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The Permanent Portfolio

The Permanent Portfolio is a strategy for diversifying your wealth. It’s an asset allocation [1] that looks like it was lifted from the Old Testament:

Okay, so you’re not shipping corn in a Phoenician galley or laying down shekels at the local moneylender. You’re investing in stock market listed companies and government debt.

Nevertheless for an asset allocation, the Permanent Portfolio is about as back-to-basics as diversified gets – the 25% slug of gold giving it a particularly Old World tang.

The Permanent Portfolio’s roots lie in the high inflation era of the 1970s, when investing was simpler. Forget robot advisors or quant funds1 [2] – the only thing most people used computers for was playing Pong or Pac-Man. Few had heard of Warren Buffett [3], let alone Jack Bogle [4] or Ed Thorpe [5].

Back then people still held active funds and shares for decades. They phoned or visited their stockbroker. Some buried gold coins in their garden or stashed them under floorboards while they hunkered down for the inevitable nuclear conflict.

Nearly 50 years ago – it’s a different world. You might wonder then what the rather presumptuously named Permanent Portfolio offers us 21st Century investors. Surely we’ve nothing to learn from an approach you could write on a fag packet? (If we still smoked…)

Well, I believe it’s worth pondering the Permanent Portfolio, and its deceptive simplicity. While it’s too straightforward for an investing stamp collector like myself, I recognize it as a thing of investing beauty.

The Permanent Portfolio’s returns have historically been pretty special, too.

Not the highest returns, granted. But that’s not the only way to judge how well a portfolio performs.

The history of the Permanent Portfolio

The Permanent Portfolio was the brainchild of Harry Browne, a US writer and politician.

Browne’s life was quite a journey – he wrote a classic [6] of the US libertarian movement and ran for president – but it’s his evolution as an investor that’s relevant to us.

Beginning his investing career as a gold bug and newsletter writer, Browne morphed into a proto-passive investor. He came to believe nobody knew much about the direction of markets or the economy.

Expansions and recessions were inevitable but impossible to time. Investors should be fearful of inflation as well as deflation, and also of government interventions. (Goodness knows what Browne would have made of quantitative easing!)

Finally cheap passive funds were the investments of choice. Why pay a fund manager when nobody knows anything?

This all resulted in the Permanent Portfolio – the pioneering all-weather [7] asset allocation I gave above.

The Permanent Portfolio is extremely simple, but designed to preserve an investor’s wealth whatever fortune throws at it:

Rebalance annually and you might benefit from automatically selling high and buying low. More importantly, you keep your ship on an even keel.

Historical returns from the Permanent Portfolio

According to Portfolio Charts, here’s how a UK Permanent Portfolio [8] would have performed since the 1970s. Note that these are real (inflation-adjusted) returns:


(Click to enlarge)

What’s most noteworthy about the Permanent Portfolio is the very low volatility.

Here’s an alternative way Portfolio Charts expresses the lows of holding the Permanent Portfolio:

…compared to the 60/40 portfolio:

In inflation-adjusted terms, a 60/40 portfolio lost more than half its value in its worst period. Investors in the 60/40 also had to put up with a 12-year run in the worst case before their portfolio regained its old highs.2 [10]

In contrast, at worst the Permanent Portfolio declined just 11% in real terms. And even looking at the darkest period, after four scant years it was back into the black.

True, the higher average returns from the 60/40 portfolio translated into higher total gains if you held it over the nearly 50 years covered.

But you could argue the Permanent Portfolio owner was likelier to keep on holding.

Why the Permanent Portfolio works

The key to the Permanent Portfolio’s stabler returns is its diversification, especially the out-sized allocation to gold.

Clued-up passive investors know that all sorts of simple lazy portfolios of index funds will beat [11] most expensive actively managed ‘solutions’.

But away from websites like this, too many people – especially those who’ve yet to get the passive religion – still hold all sorts of active funds in the name of diversification.

This apparent diversification can be a bit of a mirage, as the following matrix from Columbia Threadneedle [12] [PDF] hints at:


(Click to enlarge)

The matrix shows correlations over a three-year period, just by way of illustration. You can see that UK equities and global equities typically move in lockstep. Corporate bonds and property don’t provide much diversification, either.

You need to get into government bonds and commodities to see the all-important red numbers that highlight desirable negative correlations. This is where you hope to own assets that will go up when others (typically shares) go down.

In contrast, holding fund manager A’s Active Superstar UK Equity Booster Fund as well as fund manger B’s Tactical Return Boosting Superstar UK Equity Fund and 20 other active funds that own much the same stuff won’t give you true diversification when the returns hit the fan.

The Permanent Portfolio’s large slug of cash [14] also does much to dampen volatility. In nominal terms, cash never declines.

Diversification and gold

The matrix above detailed commodities in general. Here’s one illustration of how gold in particular has historically proved a diversifier for UK equity investors.


(Click to enlarge)

Source: The Gold Council [16] [PDF]

This shows gold was most negatively correlated to FTSE 100 shares at times when the FTSE 100 fell sharply. That’s exactly when you’d most want to see something you own go up, to offset the pain!

It’s especially worth noting because in a crash correlations increase [17] – that is, most assets tend to crash together. If you can own something that doesn’t, you’ll be glad of it.

