I just published an article over at Advisor Perspectives that is titled “What Investors Should Fear in The Permanent Portfolio” that looks at a very simple model portfolio proposed by Harry Browne. This portfolio contains equal allocations to four elements: stocks, gold, long-term government bonds and cash. Back in 1998 when Browne first proposed this portfolio in his book, Fail Safe Investing, it was decidedly harder to create your own version of this allocation model. Today, you can easily implement this portfolio at fairly low cost using four ETFs.
Harry Browne’s Permanent Portfolio has gotten a great deal of attention–and many new advocates–due to its solid performance in recent years when more traditional asset allocations suffered substantial losses. However, the question that investors need to ask is whether this will be a successful way to invest in the future.
I am not going to go through all of the analysis–but I will present three brief highlights here:
1) There is no question that the simple asset allocation in the Permanent Portfolio has done very well in the last decade and more.
2) The reliance on long-term bonds and gold has led to great performance but yields on long bonds are near historic lows and gold is near historic highs.
3) The Permanent Portfolio is not likely to fare well in a rising interest rate environment.
Ultimately, my conclusion is quite similar to that reached by William Bernstein, when he looked at this deceptively simple asset allocation. The statistics suggest that the Permanent Portfolio does indeed capture elements that will do well in a wide variety of market conditions. The danger for investors is piling into this strategy after a period that has been almost optimal for this approach vs. more conventional asset allocations. For many of the latecomers to the Permanent Portfolio, there is a substantial risk that they are chasing performance and are thus setting themselves up for much lower future returns.