The Permanent Portfolio Investment Strategy

Normally if someone were to come to me and use words like fail-safe and investing in the same sentence I’d run the other way. When it comes to the economy and investing there is no such thing as a sure thing. Well, the only real sure thing is that government will try to meddle. But I digress. When it comes to the fail-safe investing talk, one great exception is Harry Browne’s book, Fail-Safe Investing. In this little book Harry packs more insight than most libraries filled with investment books. Don’t be fooled by the title as this book doesn’t claim to show you some gimmicky get-rich-quick scheme. Rather, Brown takes a long-term, free market approach to investing. In his book he describes his approach to investing in any market environment using his concept of the Permanent Portfolio. Think libertarian investing.

Economic Environments

The economy has its ups and downs. Unfortunately, because of government intervention, it can be a roller coaster. However, if you understand how the economy really works you can be prepared and even profit from these changing conditions. It’s not about a short term approach or an attempt to time the market. It’s about understanding the economy and increasing wealth while riding through shifting economic conditions. The Permanent Portfolio was developed as simple yet safe and stable investment portfolio for the four general econmic environments.

Prosperity: A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.

Inflation: A period when consumer prices generally are rising. The might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).

Tight money or recession: A perios during which the growth of the supply of money in circulation slows down. This leaves people witth less cash than they expected to have, and usually leads to a recession-a period of poor economic conditions.

Deflation: The opposite of inflation. Consumer prices decline and the purchasing power of money grows. In the past, deflation has sometimes triggered a depression-a prolonged period of very bad economic conditions, as in tthe 1930s.

Some investments perform better than others depending of the economic environment. For instance, whereas stocks and bonds do well during times of prosperity, cash is neutral. Gold does well during times of inflation, though it doesn’t do well in times of deflation like cash does. To cover all of the economic environments, Browne narrowed down the investments to four. They break down like this:

Permanent Portfolio Economic Environments and Investments
Investment Prosperity Inflation Tight Money

A Portfolio To Rule Them All

Harry Browne suggested a portfolio with the assets divided into four equal parts allocated to each of the four investments: Stocks, Bonds, Gold and Cash. This lazy portfolio is only lazy in that it requires little maintenance. The only work usually required is that you simply re-balance the portfolio annually. Additionally, if any part of the portfolio has become worth less than 15% or more than 35% of the total value, then you simply re-balance all four portions back to 25%. There are different ways to specifically apply this investment strategy. Here’s a general allocation:

The Permanent Portfolio
Allocation Investment Type Investment
25% Stocks A Broad Stock Index Fund: Vanguard 500 Index Fund Investor Shares (Ticker: VFINX), Vanguard Total Stock Market Index Fund Investor Shares (Ticker: VTSMX)
25% Bonds Long-Term Bonds (US Treasury 20+ Year Bonds): Barclays 20+ Year Treasury Bond Fund (Ticker: TLT), Vanguard Long-Term Treasury Fund Investor Shares (Ticker: VUSTX)
25% Gold Physical Gold Bullion: American Eagle Gold Bullion Coins, South African Gold Krugerrand Bullion Coins
25% Cash A Money Market Fund (Short-Term Debt Securities, US Treasury 1-3 Year Bonds): Barclays 1-3 Year Treasury Bond Fund (Ticker: SHY), Vanguard Short-Term Treasury Fund Investor Shares (Ticker: VFISX)

As I said, there are various ways to specifically apply The Permanent Portfolio. In fact, if you’re not interested in compiling the portfolio yourself you can simply allocate all of your investment funds to The Permanent Portfolio Fund (Ticker: PRPFX).

Good To Know

There are a few things I would like to point out. The first is, if you have the option to buy these funds as a low-cost ETF (Exchange-Traded Fund), do it. ETFs aren’t known as being low-cost for nothing. Secondly, in regards to the stocks portion, you can alter it a bit to add further diversification by adding international stocks. I recommend doing this. However, international stocks can be very volatile so you shouldn’t allocate more than 5% to them. An adequate Broad International Stock Index Fund is Vanguard Total International Stock Index Fund Investor Shares (Ticker: VGTSX). For example, if you want to diversify your stocks portion globally you could simply allocate 20% of the total value of the portfolio to Vanguard Total Stock Market Index Fund Investor Shares (Ticker: VTSMX) and 5% to Vanguard Total International Stock Index Fund Investor Shares (Ticker: VGTSX). A third point of emphasis is, notice that the gold allocation is physical gold bullion. Paper gold and gold stocks are not the same as and do not behave in the same way as actual physical gold. Gold bullion (non-numismatic/non-collectable) coins can be easily purchased at any reputable coin shop. They’re also real money and nice to look at too! The last point of emphasis is, no, I don’t work for Vanguard. However, while they do have their flaws, I do like their philosophy, service and innovation.

As Fail-Safe As You Can Get

Harry Browne’s Permanent Portfolio was something that I had been trying to find for some time. I always believed that there had to be an investing strategy that was simple to understand and made economic sense. While there are no sure bets as anything can happen (e.g. a fiat currency collapse), The Permanent Portfolio is an investment strategy that’s as reasonable as one could hope for. Harry devised it with sound economic principles in mind so that investing can be done in pretty much any market environment. Judging by the results, The Permanent Portfolio sure looks like a workhorse for a lazy portfolio.

The plans of the diligent lead surely to abundance,
but everyone who is hasty comes only to poverty.

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