Bottom line: The big allocation to gold is the oddest but perhaps also the most important aspect to the Permanent Portfolio.

What have you done for me lately?

The Permanent Portfolio regained popularity between the crash of 2008 and the peak of the gold market bull run in 2011.

Scared of plunging share prices and attracted by the allure of gold, new adherents flocked to its defensive asset allocation – with hindsight at a pretty poor time.

Since 2011, the gold price has fallen and stock markets have soared. Permanent Portfolio investors have seen equity-laden investors get richer, quicker.

You can easily see this by comparing the returns from one US ‘permanent portfolio’ fund and the S&P 500:


One Permanent Portfolio-style fund (purple) Vs cash, the S&P 500, and an equity/bond portfolio.

Source: Fidelity [19]

A few caveats. Firstly, this commercial portfolio is a US fund, not a British one. I’m just using it as an illustration of how the strategy has lagged recently. Also note the asset allocation of this fund is more complicated than Browne’s pure formula. (The fund holds silver, real estate, and even Swiss francs.)

I don’t have the tools to show how a simple UK Permanent Portfolio made up of index funds would have done in recent years.

But as a pointer, a British investing service [20] found that between 2011 and 2015, its own take on the Permanent Portfolio3 [21] delivered a compound annual growth rate of 3.2%.

In inflation-adjusted terms that was an annual growth rate of 1.9% – well below their version of the Permanent Portfolio’s long run real returns of 5.1% since 1986.

As I say, these are just examples given to show that owning a steady performer like the Permanent Portfolio is not a panacea. Someone will always be doing better than you.

But we should appreciate that even during this weaker period, the Permanent Portfolio has achieved its goal of delivering above-inflation returns.

Investing in the Permanent Portfolio

The Permanent Portfolio is a self-reliant DIY investors’ dream. Not as simple as the very simplest global shares [22] and bond mix, admittedly. But a Permanent Portfolio shouldn’t take more than half an hour to set up, and the same again once a year to rebalance [23].

My co-blogger The Accumulator gave an example setup in his review of lazy portfolios [24]. He used funds. You could use ETFs if you prefer.

Note that long-term government bonds are owned in the Permanent Portfolio. Yes, their returns look weak from here, but they are there for a reason. Using, say, corporate bonds instead will correlate you closer to equities. Shorter duration bonds would bring your bond returns nearer to those of the cash allocation.

Private investors should use bank accounts for their cash component – interest rates are higher.

Gold could be owned via ETFs or coins, via a service like Bullion Vault [25], or perhaps a mix. (I suggest you review the tax differences [26]).

The equity allocation is invariably given as domestic shares. If I was a UK Permanent Portfolio investor, I might split the 25% between UK and global shares. The London market isn’t as big as the US one, where this portfolio originated. True, you probably won’t get much extra diversification benefit, but I think you’ll get some. It’s not much of a complication. Retaining half in UK shares dampens the currency risk.

US investors might be inclined to add inflation-linked bonds to the mix, but it’s worth noting Browne didn’t suggest this, even after they became available during his lifetime.

British inflation-linked bonds [27] are eye-wateringly expensive right now. I would be in no rush to include them.

Another variant could be to run your equity and bond allocations via an all-in fund like Vanguard’s LifeStrategy [28], and to manage your cash and bonds separately.

Talking of investment platforms, you would want to think about your portfolio’s size and how you will be rebalancing your allocations when choosing the best broker for you. Our comparison tools [29] can help here.

Needless to say you should be investing in ISAs and pensions to avoid your portfolio being ravaged by tax.

The four horsemen of the investing apocalypse

The contrarian in me suspects it’d be a great time in invest a Permanent Portfolio.

You never read about it anymore. It has hugely lagged other lazy portfolio [24] allocations for years, and people are worried about all its components:

All these protestations seem reasonable. But not only do most of us struggle to know the future – some of these scenarios are mutually incompatible. (Gold is its usual joker in the pack. The price could do anything.)

The genius of the Permanent Portfolio is something should do well in pretty much all scenarios. Overall that should make up for some under-performance in its other components – at least compared to share or cash-dominated approaches.

Permanently a place for the Permanent Portfolio

Active investing is my passion. At times I’ve approached a hundred holdings of some sort. I’ll also accept higher volatility for hopefully higher returns. The Permanent Portfolio is too simple for me. And realistically, I can’t imagine putting 25% in gold.

All that said, compared to when I first learned about the strategy almost a decade ago – back when I was happily ‘all in’ on equities – my need to diversify has increased. The absolute amount I have invested has grown a lot, and my time horizon has shrunk.

The Permanent Portfolio – and its history of decent returns with minimal volatility – is a useful reminder that simple and stark diversification need not be a recipe for stagnation.

I think those looking to reduce volatility in their portfolios (such as those approaching or recently into retirement) could do worse than spend a few minutes thinking about what it has to teach us.

  1. Yes, I know there were a handful of pioneering quant funds and already some use of computers. But nothing like the algorithmic trading that dominates activity today. [ [34]]
  2. This assumes no new savings. [ [35]]
  3. It uses the FTSE 250 for shares, apparently for performance-related reasons. [ [36]]