Permanent Portfolio
A simple, balanced approach to preserve wealth in any economic environment
Strategy Type
Wealth Preservation
Risk Level
Low
Time Horizon
Long-Term (10+ years)
Ideal For
Conservative Investors
What is the Permanent Portfolio?
The Permanent Portfolio is a conservative investment strategy developed by investment advisor and writer Harry Browne in the 1980s. The strategy aims to preserve wealth and provide reasonable returns across all economic environments with minimal volatility and drawdowns.
At its core, the Permanent Portfolio consists of an equal allocation (25% each) to four distinct asset classes: stocks, long-term government bonds, gold, and cash (or short-term Treasury bills). Each asset class is designed to thrive in a specific economic environment, ensuring that at least one portion of your portfolio performs well regardless of current economic conditions.
Key Benefits
- Exceptional Stability: Historically experiences very low volatility and minimal drawdowns compared to traditional portfolios.
- Simplicity: Extremely simple to implement and maintain with just four asset classes and annual rebalancing.
- All-Weather Protection: Designed to perform adequately across all economic environments: prosperity, inflation, deflation, and recession.
- Low Correlation: The four asset classes have historically exhibited low or negative correlations with each other, providing true diversification.
- Peace of Mind: Allows investors to weather economic storms with minimal stress and emotional decision-making.
The Four Economic Environments
The Permanent Portfolio is built on the premise that the economy cycles through four fundamental economic environments, and different assets perform best in each:
Economic Environments and Asset Performance
| Economic Environment | Description | Asset That Performs Best | Portfolio Allocation |
|---|---|---|---|
| Prosperity | Economic growth with low inflation | Stocks | 25% |
| Inflation | Rising prices and currency devaluation | Gold | 25% |
| Deflation | Falling prices and economic contraction | Long-Term Government Bonds | 25% |
| Recession | Economic contraction with tight credit | Cash/T-Bills | 25% |
Key Insight: By allocating equally to these four asset classes, the Permanent Portfolio ensures that regardless of which economic environment prevails, at least one portion of your portfolio will perform well, offsetting potential losses in other portions.
This approach acknowledges the difficulty (or impossibility) of accurately predicting economic changes and instead focuses on being adequately prepared for any scenario.
Portfolio Construction
Building a Permanent Portfolio is straightforward, requiring just four investments in equal proportions:
Asset Allocation and Implementation
| Asset Class | Allocation | Implementation Options | Purpose |
|---|---|---|---|
| Stocks | 25% | Total Stock Market Index Fund (VTI, ITOT) or S&P 500 Index Fund (VOO, IVV) | Growth during prosperity |
| Long-Term Government Bonds | 25% | 20+ Year Treasury Bond ETF (TLT) or individual long-term Treasury bonds | Protection during deflation |
| Gold | 25% | Gold ETF (GLD, IAU), physical gold, or gold mining stocks (GDX) | Hedge against inflation |
| Cash/T-Bills | 25% | Money market funds, short-term Treasury ETF (SHV, BIL), or Treasury bills | Stability during recession |
Implementation Notes:
- The portfolio should be rebalanced annually to maintain the equal 25% allocations.
- For the stock portion, a broad market index is preferred to maximize diversification.
- For gold, physical allocated gold or low-cost ETFs are typically recommended over mining stocks, which have different risk characteristics.
- For cash, focus on safety and liquidity rather than yield—Treasury bills or government money market funds are ideal.
Historical Performance
The Permanent Portfolio has demonstrated remarkable stability over decades, particularly during periods of market stress. Below is a comparison of how it performed during various market environments compared to the S&P 500:
| Market Period | S&P 500 | Permanent Portfolio | Notes |
|---|---|---|---|
| 2008 Financial Crisis (2008) | -37.0% | -2.7% | Exceptional protection during severe crisis |
| Post-Crisis Recovery (2009-2010) | +45.5% | +18.4% | Participated in recovery but lagged |
| European Debt Crisis (2011) | +2.1% | +4.9% | Outperformed during uncertainty |
| Bull Market (2013-2019) | +125.8% | +41.3% | Underperformed during strong bull market |
| COVID-19 Crash (Q1 2020) | -20.0% | +1.2% | Positive returns during pandemic crash |
Key Insights:
- The Permanent Portfolio significantly outperforms during market crashes and economic crises, often preserving capital or even generating positive returns when traditional portfolios suffer large losses.
