Do you want to ensure consistent returns on your investments while managing risk? The Harry Browne Permanent Portfolio was designed to meet investors’ tolerance for risk and reward, balanced perfectly with the proper asset allocation and the correct mix of stocks, bonds, commodities, and cash.
We will explore how the Permanent Portfolio works, its framework for success as a diversified portfolio, and which investment strategies it emphasizes. We will also discuss the benefits of adopting this type of portfolio structure and possible risk areas based on the limited selection of income-producing assets.
Who is Harry Browne?
Harry Browne is a relatively well-known financial and investment advisor. Browne had a long investment advising career and service history in the United States armed forces.
Browne first expounded upon this permanent portfolio in his book “Fail-Safe Investing,” one of the 12 books that he ultimately authored. Of all of Browne’s books, this might have done the best job of laying out Browne’s fundamental approach to investment. “Fail-Safe Investing: Lifelong Financial Security in 30 Minutes” was built around the idea that individuals could and should use the stock market to achieve their lifelong financial goals.
At the same time, Browne objected to the idea that only individuals with high average net worth or access to financial professionals should succeed when making investments. Indeed, he built the permanent portfolio around the theory that anyone, anywhere, should be able to achieve growth in the stock market while investing.
In Browne’s mind, the goal of a permanent portfolio was to survive and thrive in any economic condition. Specifically, Browne’s permanent portfolio theory held that the four economic conditions are:
- Times of prosperity and relatively standard levels of inflation.
- Times of prosperity and deflation.
- Times of recession.
- Times of inflation.
The Harry Browne Permanent Portfolio aims to identify an appropriate asset allotment to ensure an individual can profit in all economic cycles. This is a challenging prospect, as it involves creating a portfolio that is diverse enough to mitigate risk but concentrated enough to see real gains when the market is doing well.
Browne would ultimately be the Libertarian candidate for President in 1996 and 2000.
However, there is no question about it: Harry Browne is best known for his essential invention of the permanent portfolio strategy.
What is the Harry Browne Permanent Portfolio?
The Harry Browne Permanent Portfolio is defined as a medium-risk portfolio. Like all investment opportunities, there are no guarantees, and there have been plenty of times when the value of the Harry Browne Permanent Portfolio has declined.
The Harry Browne Permanent Portfolio consists of an equal allocation in the following asset classes:
- 25% Stocks
- 25% Gold
- 25% Cash or U.S. Ultra-Short Term treasury bonds
- 25% U.S. Long-Term treasury bonds
The asset allocation is relatively conservative. 50% of the assets are invested in fixed-income investments of U.S. treasuries.
The 25% in cash or short-term U.S. Treasury Bills is in preparation for a recession.
The 25% long-duration bond investment usually provides more conservative growth and is used for deflationary environments.
Gold is traditionally used as a safety mechanism to protect against inflation.
Investing in stocks is for periods of prosperity and provides portfolio growth. The 25% allocation ensures that investors would experience a manageable amount of volatility in their overall liquid net worth since the remaining 75% of the portfolio should provide stability.
The overall asset allocation is relatively conservative and tends to slant towards asset classes that provide slow and steady growth.
|Vanguard Total Stock Market Index
|SPDR Gold Trust
|Cash or U.S. Ultra-Short Term treasury bonds
|iShares 0-3 Month Treasury Bond
|U.S. Long-Term treasury bonds
|iShares 20+ Year Treasury Bond
Advantages of the Harry Browne Permanent Portfolio
All Economic Environments Considered
A permanent portfolio is designed to perform well in any economic condition. The basic idea behind it is simple: Economic conditions are, of course, constantly changing, and different economic conditions impact various asset classes and financial instruments in different ways. This can be highly complicated for investors continuously seeking advice from an investment adviser about the best place to put their limited investment portfolio funds.
The selection of the various asset classes of this permanent portfolio – combined with their specific allocation – was meant to ensure that an individual could safely achieve financial growth in any economic condition, with the four asset classes essentially balancing against each other.
Specifically, Browne designed the permanent portfolio to make investments in the following areas:
- Stocks to move up in times of prosperity
- Cash/short-term bonds to maintain position and safety during recessions
- Gold, to protect the value of money in times of inflation
- Long-term bonds to protect against times of deflation
There are also some slight tweaks to this permanent portfolio theory, as some investors will substitute cash for T-Bills.
