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How to Build an Automatic, Fail-Proof Portfolio

March 21, 2012 | About:

Over the last few years, many investors have been looking for a way to invest safely, given that many investors were burned during the stock and real estate crash.

One of the more popular strategies making a "comeback" is the "permanent portfolio strategy," an investment strategy that uses diversification and re-balancing to create a portfolio that does fine in almost any economic environment.

With the permanent portfolio, the portfolio only needs to be rebalanced one time a year. Since the selected investments manage themselves during the remainder of the year, regardless of economic conditions, the investor has less work to do. There is no need to keep abreast of economic or financial developments, though doing so is never a bad idea, of course.

Investment writer Harry Browne created the permanent portfolio investment strategy. In his writings, he advised readers to ignore investments promising a quick profit.

Instead, he recommended that they build a secure portfolio through an investment process described as safe, steady and slow. To learn more about Mr. Browne and his ideals, read his books, newsletters and articles.

The Permanent Portfolio

What is included in this portfolio that provides financial security regardless of how the economy performs? A little bit of everything because different asset classes perform better during certain market conditions.

The general idea is that the portfolio includes:

  • 25% precious metals.
  • 25% stocks.
  • 25% bonds.
  • 25% cash.

The portfolio will then take care of itself, with assets that will do well during recessions, prosperity, depression, inflation you name it, it's prepared. It's done great, too, outperforming almost everything else over the last 10 years. It's not lost money since 1994.

The permanent portfolio strategy is a passive one, based on the idea that if the proper investments are selected, the portfolio will grow steadily during inflation or deflation, periods of recession or depression, and other difficult conditions. Asset allocation, not stock selection based on market timing, is the focus of this strategy.

When inflation is increasing, cash and bonds may suffer but precious metals like silver and gold flourish. During strong economic times, growth stocks perform well and when the economy is in a recession, government bonds are the go-to investments. During a depression, Treasury bills are the investments that shine. Therefore, the permanent portfolio created by Mr. Browne is comprised of a 25 percent investment in each of precious metals, growth stocks, government bonds and Treasury bills.

The Permanent Portfolio Mutual Fund

The Permanent Portfolio Fund is a mutual fund based on Mr. Brownes strategy and managed by Michael Cuggino.

Allocations are slightly different, with a 35 percent investment in government securities, 25 percent in silver and gold bullion, 15 percent in growth stocks, ten percent in cash and Swiss franc bonds with a yield under two percent, and 15 percent in hard-ish assets like mining, energy and real estate stocks.

The idea is the same as the original strategy: to maintain a balance of asset types so the portfolio can weather any economic storm.

Permanent Portfolio Historical Returns

This approach may not sit well with every investor, but there is no denying that the Permanent Portfolio Fund has performed well.

During the 1990s, it struggled to retain its shareholders because of the flashy returns of the stock bull market. But since then, it has become increasingly popular. From Feb. 2, 2001 through the same date in 2011, the fund had an 11 percent annualized return compared to 1.6 percent annualized return for the S&P 500.

In recent decades, the fund has managed to provide the same or better returns as the stock market with much less risk. When the S&P dropped 37 percent during 2008, Permanent Portfolio suffered only an 8.4 percent loss. An investment that does not experience a major dip or crash is extremely rare.

When the S&P 500 stock index returned 15.1 percent in 2010, Permanent Portfolio provided a 19.3 percent return. In 2001, Permanent Portfolio had assets of $52 million. By February 2011, $10.6 billion was under management and the fund had doubled its size of just one year earlier. A lot of the portfolio's returns come from the strong gold price market over the last ten years.

The portfolio itself has not changed and investors chasing performance may quickly lose interest in this fund. However, that will not make Mr. Cuggino change his focus. The goal of the fund is to beat the inflation rate during good and bad economic times, using a mix of assets that does not change based on market conditions.

Is It For You?

The permanent portfolio strategy is designed for someone who is looking for a long-term, boring portfolio that allows the investor to not worry about the portfolio at all. Recessions, flash crashes, prosperity the portfolio handles them all with style.

It's not for everyone of course. Some people are better off actively managing their investments, actively picking stocks with little-to-no precious metals, or other strategies altogether. But for the non-professional investor who just wants peace of mind, it's an important strategy to consider.

Rating: 4.3/5 (4 votes)


AlbertaSunwapta - 8 years ago    Report SPAM
It must be 25 yrs ago that I clipped out an article called something like "Browne's Hedges" that laid out this concept. (I'm sure I even I still have it in some box somewhere.) It kept coming to mind over the years because for the next 20 yrs gold was dropped from everyone's allocation lists. It seemed odd that while in the 1980s both gold and real estate were considered by financial planners etc. as must have allocations (usually at around 10% minimum each), that by the mid 1990s no one recommended any position in gold. Also real estate wavered back and forth in recommended minimum allocation lists. I think it just becomes to embarrassing for planners to include some asset classes in their allocations if the price remains low or flat.

Now that gold has performed well again for the past 10 yrs I expect it will become a fixture of everyone's must own some lists - until years of losses cause it to become unbearably embarrassing to recommend.
Shaunconnell - 8 years ago    Report SPAM
Alberta, I think you're probably right toward the end there. People often stop buying an asset after it doesn't perform for a while -- even thought that's often the best time to buy.

Right now, real estate is a wonderful bet, and just a couple of years ago, stocks where a great buy.

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