- It typically underperforms during strong bull markets, particularly extended periods of economic prosperity with low inflation.
- Over full market cycles (10+ years), the Permanent Portfolio has historically delivered returns of approximately 7-9% annually with much lower volatility than traditional portfolios.
- The maximum drawdown (peak-to-trough decline) for the Permanent Portfolio has historically been around 5-8%, compared to over 50% for the S&P 500.
Implementing the Permanent Portfolio
Step-by-Step Guide
- Choose your investment platform: Select a brokerage that offers low-cost ETFs or index funds for each asset class, ideally with commission-free trading.
- Allocate your capital: Divide your investment capital equally (25% each) among the four asset classes.
- Select appropriate investments: Choose specific ETFs, funds, or securities for each asset class, focusing on low costs and simplicity.
- Set a rebalancing schedule: Plan to rebalance your portfolio annually to maintain the equal 25% allocations.
- Maintain discipline: The key to success with the Permanent Portfolio is maintaining the allocations through all market conditions, even when one asset class significantly outperforms or underperforms.
Pro Tips:
- Consider implementing the strategy in tax-advantaged accounts to minimize tax implications from annual rebalancing.
- For physical gold holdings, consider allocated storage solutions rather than taking physical possession, which can involve security concerns and higher costs.
- When rebalancing, use new contributions when possible to avoid selling appreciated assets and triggering capital gains taxes.
- Consider setting rebalancing thresholds (e.g., rebalance when any asset class exceeds 30% or falls below 20% of the portfolio) rather than strict calendar-based rebalancing.
Common Misconceptions
Myth: The Permanent Portfolio Is Too Conservative
Reality: While the Permanent Portfolio is indeed more conservative than a traditional stock-heavy portfolio, its historical returns of 7-9% annually are quite respectable given its extremely low volatility and drawdowns. For many investors, the psychological benefits of stability outweigh the potential for higher returns with greater volatility.
Myth: Gold Is an Outdated Investment
Reality: Despite criticisms that gold is an unproductive asset, it has consistently served as an effective hedge against currency devaluation, inflation, and geopolitical uncertainty. Its low or negative correlation with stocks and bonds makes it a valuable diversifier in the Permanent Portfolio.
Myth: Cash Drag Reduces Returns Too Much
Reality: While the 25% cash allocation may seem like a drag on returns, it serves multiple purposes: providing stability during recessions, offering dry powder for rebalancing opportunities, and reducing overall portfolio volatility. The cash component is an integral part of the strategy's risk management approach.
Who Should Use the Permanent Portfolio?
The Permanent Portfolio is particularly well-suited for:
- Conservative investors who prioritize capital preservation over maximum returns
- Retirees or near-retirees who cannot afford significant drawdowns
- Investors who experience high anxiety during market volatility
- Those who prefer a "set it and forget it" approach with minimal maintenance
- Investors who are skeptical about economic forecasting and prefer to be prepared for any scenario
- Those seeking a core holding that provides stability while allowing for more aggressive satellite investments
Variations and Modifications
Golden Butterfly Portfolio
A popular variation that adds a small-cap value stock allocation, resulting in: 20% Total Stock Market, 20% Small Cap Value, 20% Long-Term Bonds, 20% Short-Term Bonds, and 20% Gold. This modification aims to enhance returns while maintaining most of the stability benefits.
Permanent Portfolio with Tilts
Some investors maintain the core four-asset structure but adjust the allocations based on their risk tolerance or economic outlook. For example, a more aggressive investor might use 35% stocks, 20% long-term bonds, 25% gold, and 20% cash.
Core-Satellite Approach
Use the Permanent Portfolio as a core holding (e.g., 70-80% of total investments) while allocating the remainder to more aggressive or specialized investments. This approach preserves the stability benefits while potentially enhancing overall returns.