Let’s get to the meat the Permanent Portfolio performance: How well does it actually work? The answer is that the Permanent Portfolio has performed very well over the last 40 years. These and other topics are all covered in the new book.
In a prior post we talked about the Permanent Portfolio allocation which is:
25% – Stocks (in a broad based stock index fund like the S&P 500)
25% – Long Term Treasury Bonds
25% – Gold Bullion
25% – Cash (in a Treasury Money Market Fund)
This allocation will provide protection when the economy shifts through the cycles of prosperity, inflation, deflation and recession.
Now, some may be thinking that this allocation sounds very different than what they’ve seen elsewhere. For instance, the idea of owning gold is scoffed at by some investment advisors because it has no dividends or interest. Long Term Bonds? Many will tell you that they’re too risky due to rising interest rates. How about Cash? Isn’t holding a bunch of cash missing out on the hot stock market action? And, only 25% in stocks? Well everyone knows that stocks always beat every other investment so surely you want more than 25%, right? Right!?
The reality is the investment markets are uncertain and unpredictable. What may look good in a theoretical backtest may blow up horribly as economic conditions change. Even worse, portfolio strategies that should work well based history often don’t work in actual application as people abandon them due to volatility and long periods of underperformance. Finally, every reputable study on the subject has shown that relying on your gut instinct, hunches, investment gurus and hot tips to run a portfolio is a road to disaster for performance and safety.
The Permanent Portfolio strategy works because it has very wide and true diversification. You have exposure to assets that can grow your money safely at all times without having to predict the future. You also have protection in the diversification against losing large amounts of money which can cause you to abandon the strategy in bad markets.
A Couple Small Changes
I did make two small changes to the original Permanent Portfolio as investment vehicles have changed in type and availability over the years. Harry Browne recommended using the Treasury Money Market Fund for cash. I personally like using Short Term Treasuries in combination with a Treasury Money Market Fund which provides nearly identical risks but slightly better returns on your cash. Also, instead of using the S&P 500 Index, I’ve chosen to use the Total Stock Market Index(also called the Russell 3000, or Wilshire 5000 index). The Total Stock Market Index provides wider stock diversification (holds 3-7000 stocks) with slightly better results than the S&P 500 (which holds 500 stocks). The slightly better result is because the Total Stock Market also holds small and medium sized company stocks which can sometimes outperform the large company stocks of the S&P 500 alone. The Total Stock Market also has expected higher tax efficiency due to how the index is constructed and managed.
You can use my changes or not. It doesn’t matter much. If you stick to the S&P 500 and Treasury Money Market Fund as originally recommended the results are within about 0.50% (one half percent) annually (favoring short-term bonds and total stock market) through the years.
Let’s look at the score card and see how the Permanent Portfolio Allocation has done from 1972-2011 (1972 is the furthest we have data for Gold which was taken off the fixed exchange rate in 1971). The growth assumes $10,000 starting investment.
The assumption in this table is we rebalance each year to get back to our 25% allocation split among all four asset classes. Percentages are rounded to the nearest tenth.
This table uses the data directly from the Simba Spreadsheet on the Diehards Forum. Some of the numbers are lower than what the Morningstar SBBI yearbook may show for certain assets (such as Long Term Treasury Bonds). However I have opted to use the Simba Data simply because it is widely available to anyone where the SBBI data is not.
Because I am using Simba’s data, it will be slightly different than actual returns I post each year that uses Morningstar data and longer term bonds. But the data is close enough that the principal goals of stability and good returns are illustrated regardless. Past performance is no guarantee of future results.
- Stocks – Total Stock Market index
- Bonds – Treasury 20+ year long term bonds
- Cash – Treasury 1-2 year notes
- Gold – Gold bullion
- Losses in Red
Return of Permanent Portfolio
with Permanent Portfolio
Data pulled from the Simba Spreadsheet on the Diehards Forum. NOTE: Gold prices were largely fixed before 1971 and tied to the dollar. So the prices of gold did not move according to market fluctuations much before 1971.
Here is how it looks graphically. Note the wild swings in value of the various assets turn into a smooth line inside the portfolio with no large losses in value.
The worse loss for the portfolio in any one year was 1981 which had you down only about –4%. The market problems through the decades were barely registered in the final return each year. This means the portfolio was able to provide these solid and stable returns with very low volatility and risk.
You’re probably wondering how this portfolio compares to other strategies. The Permanent Portfolio was able to rack up the following returns against these competitors if you invested $10,000 back in 1972:
|1972-2011||CAGR||Growth of 10K|
|100% Total Stock Market||9.7%||$403,271|
|100% Total Bond Market||7.7%||$197,596|
|50% Total Stock Market/ 50% Total Bond Market||9.1%||$328,000|
Now, some might be thinking: “Hey, gold was price controlled before 1971 so it’s not fair using 1972 as the start because the price of gold shot up. It made it look better than it really was!” (OK, maybe you weren’t thinking that, but I was because it’s true and we need to consider its impact). We’ll start a couple years out in 1974 then, enough time that the gold market would have settled out.
For the stock lovers it helps also because the years 1973 and 1974 are eliminated. Over that time the market lost 40% in value! A $10,000 stock allocation in 1973 was worth only $5,940 by the end of 1974. If we adjust for inflation, that stock allocation sunk to $4,864 in value! But in this table we get to completely sweep those minor details under the carpet.
|1974-2011||CAGR||Growth of 10K|
|100% Total Stock Market||10.4%||$422,812|
|100% Total Bond Market||7.9%||$181,518|
|50% Total Stock Market/ 50% Total Bond Market||9.5%||$319,320|
The Permanent Portfolio allocation is competitive with the 100% stock allocation and the 50/50 bond allocation. Anything within +-0.50% of each other is essentially market noise that can easily flip back and forth each year.
The most important part is the Permanent Portfolio never had wild gut wrenching swings in value. In 1973-1974 stocks lost 50% in value after inflation. In 1987, stocks dropped 25% in one day. During the 2000-2002 Internet bubble crash, stocks dove about 40% over two years and the NASDAQ dove 80%! In 2008 stocks were down about 40% for the year. 2011 was another lackluster year for stocks.
Yet given all the above the Permanent Portfolio was able to produce positive returns during these very bad markets. Most recently in 2008 we had the worst single year market crash since 1931 and the portfolio avoided virtually all losses (or even a small gain depending on what long term bond maturity you held). The Permanent Portfolio allowed you to avoid all those disasters but gave you performance on par with the far riskier 100% stock allocation.
Even better, the Permanent Portfolio was able to provide real after-inflation returns during some times when the stocks and bonds couldn’t (such as the decade of the 1970s and 2000s). This means that even though inflation may have been killing your stocks and bond returns (by giving you negative real growth even though they went up in value), the Permanent Portfolio was able to go above and beyond by several percentage points to give real results that weren’t being eroded by a falling dollar.
Take a look at the returns table above and notice how you’ll always have one asset class doing very well and one doing flat or badly (in red). Isn’t that counter-intuitive that you should be able to profit from that type of movement? Nope. It’s diversification in action. The way the Permanent Portfolio uses its assets to diversify according to economic conditions is what makes it work so well.
The above shows that the Permanent Portfolio has not only had good returns, but also low volatility and only very small losses. Those are all very good things for an investment portfolio.