It’s an investment strategy that has had only five losing years since 1971. Its biggest drop was in 1981, when it fell just 4.1 percent. In 2008, when global stock market levels were almost cut in half, this portfolio dropped less than 1 percent.
It also averaged a compound annual return of 8.49 percent between 1978 and 2018. The late investment writer, Harry Browne, created this bit of magic. It’s called The Permanent Portfolio. This isn’t something investors should jump in and out of, based on market sentiment. That’s speculating, not investing. Instead, if the portfolio fits your personality, it’s worth a long-term commitment.
The strategy combines gold, stocks, long-term bonds and cash in equal proportions. The mix never varies.
Permanent Portfolio Allocation
• 25% Cash (or short-term government bonds)
• 25% Long Term Bonds
• 25% Stocks
• 25% Gold
The investor needs to maintain the above target allocation. The portfolio won’t gyrate wildy when stocks plunge, yet it still provides growth. It works because it’s equally weighted to asset classes that often move in opposite directions. For example, the global stock index dropped 9.97 percent during the first 29 days of October, 2018. But short-term bonds gained slightly. Gold also rose 3.06 percent. Long-term bonds barely dipped. As a result, this portfolio dropped less than 3 percent.
The Permanent Portfolio’s greatest benefit might be its effect on the human psyche. People hate investment losses. As Richard H. Thaler wrote in the Journal of Behavioral Decision Making, we hate investment losses much more than we enjoy investment gains. Plenty of people think an investor’s success comes from picking the right stocks, timing the market or choosing the best allocation of low-cost index funds. But that isn’t entirely true.
Most professional stock pickers underperform the market after fees. Studies show that market timing doesn’t consistently work. And the best allocation of index funds is only as powerful as the person behind the wheel. After all, most investors underperform the funds they own. They buy more on highs. They sell or cease to add fresh money when those funds are on a low.
This is pretty serious stuff. Investors tend to be their own worst enemies. Here’s an example. Between 2003 and 2013, U.S. stock market funds averaged a compound annual return of 7.3 percent. That would have turned a $10,000 investment into $20,230. But according to Morningstar, the average investor in U.S. stock market funds averaged a compound annual return of just 4.8 percent over the same time period. That would have turned a $10,000 investment into $15,981. Over longer periods of time, such a performance gap becomes a Grand Canyon.
If $10,000 gained a compound annual return of 7.3 percent for 50 years, it would grow to $338,833.
But if the same amount gained a compound annual return of 4.8 percent over 50 years, it would grow to just $104,247.
Many investors don’t perform well because they speculate. They let greed and fear manipulate their decisions. They sell or cease to add fresh money when the market drops.