Will Harry Browne’s Permanent Portfolio Continue To Work?

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.

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About Geoff Considine

After earning his Ph.D. in Atmospheric Science, Geoff worked for NASA for 3 years, leaving to become a quantitative analyst developing trading and portfolio management solutions for Aquila Energy. Leaving Aquila in 2000, Geoff became a consultant focusing on quantitative methods in portfolio management. Geoff founded Quantext in March 2002. Geoff has published commentary and analysis in a range of publications, including Advisor Perspectives, Financial-Planning.com, and Horsesmouth.com. Quantext is a strategic adviser to FOLIOfn,Inc. (www.foliofn.com (http://www.foliofn.com)). Neither Quantext nor Geoff Considine is an investment advisor.

13 thoughts on “Will Harry Browne’s Permanent Portfolio Continue To Work?

  1. Simon Napper

    It is an uncanny lazy portfolio — nothing else has matched it.

    I agree that its continued success is under pressure.

    We completed a similar review.

    Alternatives would be to change gold to more broadbase precious metals or commodities.

    We will make those additions and run historical simulations to compare results in future.

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  3. effem

    Who on earth pays this guy 82bp in expenses to run this portfolio? People in this country deserve to be poor.

  4. Geoff Considine Post author

    Dec 21, 2011

    I just had a look at how PRPFX has done since my analysis–not especially well, as I expected when I wrote this back in March. This is not an indictment of the strategy but more about the risk of getting into a strategy or fund after it has generated historically high performance.

  5. Andy

    What are you talking about? The HB portfolio returned 11+% in 2011, smashing the S&P and most all asset classes for the year!!!

  6. Patrick Garrison

    Whilst on the general subject of risk reduction, as I’m using a somewhat broader base of Mr. Browne’s theory rather than only four holdings, I also note that FolioInvesting should expand their risk management options. Currently, the weighting of a portfolio is done on the basis of the current value of the holdings, and not thetotal amount that one has invested in each one. Thus, if your choice is for equal weighting, for example, you will over time, with periodic investing, overweight the poorer performers in a given folio, rather than maintaining an equal amount at risk in each holding in the folio, if one were to weight the holdings by total amount invested.

    Of course, the current system may well allow for capital gains capture if the holding reverts to a mean if the dip in price is only temporary, and it then returns to a higher level, but if it goes down and settles there for some long duration, one may well be increasing one’s risk unintentionally. Adding a couple of additional fields to show the total invested (current value – gain/loss) plus as a percentage of that total would allow investors another level of risk management currently unavailable.

  7. Loren Dohm

    Geoff –
    In your response to Andy, there appears to be some confusion between the return on the mutual fund (“PRPFX”) and the return on the permanent portfolio strategy Harry Browne developed in the mid-1980′s (“the HB 4×25″). Although related, they are two distinct and different animals. I have used the HB 4×25 for a number of years and also had an 11+% return on it last year. Management of the HB 4×25 is functionally simpler than that used by PRPFX and does not involve paying a nearly 1% fee every year to a mutual fund manager.

    PRPFX is really just an early and partial iteration of the permanent portfolio strategy eventually developed by Browne. The fund may or may not be a useful for someone’s portfolio, but it is not the same as the HB 4×25.

    With respect to your statement that the strategy would not do well in a rising interest rate environment, no viable practical long term strategy that I’ve ever seen (other than staying nearly all in cash and/or selectively timing the shorting of bonds) will do well in such an environment. And, in fact, during the worst year of rising interest rates in my lifetime (1981) the HB 4×25 only lost a little over 6% (it’s worst year ever).

    I might add that the strategy was devised for a “post-gold standard” world (i.e., post 1971) with fiat currencies so it has only really been back-tested that far.

    Patrick –
    Your point is well-taken — the FolioInvesting model (I’m not knocking it — just pointing out) doesn’t really apply to how the HB 4×25 is actually managed. Browne suggested that periodic investments to and withdrawals from the portfolio should be made from the cash portion. He suggested rebalancing either: 1) whenever any one asset class rose to 35%, or sunk to 15%, of the portfolio; or 2) once a year. Very simple, but a little different than the Folio model.

  8. Geoff Considine Post author

    Hi Lauren:
    Thanks for your comments. Your point is well taken that the Permanent Portfolio is expressed differently in PRPFX and in the simple four-asset portfolio (4×25). I understand that tthe 4×25 returned around 11% for 2011.

    As far as interest rate exposure, the 4×25 has a very strong negative correlation to 10-year Treasury bond yield (source: my calculations). PRPFX has almost a zero correlation to ten-year Treasury yield (source: my calculations). The higher return of the 4×25 in 2011 would seem to be related to this difference.

    As far as other portfolios, there are many alternative portfolios with zero to mildly positive correlations to ten-year Treasury yield. If you do a few experiments, this will become clear.

    Regards,

    Geoff

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