My mother-in-law loves to buy Certificates of Deposit (CDs). “When I die,” she says, “you’ll be shocked to see how many I own.” Every couple of months, she calls up her neighborhood banks. She looks for the bank with the best CD interest rate. When she finds it, she grabs her checkbook, climbs into her car and races to the bank. Her Audi needs a bumper sticker that reads, “I speed for CDs”

I used to ask why she doesn’t invest in a diversified portfolio of low-cost index funds. “Grandfather Joe lost everything in the stock market crash of 1929,” she says.

I mentioned that Joe’s portfolio probably wasn’t diversified. I added that he might have freaked out and sold at the bottom. If Joe’s investments were diversified, and if he didn’t panic, he would have broken even by late 1936. Mark Hulbert, writing for the New York Times, based this assessment on reinvested dividends coupled with a period of deflation.

For example, assume that Joe could have bought two new cars with his portfolio proceeds in 1929, before the market crash. But instead of buying those cars, he kept the money in the market. His portfolio would have cratered during the crash. But if he had earned the return of the overall market, he might have sold his investments in 1936 to buy two brand new cars.

Plenty of people, however, relate to my mother-in-law’s fears. That’s why financial salespeople sell variable annuities like umbrellas in the rain. Such products pay advisors big commissions. They also promise stock market growth coupled with the promise that they won’t lose money. But they charge high hidden fees, so they don’t perform well.

The Permanent Portfolio offers something better. Between 1978 and 2017, it averaged a compound annual return of about 8.69 percent per year. It doesn’t perform as well as the stock market or a balanced portfolio of index funds. But it’s a lot more stable. The blue line below (Portfolio 1) represents the Permanent Portfolio. The red line represents a balanced portfolio of index funds (60 percent stocks, 40 percent bonds). The orange line (Portfolio 3) represents the U.S. stock market.

How Did The Permanent Portfolio Stack Up?
1978-2017

How Did The Permanent Portfolio Stack Up?

At first glance, the orange stock market line doesn’t look so bad. Long-term charts tend to smooth variations. But some shorter-term charts can wet a lot more pants.

January 2000 to December 31, 2003 was one such period. The Permanent Portfolio (Portfolio 1) gained a total of 26.86 percent. It earned a compound annual return of 6.13 percent per year. That crushed the performance of my mother-in-law’s CDs.

It also thumped most traditional stock market portfolios. Over the same time period, a balanced portfolio of 60 percent stocks and 40 percent bonds (Portfolio 2) would have gained just 6.72 percent overall. That’s a compound annual return of just 1.64 percent per year.

Even worse, U.S. stocks (Portfolio 3) dropped a total of 17.34 percent over the same four-year period. That’s a compound annual loss of 4.65 percent per year.

How Did The Permanent Portfolio Stack Up?
January 2000 to December 31, 2003

How Did The Permanent Portfolio Stack Up?

A single, horrific year for stocks can look even scarier. In 2008, for example, the Permanent Portfolio (Portfolio 1) was a lifeboat in a storm. It dropped just 0.73 percent. That would have turned a $10,000 investment into $9,927.

A balanced portfolio of index funds (Portfolio 2) would have seen the same $10,000 fall 16.89 percent to $8,311.

A U.S. stock market index (Portfolio 3) would have dropped 37.04 percent, turning $10,000 into just $6,296.

How Did The Permanent Portfolio Stack Up?
2008

How Did The Permanent Portfolio Stack Up?

Plenty of people fear investment drops. Richard H. Thaler describes such loss aversion in the Journal of Behavioral Decision Making. He says we hate investment losses more than we enjoy investment gains. That’s why the Permanent Portfolio might appeal to investors who freak out when markets fall.

Since 1971, the Permanent Portfolio hasn’t dropped more than about 5.5 percent in a single calendar year. Created by the late investment writer Harry Browne, it combines gold, stocks, long-term bonds and cash in equal proportions. The mix never varies.

Permanent Portfolio Allocation

  • 25% Cash
  • 25% Long Term Bonds
  • 25% Stocks
  • 25% Gold

The investor’s only responsibility is to buy or sell once a year, as needed, to maintain the target allocation. The Permanent Portfolio doesn’t crash when stocks fall because its asset classes often move in opposite directions. It’s also profitable because, when investors rebalance, they buy the underperforming asset class when everybody else is running the other way. When that asset class eventually recovers, a quarter of the Permanent Portfolio surges.

Craig Rowland and J.M. Lawson describe this strategy in their book, The Permanent Portfolio . It’s also easy to build a Permanent Portfolio yourself with stock market ETFs. Investors could put 25 percent of their money in Vanguard’s Total Stock Market ETF (VTI). For exposure to long-term government bonds, they could invest 25 percent in the iShares 20+ Year Treasury Bond Index (TLT). They could satisfy the cash component by putting 25 percent in a money market fund or in Vanguard’s short-term government bond ETF (VGSH). The remaining 25 percent could be invested in the iShares Gold Trust ETF (IAU).

Such a portfolio won’t likely beat the stock market or a balanced portfolio of index funds. But it’s usually a winner when stocks hit the skids. It also leaves bank CDs choking in its dust.

Average Compound Annual Returns
1978-2017

Time Period Permanent Portfolio Balanced Portfolio* 100% U.S. Stocks
1978-1982 15.94% 13.50% 15.69%
1983-1988 9.60% 13.08% 14.64%
1989-1994 7.02% 10.58% 14.48%
1995-2000 8.25% 15.53% 19.67%
2001-2006 7.82% 5.16% 4.11%
2007-2012 9.01% 5.28% 2.72%
2013-2017* 3.51% 9.51% 14.74
1978-2017* 8.69% 10.26% 11.50%

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller, Millionaire Teacher and The Global Expatriate's Guide to Investing: From Millionaire Teacher to Millionaire Expat.