In every manner of building wealth, one thing remains common: risk and profit analysis. Whether a business or investment, this factor has a huge impact on decision-making.
Further, this common factor is treated differently by different people. Many consider risk a part of investment and are ready to take big decisions. Others take a very conservative view. They would not like to invest in anything that has the potential of giving them losses.
And then some people try to find a middle ground by investing in medium-risk options. The ones that can give good profits over a period of time.
Harry Browne Permanent Portfolio tries to strike a balance between these two. It was created by Harry Browne, an American investor, author, and politician.
This article will look at what Harry Browne’s Permanent Portfolio is. Plus, its composition, assets allocation, and many more things will be covered.
So let’s get going!
Key Takeaways –
- The Harry Browne Permanent Portfolio is a medium-risk portfolio.
- It exposes 25% assets on the Stock Market and 25% on Commodities.
- Compound annual return in the last 10 years is 5.34%.
- The standard deviation for the previous 10 years is 6.03%.
- Further, it has an equal allocation of stocks, bonds, gold, and cash, or treasury bills.
What Is a Permanent Portfolio?
Harry was a well-known American politician, writer, and investment guide. He made significant contributions to the libertarian movement. He was even selected as presidential nominee on the Libertarian Party ticket. Browne has also authored various articles and books on investment and libertarian politics.
One of his many investment advice was the permanent portfolio. He based the portfolio on the long-term approach. This could save investors from high volatility using broad diversification of assets.
Browne first introduced a permanent portfolio concept in his book ‘Fail-Safe Investing.’ The basic idea is to have an asset mix that will survive and thrive in any kind of economic environment.
The portfolio has such a design that it has something for everyone. For example, if there is inflation, gold will go up, and cash will lose value. Similarly, cash will increase in value during a deflationary period. And bond performance will go down.
The four crucial assets for diversifying the assets are US Stocks, long-term bonds, cash, and gold. He believed four assets would protect the portfolio from inflation, deflation, and stagflation.
Further, he classified them into four basic categories. He also combined them with asset allocation –
- Prosperity: Investment in stocks will bring profit during periods of prosperity. It’s a profitable strategy for equities and, on occasion, bonds.
- Deflation: Invest in some long-term bonds during deflation or declining interest rates for prosperity. Stocks generally underperform as corporate earnings tighten. Also, cash is king because product costs decline, giving consumers more money to spend. Stocks, like gold, are less desirable during deflationary periods.
- Inflation: Profit during inflation is possible by investing in gold as it’s bullish. The inflation period is outstanding for gold. Its’ because the value of money falls, people’s worries about paper assets rise.
- Recession: A Treasury Money Market Fund’s cash protects your purchasing power during deflation. When the economy slows down, interest rates generally rise. Gold and equities often underperform during recessions. Which leaves cash once again as the portfolio’s savior.
This way, the portfolio stands strong against different economic conditions. This is why this portfolio is also known as a lazy portfolio.
Permanent Portfolio – Review
The Harry Browne Permanent Portfolio is a simple, four-asset investment mix. Its structure provides stability and profitability in any economic climate. The portfolio works on the idea that it’s difficult to predict which assets will outperform.
So it’s best to have a diversified mix that will do well no matter what’s happening in the economy.
The four asset classes in the Harry Browne Permanent Portfolio are – US stocks, long-term bonds, cash, and gold.
Browne recommends investing in these assets in equal proportions. Also, the investment should be regardless of what the economy is doing. For example, if you think inflation is on the horizon, you would buy more gold and less cash. But if you think the economy is headed for a recession, you will do the opposite.
During my analysis, I found low allocation to stocks very strange and not a deal maker. As we all know, equities are generally the driving force behind a portfolio’s return. But here, the portfolio’s 25% allocation doesn’t give much growth potential. It’s a low point, especially for long-term investors with a high-risk tolerance.
Another thing that I found, the portfolio doesn’t provide any international(ex-US) holdings. International stocks and bonds are now famous among investors and boost diversification.
