Is The Permanent Portfolio The Perfect Portfolio?


I have long been fascinated with the Permanent Portfolio which, devised by Harry Browne in the 1970's, allocates equal weightings to equities, long bonds, cash and gold. The big idea is that no matter what is going on in the world and markets, at least one of those will be doing well. I think what is interesting about it is what seems like potential for some sort of linear return where your account goes up, I don't know, 8% per year. The stock market averages 10% or whatever per year but the individual years' returns are of course all over the place.

There is a long standing mutual fund tracking the idea, the Permanent Portfolio Class I (PRPFX), but it should be noted that PRPFX doesn't necessarily maintain 25% each in the four asset classes. Here is a long term chart from Morningstar comparing it to the Vanguard S&P 500 Fund (VFINX).

Um, what was that about linear returns? It looks pretty good me. Here's another chart covering just the current bull market.

This isn't as good, it clearly has not been an equity proxy during the bull market but it is not designed to be an equity proxy. Mark Hulbert wrote about the Permanent Portfolio Fund and included risk and volatility data and you can look at Morningstar for the information they have accumulated to draw your own conclusion about what the fund has done.

Looking forward there are some difficulties in repeating the past success. The biggest one is that long bonds cannot repeat the decline in interest rates that has occurred over any longer period of time without first going much higher in yields which of course would mean painfully lower prices. The path between current lowish yields and higher yields could be brutal. PRPFX being an active fund has the opportunity to avoid the riskiest part of the bond market. The fund may or may not successfully do so but it could.

Cash yields for now are lower but are going up and that path would not be brutal if cash yields ever return to "normal." As I have said many times before, I think 25% in gold is way too much.

Buying PRPFX, like buying any actively managed product, is a bet on portfolio manager Michael Cuggino's ability to navigate whatever comes along. That could certainly work out but it is unknowable. A more hands on idea would be to start with the allocation concept has being a template to alter based on returns expectations, time horizons and the other factors that often go into building an asset allocation which is what this is, a different take on asset allocation.

The long bond allocation could be replaced with shorter term bonds, bank loan funds, alternatives that have bond-like total return and volatility profiles or any others you can think of. Realistically a mix of those types of things would probably make more sense than going all in on one of those. I also think the typical investor might want more than 25% in equities, at least most of the time. As I mentioned already, 25% in gold is too much for me for the simple reason that equities is the asset class that goes up the most, most of the time while gold has the historical tendency to have a low to negative correlation to equities which, again, are the thing that goes up the most, most of the time.

I am all for smoothing out the ride, it is exactly what I try to do for clients and the Permanent Portfolio offers are good starting point for how to do it even if the fund itself may not be the bet best.