Harry Browne's Permanent Portfolio

Harry Browne’s Permanent Portfolio (Allocations, ETFs, Backtest, Performance)

Harry Browne was an American investment advisor and financial writer. He was best known for his investment philosophy and strategies, which he outlined in several books. In his book “Fail-Safe Investing,” Harry Browne introduced the Permanent Portfolio as a way to ensure financial security. Let’s take a look at Harry Browne’s Permanent Portfolio.

Harry Browne’s Permanent Portfolio is a diversified investment strategy that includes stocks, bonds, gold, and cash. It aims to provide stability and growth over the long term by protecting against any economic scenario, including prosperity, inflation, recession, and deflation. The portfolio is meant to minimize risk and maximize returns.

In this post, we take a look at Harry Browne’s Permanent Portfolio, and we end the article with a backtest.

Introduction to Harry Browne’s Investment Strategy

Harry Browne was an American investment advisor and writer who was a prominent figure in the libertarian movement. He was known for his investment philosophy and strategy, which was based on the idea that investors should focus on reducing risk and maximizing returns. Browne’s investment strategy, which he outlined in his book “Fail-Safe Investing,” is based on the Permanent Portfolio.

The Harry Browne Permanent Portfolio is a diversified portfolio that includes stocks, bonds, gold, and cash. The idea behind the portfolio is to provide a way for investors to protect their assets during any economic scenario, whether it be a boom, bust, inflation, deflation, or recession. The portfolio is meant to provide stability and growth over the long term, so it is designed to minimize risk while maximizing returns.

Browne believed that the Permanent Portfolio was a simple and effective way for investors to protect their assets. He argued that by following this strategy, investors could avoid the common pitfalls of investing, such as timing the market and chasing returns. To him, the Permanent Portfolio is a way for investors to be in control of their own financial future, rather than relying on the opinions of others. By following this strategy, investors can protect their assets during any economic scenario and be in control of their own financial future.

Exploring the Permanent Portfolio

The Permanent Portfolio, created by investment advisor and writer Harry Browne, is a unique approach to investment that aims to provide stability and growth over the long term while minimizing risk. It is based on the idea that a well-diversified portfolio that includes stocks, bonds, gold, and cash can provide protection against any economic scenario, including boom, bust, inflation, deflation, and recession.

One of the key features of the Permanent Portfolio is its simplicity. By following this strategy, investors can avoid the common pitfalls of investing, such as trying to time the market or chasing returns. Additionally, the portfolio is designed to be easy to maintain, with only occasional rebalancing required.

The Permanent Portfolio has been praised for its long-term performance, which has consistently outperformed traditional investment portfolios during both bull and bear markets. This is due to its diversification across multiple asset classes, which helps to reduce risk and minimize the impact of market volatility.

However, it is important to note that the Permanent Portfolio is not a guaranteed investment strategy, and there is always a certain level of risk involved. Additionally, some investors may not be comfortable with the relatively low level of equity exposure in the portfolio, which could result in lower returns over the short term.

Benefits of Harry Browne’s Investment Model

Harry Browne’s investment model, based on the Permanent Portfolio, offers several benefits that make it an attractive option for long-term investors. Some of the key benefits are:

  • Diversification: The Permanent Portfolio is a well-diversified investment portfolio that includes stocks, bonds, gold, and cash. This diversification helps to reduce the impact of market volatility and minimize risk.
  • Simplicity: The Permanent Portfolio is designed to be a simple investment strategy that is easy to follow and maintain. This simplicity reduces the risk of making mistakes, such as trying to time the market, and makes it a good option for inexperienced investors.
  • Consistency: The Permanent Portfolio has a long-term track record of consistency, with a strong performance during both bull and bear markets. This consistency helps to provide peace of mind for investors who are looking for stability in their investments.
  • Low maintenance: The Permanent Portfolio requires only occasional rebalancing, which makes it a low-maintenance investment option. This reduces the time and effort required to manage the portfolio, freeing up more time for other activities.
  • Reduced emotional stress: The Permanent Portfolio helps to reduce emotional stress by avoiding the common pitfalls of investing, such as trying to time the market or chasing returns. This can help investors make more rational decisions, which can result in better investment outcomes.
  • Control: The Permanent Portfolio puts investors in control of their own financial future, rather than relying on the opinions of others. This can help to increase confidence in their investment decisions and lead to better long-term outcomes.

Backtesting the Permanent Portfolio

Backtesting the Permanent Portfolio involves simulating the portfolio’s performance over a historical period to evaluate its potential for future performance. Here are the steps to backtest the Permanent Portfolio:

  • Choose a historical period: Select a historical period that is representative of different economic conditions, such as a period of prosperity, inflation, recession, or deflation. This will allow you to evaluate the portfolio’s performance during different market conditions.
  • Source some historical data: Gather data on the performance of the four asset classes included in the Permanent Portfolio (stocks, bonds, gold, and cash) over a historical period. This data can be obtained from financial websites or by using specialized financial software.
  • Allocate the portfolio: Allocate the portfolio according to the Permanent Portfolio guidelines, with 25% invested in each of the four asset classes.
  • Rebalance: Regularly rebalance the portfolio back to the 25% allocation for each asset class. This can be done on a set schedule, such as annually, or when the allocation deviates significantly from 25%.
  • Evaluate performance: Evaluate the performance of the portfolio over the selected historical period, taking into account both returns and risk. This can be done by calculating metrics such as the portfolio’s return, volatility, Sharpe ratio, and maximum drawdown.
  • Compare results: Compare the results of the backtest with other investment portfolios or benchmarks, such as the S&P 500, to evaluate the Permanent Portfolio’s relative performance.

Long-Term Performance of the Permanent Portfolio

The Permanent Portfolio was designed to offer stability in different market conditions and not the best returns. Nonetheless, the portfolio has shown consistent returns over time, with a low correlation to traditional stock and bond portfolios. This has made it a popular option for long-term investors seeking stability in their investments.

The Permanent Portfolio has shown remarkable resilience during market turmoil, including periods of recession and deflation. This has been attributed to its well-diversified mix of stocks, bonds, gold, and cash, which helps to reduce the impact of market volatility. The Permanent Portfolio’s lower volatility compared to traditional stock and bond portfolios helps to reduce the emotional stress often associated with investing.

As with any investment, past performance does not guarantee future results, so it’s important to monitor and invest according to your goals and risk tolerance. It’s recommended to consult a financial advisor to make sure that this strategy is appropriate for your investment needs and to evaluate the performance of the portfolio.

Assessing Risk and Return of the Permanent Portfolio

Assessing the risk and return of the Permanent Portfolio involves evaluating various financial metrics to determine the portfolio’s performance and potential for future returns. Some of the key metrics to consider when assessing the risk and return of the Permanent Portfolio include:

  • Return: This measures the portfolio’s total return over a given time period, taking into account both capital gains and income from investments. The Permanent Portfolio’s CAGR over a 30-year period is 6.44%
  • Volatility: This measures the portfolio’s standard deviation of returns, indicating the level of price fluctuation and risk associated with the portfolio. The portfolio’s standard deviation is 6.35.
  • Sharpe ratio: This measures the portfolio’s risk-adjusted return, taking into account its volatility relative to its returns. The portfolio’s Sharpe Ratio is 0.67, while the Sortino Ratio is 0.93.
  • Maximum drawdown: This measures the largest single decline in the portfolio’s value over a given time period, indicating the potential for loss during market downturns. The portfolio’s maximum drawdown is 15.92%.
  • Correlation: This measures the degree to which the portfolio’s returns move in line with a benchmark, such as the S&P 500, indicating the portfolio’s diversification benefits.
  • Performance during different market conditions: This measures the portfolio’s performance during different market conditions, such as recessions or bull markets, to determine its resilience and suitability for different economic environments.

Analyzing the Components of the Permanent Portfolio

The Permanent Portfolio is made up of four core components: stocks, bonds, gold, and cash.

  • Stocks: The stock component of the Permanent Portfolio is designed to provide long-term growth and capital appreciation and has a 25% allocation. It is easier to invest in a broad-based stock index, such as the S&P 500, to ensure exposure to a wide range of companies and industries.
  • Bonds: The bond component of the Permanent Portfolio is designed to provide stability and income and has an allocation of 25%. This is typically achieved through investments in high-quality bonds, such as Treasury bonds, to ensure a low risk of default and consistent income.
  • Gold: The gold component of the Permanent Portfolio is designed to provide a hedge against inflation and market turbulence. Gold has been used as a store of value for centuries, and its value has held up well during periods of market turbulence, making it an important component of the Permanent Portfolio. The gold allocation is 25%.
  • Cash: The cash component of the Permanent Portfolio is designed to provide a source of liquidity and stability and has a 25% allocation. This comes in the form of investments in ultra-short-term Treasury Bills, which provide a low-risk option for holding cash.