But, there’s one more view to it. Browne couldn’t include the international stocks as they weren’t popular during portfolio establishment. So, I’m Neutral about this.
Furthermore, the portfolio has a low turnover. It is great for investors who want to cut their tax bills. You’ll only need to make changes when any underlying asset experiences a major change.
For example, if the market crashes and US stocks lose half their value, you’ll need to sell some stocks. At the same time have to buy long-term bonds to maintain your 25% allocation.
Choose Harry Browne Permanent Portfolio if you want a simple, low-maintenance investment mix. Such a portfolio will do well no matter what the economy is doing.
The portfolio’s four asset classes provide stability and profitability in any economic climate. Plus the low turnover means you’ll rarely need to make changes.
Moreover, one thing that I like the most is the stability and profit margin this portfolio holds. I can say that the portfolio is a rock-solid choice if you are looking for the most balanced ETF portfolio.
But, I noticed a few more advantages and disadvantages, which I’ll be listing below.
Require the least maintenance
Since the portfolio is broadly diversified, it doesn’t need much maintenance. You have to keep rebalancing it from time to time. Also, you don’t need to watch the markets constantly. There is no need to make any rash decisions when the economy takes a turn for the worse.
The final advantage of the portfolio is its tax efficiency. Since it’s broadly diversified, investors can sell individual assets. This helps them keep their taxes low, especially for high-income earners.
Thisportfolio is created in a way that can provide safety to the investors. Investors using the permanent portfolio approach don’t have to think about huge losses. Even during economic downturns, which is explicitly appealing for investors approaching retirement.
There will always be a cost to investing. But this approach has considerably lower expenses compared to other portfolios in the market. The savings are an outcome of a focus on certain assets. Long-term bonds and index ETFs tracking US markets have minimal expense ratios than their competitors.
Furthermore, gold is relatively cost-effective to maintain. It takes absolutely nothing for you to keep money in your pocket.
Protects purchasing power
The biggest advantage of a permanent portfolio is that it protects your purchasing power. No matter what happens in the economy, your purchasing power will remain intact.
Suitable for long-term investors
This portfolio is suitable for long-term investors who want to protect their wealth. Those who don’t mind sacrificing some returns for safety can go with it.
Underperform during bull markets
The biggest con of this portfolio is that it underperforms during bull markets. Since it’s a conservative portfolio, it doesn’t take part fully in the market’s upside. Yet, this is also its biggest strength as it protects you from the market’s downside.
Not suitable for short-term investors
This portfolio is not suitable for short-term investors. It doesn’t allow them to take part fully in the upside of the market. Short-term investors should look for other portfolios that are more aggressive.
Limited upside potential
The biggest con of Harry Browne’s permanent portfolio is its limited upside potential. This is because it’s focused on preservation rather than growth. You won’t lose any money in a downturn. But you also won’t make as much as you would if invested in a more aggressive portfolio.
Harry Browne Permanent Portfolio – Performance
The performance of Harry Browne’s Permanent Portfolio has been mixed over the years. Here are some of the elements of its performance.
|10Y Annualized Return||5.49%|
The returns of this portfolio have been quite impressive over the long term. Harry Browne Permanent Portfolio has returned -3.52% Year-To-Date and 5.49% of annualized return in the last 10 years.
It is a metric that indicates how much price fluctuations vary in size. Because the prices change less predictably, assets with higher volatility are riskier. Harry Browne Permanent Portfolio’s current volatility is 27.17 percent. This makes it a medium-level risk portfolio.
Harry Browne Permanent Portfolio has performed quite well over the years. Despite there being some down years. The compound annual return of the Harry Browne permanent portfolio in the last 25 years is 6.87%. The standard deviation is 6.45%, making it a safe and profitable portfolio.
Moreover, the Harry Browne Permanent Portfolio dividend yield is also respectable. At 0.73%, it provides an excellent extra income while your money is invested.
If we talk about the drawdown, the biggest one was in 2008. The drawdown percentage was 12.63%, which continued for over eight long months. It took 10 more months for the portfolio ETFs to perform well on the charts again. There have been other drawdown incidents as well, but this was the biggest due to the economic crisis.
Harry Browne Permanent Portfolio – Asset Allocation
There are several allocation strategies that make a permanent portfolio. Here’s one example of assets allocation that you can use:
- In periods of prosperity, a 25% allocation to US equities provides a powerful return. Browne also suggests an inexpensive S&P 500 index fund.
- Next, Browne advises investing 25% in long-term US Treasury bonds. During periods of plenty and deflation—or lower prices—they flourish. But they suffer during downturns.
- Then the next 25% asset allocation should be in cash or short-term treasury. It’s to hedge against the recession period.
- The last 25% allocation is recommended in gold. It can protect during periods of inflation. According to Browne, gold bullion coins are a great investment.
Harry Browne Permanent Portfolio Vs. Other Portfolios
Let’s see how Harry Browne Permanent Portfolio performs against other portfolios.
Harry Browne Permanent Portfolio Performance vs. S&P 500
As of March 12, 2022, the Harry Browne Permanent Portfolio has returned -3.52% YTD while the S&P 500 has returned -11.79%. The annualized return of the Harry Browne Permanent Portfolio in the last 10 years is 5.49%. Whereas the return of the S&P 500 is 15.18%.
The biggest drawdown for the Harry Browne Permanent Portfolio was during the financial crisis. It lost 12.63%, and on the other hand, the S&P 500 lost 37.22%.
Harry Browne Permanent vs Ray Dalio All Weather Portfolio Comparison
The Permanent Portfolio, compared to All-Weather, contains less gold and cash. But it includes more equities and bonds. The All-Weather Portfolio can also withstand economic storms by combining diversification with it.
In the previous 25 years –
The Harry Browne Permanent Portfolio has achieved a 6.87% compound annual growth. And a 6.45% standard deviation.
Whereas the Ray Dalio All Weather Portfolio has returned 7.74% per year. Plus, 6.85% with a standard deviation of 6.85 percent in the previous 25 years.
As a result, the outcomes have been quite comparable. The All-Weather Portfolio still outperformed in terms of total return. Also, they ended up with almost identical risk-adjusted returns.
Permanent Portfolio vs. Golden Butterfly Portfolio
The goal of the Golden Butterfly is to provide an equal chance of returning rich rewards. The returns are regardless of market conditions. The Permanent Portfolio, which utilizes four of the five assets, is similar to this concept.
However, the Harry Browne Permanent Portfolio balances inflation, prosperity, recession, and deflation equally. Whereas the Golden Butterfly biases assets toward wealth. It does so by adding a premium allocation to some high-performing small-cap value.
The Golden Butterfly offers a great risk-adjusted portfolio to investors. It incorporates the renowned stability of the Permanent Portfolio. The difference is that it’s way more aggressive growth rates than comparable options.
Therefore, if I have to choose one, I’ll go with the Butterfly Portfolio. It’s because it consists of small-cap value stocks. Plus, I don’t feel like 5% extra gold will do much good if I invest long-term.
How To Create a Leveraged Permanent Portfolio?
A leveraged portfolio is a type of investment in which the value of the underlying assets is multiplied. A three-times leveraged S&P index fund, for example, would aim to increase the S&P 500 index’s gains up to three times. It doesn’t matter if the outcomes are positive or negative. Also, these funds are expensive in terms of management and trading expenses. It’s because of their increased complexity.
We will now look at creating a leveraged Harry Browne Permanent Portfolio. We can do this by using three ETFs.
The first step is to choose the asset allocation that you want. I will use a 25%,50%,25% split between stock and gold funds for this example.
