If investment portfolios were meals on a restaurant menu, almost nobody would order the Permanent Portfolio. That isn’t because it hasn’t performed well. It has. And it’s relatively stable. In fact, it might be the world’s least volatile portfolio. But ever since Harry Browne created the portfolio in 1981, investors have found reasons not to like it.
That speaks to the fickleness of human nature, more than anything, because the Permanent Portfolio has only been impressive. When back-tested, it averaged about 8.65 percent per year from January 1971 to May 30, 2021. That’s a bit lower than the compound annual return for a portfolio comprising 60 percent U.S. stocks and 40 percent U.S. bonds. But there’s a difference. The Permanent Portfolio has only had six losing years since 1971. And during its worst-performing year (1981) it dropped just 4.1 percent.
In contrast, a balanced portfolio (60/40) had nine losing years over the same time period. And some of its drops were doozies. In 1973, it fell about 9.12 percent. It dropped a further 14.41 percent in 1974. In 2008, it fell about 22 percent. In sharp contrast, the Permanent Portfolio dropped less than 1 percent in 2008.
With such stability, it sounds like a perfect option for low-risk investors. After all, it has earned decent returns without gut-wrenching drops. There’s just one problem: almost nobody wants to dig in to a Permanent Portfolio meal. That’s because, no matter what’s happening in the world, it never looks appetizing. Ever.
The Permanent Portfolio comprises a four-way split between cash, stocks, long-term bonds and gold. It also gets rebalanced back to its original allocation. But few people ever want this portfolio because…frankly, they think too much. They make predictions. For example, someone today might say, “Gold doesn’t make long-term profits. I don’t want gold.” Or they might say, “Bonds are in a bubble, and long-term bonds are worse. With their paltry interest rates, inflation will eat long-term bonds for lunch.”
These statements might be true. But judging a portfolio on its individual elements doesn’t consider how the ingredients work together. For example, salt, butter, flour or sugar would each taste horrible in isolation. But they’re important components for a plate of pancakes.
To say that this portfolio has never been popular is a serious understatement. Consider 1980. The price of gold had increased about 1,400 percent over the previous nine years. Value-oriented investors would have screamed, “Don’t buy gold now!” And they would have been right. Gold crashed in 1981, and it took 27 years to hit a new high. But between 1981 and 1991, investors in the Permanent Portfolio averaged 10.36 percent per year. Rebalanced annually, those ingredients worked well together.
By 1990, stocks were soaring after an eight-year run, yet they were still relatively cheap and popular. The Permanent Portfolio? Not so much. It had just 25 percent invested in stocks, with 75 percent in long-term bonds, cash and gold. Yuck! Yet, over the next ten years, it averaged 7.7 percent. It doubled in value, with just one losing year, dropping 0.9 percent in 1994.
By 2000, U.S. stock popularity had increased further. In contrast, bonds were relics from your grandparents’ era. Gold still hadn’t recovered from its 1981 plunge, so few investors wanted gold on their plate. However, nobody knew that U.S. stocks were about to enter their “lost decade.” If $10,000 were invested in U.S. stocks in January 2000, it would have been worth about $9,016 a full ten years later. Meanwhile, over the same time period, the Permanent Portfolio averaged a compound annual return of almost 7 percent.
As a result, over the 21+ years between January 2000 and May 31, 2021, the Permanent Portfolio almost matched the performance of the U.S. stock index and beat the performance of the global stock index. As seen in the chart below, it did so with far less volatility.
It’s easy to build a Permanent Portfolio with ETFs. You could put 25 percent of your money in Vanguard’s Total Stock Market ETF (VTI). For exposure to long-term government bonds, you could put 25 percent in the iShares 20+ Year Treasury Bond Index (TLT). You could satisfy the cash component with 25 percent in a money market fund or in Vanguard’s short-term government bond ETF (VGSH). The remaining 25 percent could be allocated to the iShares Gold Trust ETF (IAU).
I’m not saying the Permanent Portfolio will beat the U.S. stock market or a balanced index fund. After all, on a long-term basis (30+ years), it lags both. But it offers decent returns coupled with stability. The only trouble is, almost nobody wants it. Ever. Human nature sees to that.
|25%||Vanguard’s Total Stock Market ETF (VTI)||0.03%|
|25%||iShares 20+ Year Treasury Bond Index (TLT)||0.15%|
|25%||Vanguard’s short-term government bond ETF (VGSH)||0.05%|
|25%||iShares Gold Trust ETF (IAU).||0.25%|
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas