What Investors Should Fear in the Permanent Portfolio

Over the last decade, the assets of the fund PRPFX have swelled from $50 million to more than $10 billion.  The concept underlying that fund, Harry Browne’s Permanent Portfolio (PP), has rewarded PRPFX investors with attractive risk-adjusted returns.  Those investors, however, may want to rethink their exposure – especially if PRPFX is the core of a retirement-oriented strategy.

Browne laid out a very simple asset allocation model in his 1998 book, Fail-Safe Investing.  The concept starts with the premise that there are four extremes in the economy and that a good portfolio will have components that will outperform in each one:

  • Inflation: Gold and precious metals outperform
  • Deflation: Bonds outperform
  • Prosperity: Stocks outperform
  • Recession: Cash outperforms

The PP invests 25% in each of these asset classes, a strategy easily accomplished using three ETFs and a money market fund:

Asset Class Fund or Stock Ticker
Total Stock Market Index VTI
Gold GLD
Long Government Bonds TLT
Cash -

ETF Implementation of Permanent Portfolio

Long-term performance

William Bernstein wrote an excellent article in 2010 that reviewed the PP’s performance since 1964.  Neither ETFs nor index mutual funds existed for much of this period, so Bernstein used pure index data.  For the 45-year period through 2009, the four-component PP, rebalanced annually, would have returned 8.5% per year, with annualized volatility of 7.7%.  By comparison, a portfolio that was 60% allocated to a stock index, 20% allocated to long-term bonds and 20% allocated T-Bills would have returned 8.8% per year with annualized volatility of 11.3%.

In other words, while the 60/40 narrowly outperformed the PP, an investor was not effectively rewarded for the 46% higher volatility of the 60/40 portfolio.  Considering portfolio volatility, the PP dramatically outperformed. 

The mutual fund PRPFX broadly follows the PP concept.  While this fund has a relatively high expense ratio of 0.82% considering its simple composition, its total returns have been impressive over the last decade and more.  According to Morningstar, this fund had an annualized return of 11% over the 10-year period through January 2011 and 8.5% annualized return for the 15-year period.  The S&P 500 returned 2.5% and 6.6% per year over these two periods, respectively.