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Simplified Investing via a "Permanent" Strategy

8 February 2013 in Trading Ideas

The name “Harry Browne” may not mean anything to you. But among a select group of seasoned investors, it is synonymous with the “Permanent Portfolio,” a unique and extremely simple approach to some classic investing problems.

Browne, who died in 2006 at the age of 72, was a life-long financial writer who authored more than a dozen books on economics and personal finance. One of his best-known was 1991’s “Fail-Safe Investing: Lifelong Financial Security in 30 Minutes,” in which Browne laid out many of the ideas that would be incorporated into the Permanent Portfolio strategy.

Few investors need to be schooled in the central importance of portfolio diversification. A related idea involves distributing your portfolio among asset classes that are uncorrelated, meaning they don’t all rise or fall in value at the same time.

Browne’s strategy addressed these two goals with one of the simplest approaches imaginable. His suggested portfolio is invested in equal proportions in four asset classes: 25% each in equities, gold, long-term bonds and short-term bonds.

Unlike many other investment approaches, the allocation between asset classes does not change as an investor nears retirement, hence the “Permanent” part of the name.

By investing a quarter of one’s portfolio into each of these four asset classes, Browne argued that an investor will be prepared for any of the four possible stages or cycles an economy can go through: Prosperity, which is good for stocks; recession, which is good for short-term bonds; inflation, which is associated with increased gold prices; and deflation, when long-term bonds have historically done well.

In other words, at any given time, one of the asset classes can be expected to increase in value, according to Browne’s theory. For example, if stocks are down because of a bear year on Wall Street, the value of gold might rise, thus protecting the portfolio’s overall value.

What sort of performance has this approach had in the real world? According to an article published in the Journal of the American Association of Individual Investors1, the Permanent Portfolio strategy has returned a 9.5% compound annual growth rate over the last four decades. The worst annual loss was 5%, which occurred in 1981. During the 2008 financial crisis, according to the article, the strategy saw a decline of 2%.

Interest in Browne’s approach appears to be increasing. There is now more than $16 billion in assets invested according to the Permanent Portfolio Fund, and last fall, the Wiley publishing house issued a new book on Browne and his ideas: “The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy.”

Investors can put Browne’s ideas into action with the new Permanent Strategy motif, based on the Permanent Portfolio strategy. Read more about the motif here.

1http://www.aaii.com/journal/article/the-permanent-portfolio-using-allocation-to-build-and-protect-wealth


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