolio: Safe, Stable and Simple?

  1. This brings up a whole other discussion. It it wise to borrow money to invest? Is investing now, having your money compound and earn, compound and earn, etc., etc. better than waiting until all debts are paid off before investing? I don’t know the answer. I’m sure someone could calculate the two scenarios. I think it’s a personal decision, but it’s an interesting discussion.
    TheDailyThinker recently posted..Dig Yourself Out of Debt by Making SacrificesMy Profile

    • Yep, it is a math and psychology question all rolled into one. That’s what makes personal finance so tough (but so much fun). I recommend paying off debt before investing, but that’s because most investments don’t return more than debt costs.

      I laugh when I see people with a 100k in debt bragging that their stock made them $10,000 last year. Keep bragging dummies…
      John recently posted..Spend Less than You EarnMy Profile

  2. We manage to save about 15% of our gross income a year, while paying down our debt (another 33% of our gross income) and we do it in funds.

    I can’t imagine putting 25% of my money into something that doesn’t work for me at all, such as gold, but we’ll see what I think when I have J.D’s kind of money!
    bax recently posted..Three Week ChallengeMy Profile

  3. Building a good permanent portfolio really is the best option for most investors. I know lots of people that tend to over trade with their small investment accounts and end up losing the grand portion of their profits + capital base. A set it can forget it allows you to remove much of the emotional stress from investing; thus majorly improving the investing experience.
    Juan recently posted..Money Network Card ReviewMy Profile

  4. I like the idea of having a “couch potatoe” portfolio for most beginner investor. This is a solid method that will avoid you to make any emotional mistake. Just rebalance your indexes once in a while; it makes perfect sense.

    However, I don’t like this diversification at all.
    1) Treasury bonds barely pay interest right now. Preferred shares or corporate bonds would be more appropriate. You already have 25% in cash, why bother adding another 25% in treasury bonds? it’s like having 50% of your investment in cash. This is not investing; it’s only saving money aside 😉

    2) I don’t like commodities. Gold is nothing but a yellow metal. If you leave an ounce of gold on your kitchen table for the next 10 years, there will be nothing more than the very same ounce (plus some dirt) on your table. Commodities don’t generate profits, they are just subject to fluctuation upon speculation. If you want to play the commodity card, you are better off investing 25% of your money in a Canadian global market index. 50% of the Canadian market value is coming from Financials and Resources.

    Try investing $25/month at first, you’ll see, in no time you’ll become an addict to investment 😉
    The Financial Blogger recently posted..Major Blog Acquisition – Would You Buy a Blog for 50K?My Profile

  5. 100% of my investing is in mutual funds. Simple enough for me. Different types of mutual funds can be chosen based on risk tolerances and preferences. There are even mutual funds that invest in things like treasuries and precious metals. Sounds much simpler to me than physically buying bonds and precious metals and storing them in your home. I only think about, and re-allocate my funds about once per year, and it doesn’t take very long at all. I would be skeptical about the expected returns of a plan like the one you’ve laid out. Sure, it will protect against big losses, but the big loss might be that of lower overall returns. Something to think about…
    Matt @ RamblingFever Money recently posted..Bodyguards, Boobs and a Pocket Full of CashMy Profile

  6. John, be careful with this portfolio, it is not as safe or stable as it’s made out to be. Long term treasury bonds could suffer huge losses if interest rates go up just a few points. Same thing with gold. Gold does best in times of crisis, either high inflation or deflation. It doesn’t do well in between. Both those asset classes have done well for the last decade, but take a look a bit further back. Not saying that you shouldn’t be in them as investments, just don’t consider them as safe as the marketing folks want you to think.
    CultOfMoney recently posted..Secrets of Fantasy Baseball that can help your financesMy Profile

  7. What’s wrong with spending hours pouring over balance sheets, lol.

    Interesting portfolio. I’d probably replace the the 25% treasuries with a good TIPs fund since treasuries are probably at there lows. Once rates start rising, TIPs will be a safer investment. 25% in cash is excessive for an investment portfolio (unless that cash includes emergency fund and other savings account money). But I prefer to take on more risk myself.
    JP @ Novel Investor recently posted..Betterment Review: Simple Investing For EveryoneMy Profile

    • Thanks for weighing in from an investor’s viewpoint. I’m a novice at best when it comes to diversification. Appreciate you stopping by!

  8. I’ve always been an index fund kind of guy and have never heard of the permanent portfolio. Interesting – I need to look into it further. Thank you for posting it.
    JB recently posted..It’s Tax TimeMy Profile

  9. John, I’m all for easy investing, which is why index funds are so popular and the Vanguard Family is the largest out there. Your portfolio doesn’t have anything any international mix and thus is missing a huge opportunity. If you want to hedge adjacent inflation buy a house or invest in real-estate, rather than gold. That’s my opinion and I place my money where my mouth is. Good discussion topic John.
    Brent Pittman recently posted..And the Winner Is…My Profile

  10. Hmmm, never looked into this at all. I do see those target dated retirement funds that do everything for you, which I think is a nice service.

    I should probably do so more aggressive investing b/c I am way too conservative. I’m 30% CDs, 30% real estate, 30% stocks, and 10% pure liquidity usually.

    • Hey Sam. I’d say 30% in real estate sounds aggressive to a novice like me. I think it all comes down to the amount you can save to invest. If you can put aside $5000/month under a mattress and the other guy is investing $500/month in high growth stocks, mattress guy is going to win anyway, no matter how well the stocks do.
      John recently posted..Best Personal Finance Writing – Week 8My Profile

Comments are closed.