Adjusting the Allocations of the Permanent Portfolio

The Permanent Portfolio is a set-it-and-forget-it investment strategy, but over time, the allocations of the portfolio may need to be adjusted to maintain its original allocation and risk/reward balance. Adjusting the allocations of the Permanent Portfolio is a crucial step in ensuring that the portfolio remains aligned with the investor’s goals and risk tolerance over time.

  1. Rebalancing: Rebalancing is the process of bringing the portfolio back to its original allocation, by selling assets that have increased in value and buying assets that have decreased in value. This helps to ensure that the portfolio remains well-diversified and reduces the risk of having too much exposure to any one asset class.
  2. Adjusting market conditions: Market conditions can change over time, and it may be necessary to adjust the allocations of the Permanent Portfolio to reflect these changes. For example, during times of high inflation, investors may want to increase their exposure to gold, while during times of recession, they may want to increase their exposure to bonds.

Implementing Harry Browne’s Investment Strategy

The Harry Browne Permanent Portfolio can be implemented using four ETFs. Here is how to achieve the portfolio with four ETFs:

  • Invest 25% of the capital in the Vanguard Total Stock Market (VTI).
  • Invest another 25% in the iShares 20+ Year Treasury Bond (TLT).
  • Invest another 25% in the SPDR Gold Trust (GLD).
  • Invest the last 25% in the SPDR Blmbg Barclays 1-3 Mth T-Bill (BIL), which is a cash equivalent.

This portfolio is designed to provide exposure to various asset classes that are meant to perform well during different market conditions. The allocation of 25% each to U.S. large-cap stocks, long-term U.S. bonds, ultra-short-term U.S. bonds, and gold is meant to balance risk and reward. By diversifying across these asset classes, the portfolio aims to provide stability and reduce volatility over the long term.

Pros and Cons of Harry Browne’s Permanent Portfolio

Harry Browne’s Permanent Portfolio is designed to provide stability and growth over the long term by minimizing risk and maximizing returns. However, as with any other portfolio or investment strategy, Harry Browne’s Permanent Portfolio comes with some merits and demerits.

The pros of Harry Browne’s Permanent Portfolio include:

  • Diversification: The portfolio is well-diversified across various asset classes, reducing the overall risk of the portfolio.
  • Stability: The portfolio is designed to perform well in all market conditions, providing stability and reducing volatility.
  • Easy to implement: The portfolio can be easily implemented using exchange-traded funds, which makes it accessible to a wide range of investors.
  • Low maintenance: Once the portfolio is established, it requires little maintenance, making it ideal for passive investors.

The cons of Harry Browne’s Permanent Portfolio include:

  • Limited growth potential: The portfolio is designed for stability, and may not offer the same potential for growth as other investment strategies.
  • Lack of customization: The portfolio is a one-size-fits-all approach, which may not be suitable for everyone’s unique investment needs and goals.
  • Dependence on market performance: The portfolio’s performance is dependent on the performance of the underlying markets, which can be unpredictable.
  • Limited exposure to emerging markets: The portfolio is primarily focused on U.S. markets, offering limited exposure to emerging markets and other regions.

In conclusion, the Permanent Portfolio is a unique investment strategy that provides a simple and effective way for investors to protect their assets and grow their wealth over the long term. It is a good option for those who are looking for a diversified portfolio that minimizes risk and maximizes returns while avoiding the common pitfalls of investing.

Harry Browne’s Permanent Portfolio Backtest – Does It Work?

Let’s backtest Harry Browne’s Permanent Portfolio.

We use the same ETFs that are described above: VTI, TLT, GLD, and BIL. We allocate 25% to each asset and rebalance daily. Rebalancing daily is of course not feasible in the real world, but we do it to get a better understanding of the drawdowns. The results are pretty similar as long as you rebalance at least annually.

The backtest period is from July 2007 until today:

Let’s look at the statistics:

  • CAGR – annual returns: 5.7%
  • Max drawdown: -17%

Returns are relatively low, but so are the drawdowns.

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