Next, you need to choose the specific ETFs or mutual funds you want to invest in. For this example, I will use the following –
There aren’t any major three-times leveraged gold funds present in the market. But Proshare Ultra Gold Fund is a two-times leveraged fund that aims to double profits or losses in the market. The fund’s expense ratio is very less compared to others at 0.95 percent.
This is a 3X leveraged ETF that tracks the S&P 500 with leverage on the downside. The expense ratio is a bit on the higher side but still manageable at 1.01 percent.
This is a 3X leveraged ETF that tracks the S&P 500. The expense ratio of UPRO is 0.93 percent.
Using these leveraged ETFs, you will have a leveraged Harry Browne Permanent Portfolio. It will aim to provide you with superior returns during bull markets. Also, it will provide some protection during bear markets.
The main advantage of using leverage is that it can help you achieve your goals quicker. However, the downside is that it can also amplify your losses. It happens during market corrections or bear markets.
How To Build Your Own Permanent Portfolio Using ETFs?
There are many different ways to build a portfolio using ETFs. You can use a simple, four-ETF portfolio or create a more complex portfolio with dozens of ETFs.
The best method to build a portfolio is to find the right mix of asset classes. Choose the ones that meet your specific needs and risk tolerance. You may include some international stocks, bonds, and commodities in your investment portfolio. Or, you may want to focus on specific sectors such as technology or health care.
It’s essential to remember that there is no one-size-fits-all solution for portfolio building. You need to find the mix of assets that works best for you.
Here’s an example of a portfolio that imitates permanent portfolios. I am using four ETFs, all exposed in a 25% ratio, to get a stable and minimal risk portfolio:
- 25 % of Vanguard Total Stock Market Index Fund ETF (VTI) –
It’s a large blend fund that tracks the performance of the CRSP US Total Market Index. It provides good exposure to the US market and has a YTD of 15.21%. The expense ratio of this Vanguard fund is among the lowest at 0.03%.
- 25 % of Vanguard Long-Term Treasury Index Fund ETF (VGLT) –
It tracks a market-value-weighted index of fixed income securities issued by the US Treasury. But it excludes the inflation-protected bonds, with maturities of at least 10 years. The expense ratio of this ETF is minimal as well, at 0.04%.
- 25 % of Vanguard Short-Term Treasury Index Fund ETF (VGSH) –
This fund tracks the same fixed-income securities issued by the US Treasury as of VGLT. The difference is it excludes the inflation-protected bonds with maturities of 1-3 years.
- 25% of Aberdeen Standard Physical Gold Shares ETF (SGOL) –
This is one of the largest and most popular gold ETFs. It tracks the price of gold and has an expense ratio of 0.17%.
This portfolio gives good exposure to:
- US stocks
- Long-term US Treasuries
- Short-term US Treasuries
The main advantage of the permanent portfolio is it is diversified across different asset classes. This diversification can help protect your portfolio during market corrections or bear markets. The only disadvantage is it doesn’t offer much upside potential during bull markets. For example, if the market goes up by 20%, this portfolio will only go up by 5%.
Is Harry Browne Permanent Portfolio For You?
Harry Browne’s Permanent Portfolio is a well-diversified portfolio. It can help you protect your assets during market corrections or bear markets.
The following group of investors can use this portfolio –
Prudent Investors –
Some investors are ready to give up potential gains to avoid huge losses. The Permanent Portfolio can protect such people.
The portfolio generates steady, gradual growth with minimal losses in difficult economic situations. So, those approaching retirement or who can’t afford losses will profit from it.
When learning about investing, it’s a good idea to use a safe investing strategy. It will allow you to get some exposure to the market’s potential returns. The Permanent Portfolio can help to learn about asset allocation and risk management.
Harry Browne’s Permanent Portfolio is a well-diversified, low-risk portfolio. It can help you protect your assets during difficult economic times. It may not offer the same upside potential level as other investment options.
But it comes with the peace of mind that you will not lose money during market downturns. If you are looking for a safe way to invest your money, the Harry Browne Permanent Portfolio may be right for you.