The Permanent Portfolio: The “Fail-Safe” Allocation for Nervous Investors
The Permanent Portfolio: The “Fail-Safe” Allocation for Nervous Investors
COACHING POINTS
- The Philosophy: The future is unknowable. Economic cycles oscillate between four states: Prosperity, Deflation, Inflation, and Recession. A truly robust portfolio must have a specific asset ready to perform in each of these climates.
- The Composition: Unlike the 60/40 portfolio which relies heavily on growth, the Permanent Portfolio allocates equal weight (25%) to four uncorrelated assets: Stocks, Long-Term Treasuries, Gold, and Cash.
- The Result: This strategy sacrifices maximum upside (during bull markets) for exceptional stability. It historically avoids deep drawdowns, making it the ultimate “sleep well at night” strategy for wealth preservation.
“Safety first.” While most strategies obsess over maximizing returns, the Permanent Portfolio obsesses over minimizing regret. Created by Harry Browne in the 1980s, this strategy acknowledges that we cannot predict the next crisis. By holding opposing assets (like Gold and Bonds), the portfolio uses volatility to its advantage—when one engine fails, another fires up. Source: Fail-Safe Investing (Harry Browne)
How each 25% slice protects you in a different scenario.
- Prosperity (Stocks): When the economy grows, businesses thrive. Your 25% Equity allocation drives returns.
- Deflation (Bonds): When prices fall and rates drop (e.g., 2008, 2020), Long-Term Treasury Bonds skyrocket in value, offsetting stock crashes.
- Inflation (Gold): When currency is devalued (e.g., 1970s), Gold acts as the store of value, protecting purchasing power.
- Recession (Cash): During “tight money” periods where liquidity is king, Cash (T-Bills) provides stability and dry powder to rebalance.
What-If Scenario: The 2022 Stress Test
Comparison: 60/40 Portfolio vs. Permanent Portfolio during “Inflation + Rates Up”.
| Strategy | 2022 Performance | Why? |
|---|---|---|
| 60/40 Portfolio | -17% (Severe Loss) | Stocks and Bonds crashed together. |
| Permanent Portfolio | -3% (Stable) | Cash (0%) and Gold (flat) anchored the portfolio while Stocks/Bonds fell. |
Visualizing the 4-Part Structure
| Asset Class | Allocation (%) |
|---|---|
| US Stocks (VTI) | 25 |
| Long-Term Treasuries (TLT) | 25 |
| Gold (GLD) | 25 |
| Cash / T-Bills (SHV) | 25 |
*The beauty is in the balance. No single asset dominates the risk profile, forcing a disciplined “buy low, sell high” rebalancing process.
Max Historical Drawdown (Risk)
| Strategy | Deepest Loss (%) |
|---|---|
| S&P 500 | 51 |
| 60/40 Portfolio | 30 |
| Permanent Portfolio | 13 |
*Historically, the Permanent Portfolio has rarely suffered a double-digit loss, making it ideal for retirees or those with low risk tolerance.
Execution Protocol
You don’t need physical gold bars buried in the yard.
Stocks: VTI (Total Stock Market).
Bonds: TLT (20+ Year Treasury).
Gold: GLD or PHYS (Gold Trust).
Cash: SHV (Short-Term Treasuries) or a Money Market Fund.
This is critical. If Stocks double, sell the profit and buy cheap Gold or Bonds to get back to 25/25/25/25. This automated contrarian trading generates the long-term return.
During a raging bull market (like 2023), you will underperform the S&P 500 significantly because 75% of your money is in defensive assets. You must accept FOMO (Fear Of Missing Out) as the price of insurance.
COACHING DIRECTIVE
- Do This: If you have already won the game (high net worth) and your primary goal is to stay rich rather than get rich. It preserves purchasing power.
- Avoid This: If you are young (20s-30s) and building wealth. The high allocation to Cash and Gold creates a “cash drag” that limits the compound growth needed for early accumulation.
Frequently Asked Questions
Can I tweak the percentages?
Yes. Many modern variations (like the “Golden Butterfly”) modify it to 40% Stocks, 20% Bonds, 20% Gold, 20% Cash to add a bit more growth potential while keeping the defensive structure.
Does it work internationally?
The original theory was US-centric. For a global version, you would use Global Stocks and perhaps diversify the Bond/Cash portion, but Harry Browne argued for keeping the “safe” portion in your home currency to avoid FX risk.
Why Long-Term Bonds?
Long-term bonds (20+ years) are the most volatile type of bond. They are needed here because they spike the hardest during deflation, providing the powerful counter-balance to stock crashes.