Professional Managers Not Needed
A significant benefit of the permanent portfolio strategy is the limited need for professional financial advice since a portfolio automatically invests in four asset classes. Individuals could get initial investment advice about how to invest money in a Permanent Portfolio and then not have to worry about repeatedly being charged for time or research services. Compared to expensive hedge funds or mutual funds with egregious fees, the permanent portfolio can be built using low-cost ETF funds.
An individual can use a permanent portfolio instead of this professional financial advice. The permanent portfolio approach involves investing in various stocks, fixed-income investments, and commodities. When used correctly, someone who invests in this permanent portfolio will always see growth in the value of their portfolio. Harry Browne’s permanent portfolio approach involved creating a profitable portfolio comprised of multiple asset classes.
It is worth noting that when using ETFs to construct the Permanent Portfolio, these financial instruments have extremely low expense ratios, with expenses currently clocking in at around .07%. This is extremely low and should give investors comfort when purchasing any of these asset classes, as they can know that such an investment is highly efficient.
The portfolio is simple to implement and manage. This could make life easier for investors looking to steer their money somewhere profitable but do not want to spend too much time managing the fund.
A permeant portfolio strategy is meant to be a form of “set it and forget it” when investing. Individuals can invest in a permanent portfolio and then watch that nest egg grow, only to cash it out when they need it.
The portfolio requires relatively little active management. All that is truly needed is for investors to rebalance the fund once a year. Doing so will ensure that the portfolio remains weighted at roughly 25% for each asset class.
Investing in the stock market can be overwhelming, but portfolio allocation methods can help manage risk and increase returns. One advantageous method is the equal-weighted strategy, where each asset in the portfolio is given equal weight. This allows for a balanced distribution of investments across different economic conditions. By diversifying holdings, the equal-weighted strategy can protect against market volatility while maximizing potential returns.
Disadvantages of the Harry Browne Permanent Portfolio
As much as the Harry Browne Permanent Portfolio offers advantages, that is not to say that there are specific reasons you should be cautious before making any investment.
No Alternative investments
First, as noted above, alternative investments – even relatively conservative ones – would have yielded more robust results than an investment in the Harry Browne Permanent Portfolio.
Unsuitable for Retirees
The Permanent Portfolio may not be appropriate for retirees seeking cash to maintain their lifestyle. Due to the low stock allocation, the monthly income is generated by 25% of the portfolio. Gold would not provide any monthly yield. And the remaining 50% of the bond portfolio would barely match inflation.
The Permanent Portfolio may not be able to generate much cash for reinvestment, and if this is your long-term goal, you may find yourself challenged by the portfolio’s offerings.
If you are seeking retirement income, a better option would be to look at investments for monthly income.
Exposure to Commodities
Third, the commodities section of this portfolio is not entirely as risk-free as possible. Different commodities are exposed to potential risks, including war, weather, climate, etc. Some have argued that the commodities section of this portfolio may have more risk exposure than many naturally risk-averse investors necessarily want to tolerate.
Also, most commodities index ETFs do not track the actual commodity prices. They are based on futures contracts with a backwardation (futures price is lower than spot price) or contango (futures price is higher than spot price) impact.
Also, different sectors – such as utilities – may be more appropriate for investors looking to stash their cash somewhere safe, relatively low risk, and able to survive both an economic downturn and an inflationary period. After all, there are several recession-proof stocks in the market.
Although the Permanent Portfolio makes sense and provides a psychological boost, there might be better portfolios to grow your wealth. Of course, the Permanent Portfolio hasn’t outperformed other hedge funds like Medallion Fund, but even a simple S&P 500 investment has outperformed the Permanent Portfolio.
When stock returns are high due to booming economic conditions, the Permanent Portfolio will not compete with other funds since it only holds a 25% allocation in equities. For a young investor, the stock exposure is quite low on a risk-adjusted return basis.
The low stock allocation reduces the portfolio volatility in times of distress, but returns are sacrificed over the long term. Even the other classic portfolio, such as the Ray Dalio All-Weather Portfolio, has a higher stock allocation.
The 25% cash component would also significantly drag on portfolio performance since inflation is a more significant concern over extended periods.
It is apparent that an investment in the Harry Browne Permanent Portfolio is not a panacea and should not be considered the “one investment strategy” that will guarantee success.
How To Build A Permanent Portfolio
Let’s take a look at the breakdown of each of these asset classes and how to build the Permanent Portfolio.
To invest in stocks, you can pick any broad-based index fund. The Vanguard Total Stock Market (VTI) is an ETF that seeks to track the U.S. total market. As a diversified ETF, it has stocks distributed across various sectors, including small, medium, and large-cap companies. As a passively managed ETF, it has a low expense ratio low.
Since the S&P 500 is a sufficiently diversified representation of the U.S. stock market, one can substitute the VTI ticker with SPY.
25% of the fund is invested in cash, a poor hedge against inflation. A better option would be investing in short-term T-Bills to match the inflation rate.
Long Term Bonds
Investing in bonds, however, is slightly more complicated due to the duration risk. One needs to pay attention to the shape of the yield curve and how long one wants to hedge against inflation risks.
The 25% long-term bond can be invested in the iShares 20-Year Treasury Bond (TLT). Bonds tend to be safer investments, although longer-duration bonds are believed to be somewhat riskier investments.
However, bond investments do well – particularly compared to stocks – during a bear market. It allows bonds to balance stocks, which typically grow better during a bull market.
An investment in bonds can also reduce portfolio risk. Treasury Bonds are among the most stable assets in the entire world and are among the more conservative investments an investor can make.
In the 1970s, investing in commodities was a much wiser decision than purchasing stocks and bonds. A rising inflation environment hurts stocks and bonds as tangible assets retain value.
25% of the fund is invested in gold for risk reduction and an inflation hedge. The ETF GLD is the simplest way to gain exposure to paper gold. Of course, one can also invest in physical gold using APMEX.
APMEX is one of the largest dealers of precious metals in the U.S. It offers a safe, trusted way to invest in gold and other metals. Besides one-time purchases, APMEX offers features such as auto-investing or a precious metals IRA.
It is possible to recreate the Permanent Portfolio using M1Finance.
You can read my M1Finance Review and why I prefer this platform to Vanguard, Fidelity, Schwab, or Betterment.
Who Is the Permanent Portfolio For
Generally speaking, there are two types of people for whom this portfolio may be right:
- Risk-averse investor looking for a portfolio with a proven track record of success.
- Fans of passive income want a “set it and forget it” portfolio without needing a financial advisor or paying specific management fees.
The excellent track record of performance, low management fees, and lower volatility make this an excellent investment for individuals in either category.
Is the Permanent Portfolio A Good Investment
So, is the Harry Browne Permanent Portfolio right for you? Ultimately, this is a difficult question to answer. It depends on various factors, including risk tolerance, investment strategy, financial goals, other assets purchased, interest rates, etc.
However, there is no question that the Harry Browne Permanent Portfolio has a track record of success, assisting investors in meeting their investment goals and generating a high total return during its time in existence.
That’s not to say that the Harry Browne Permanent Portfolio is always better than other investment options. For example, one analysis found that the portfolio would have generated a combined 2,600% return from 1972 – 2016, while an investment of 60/40 stocks-to-bonds would have generated a return of 5,050% during the same period.
However, the portfolio still had reduced volatility risk and performed better during multiple recessions, meaning that an individual who invested in the Harry Browne Permanent Portfolio would have suffered fewer losses if they had taken advantage of the Harry Browne Permanent Portfolio rather than using other investment opportunities.
Indeed, this cuts back to two of the core benefits of the entire permanent portfolio strategy.
- First, an investment in the Harry Browne Permanent Portfolio is highly stable. Investing in a permanent portfolio won’t allow you to see massive, rocket-like gains, but it will typically show slow, steady growth, outperforming bear markets.
- Second, the portfolio is highly diversified. Some may argue that such an investment is over-diversified, but this diversification serves as a method of protection, particularly in turbulent economic times.
Every investment decision comes with real risk. Investing in the Harry Browne Permanent Portfolio seems designed to ensure that you see your money grow, and it is a remarkably safe bet for investments if you are worried about the underlying economic conditions. Of course, like any other investment, you are not required to invest all of your money with the Harry Browne Permanent Portfolio, and you can very easily invest some dollars in this portfolio while investing some money elsewhere.
Fundamentally, you should ask yourself if the Harry Browne Permanent Portfolio is a suitable investment for you and if the potential gains from this portfolio offset the potential risks.
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
M1 Finance: John compared M1 Finance against Vanguard, Schwab, Fidelity, Wealthfront and Betterment to find the perfect investment platform. He uses it due to zero fees, very low minimums, automated investment with automatic rebalancing. The pre-built asset allocations and fractional shares helps one get started right away.
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Streitwise is available for accredited and non-accredited investors. They have one of the lowest fees and high “skin in the game,” with over $5M of capital invested by founders in the deals. It is also open to foreign/non-USA investor. Minimum investment is $5,000.
Platforms like Yieldstreet provide investment options in art, legal, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.