Introducing the Permanent Portfolio - MoneySense

Introducing the Permanent Portfolio

When Scott Burns created the original Couch Potato portfolio back in 1982, he suggested that investors put half their money in an S&P 500 index fund, and the other half in a bond index fund. At the time, that was a revolutionary approach to investing. It was based on the idea that picking stocks and […]

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When Scott Burns created the original Couch Potato portfolio back in 1982, he suggested that investors put half their money in an S&P 500 index fund, and the other half in a bond index fund. At the time, that was a revolutionary approach to investing. It was based on the idea that picking stocks and forecasting the economy are futile, and that investors would be better off simply buying entire asset classes in equal amounts, and holding them at all times.

But the Couch Potato wasn’t entirely original. The year before, an American investment analyst and libertarian named Harry Browne co-authored a book called Inflation-Proofing Your Investments, in which he laid out his own passive strategy based purely on asset allocation. Browne suggested dividing your money equally among stocks, long-term government bonds, gold and cash. He called it the Permanent Portfolio.

When Browne created the Permanent Portfolio in the 1980s, it wasn’t particularly easy to manage on your own. (A mutual fund version of the of the Permanent Portfolio was launched in California in 1982 and is still going strong, albeit with a more complex asset mix that includes silver, Swiss francs and real estate.) There were a few equity index funds, but you would have had to buy individual Treasury bonds and gold coins.

Today, the strategy has gained a following among do-it-yourself investors, since it’s easy to build and maintain a Permanent Portfolio with ETFs. For Canadians, it might look like this:

12.5% iShares S&P/TSX Capped Composite Index Fund (XIC)
12.5% iShares MSCI World Index Fund (XWD)
25% BMO Long Federal Bond Index ETF (ZFL)
25% iShares Gold Trust (IGT)
25% any CDIC-insured investment savings account

A child of the 1970s

It’s not surprising that Browne’s idea arose when it did. The bear market of 1973–74 was horrendous, and sky-high inflation meant that real returns on both equities and bonds were negligible during the decade (remember The Death of Equities?). President Nixon also took the US off the gold standard in 1971—before that, an ounce of bullion was fixed at $35. As soon as it was allowed to float, the price of gold skyrocketed: 49% in 1972, over 70% in both 1973 and 1974, and 136% in 1979 (all figures in US dollars). During a period like that, it’s easy to see the appeal of moving beyond traditional portfolios of stocks and fixed-income.

But not long after Browne introduced the Permanent Portfolio, stocks began a charging bull market that would last for some 18 years, until the dot-com bubble burst in 2000. Gold performed horrendously during this period, and the Permanent Portfolio lost its shine as investors fell in love with equities again.

What’s gold is new again

Now we’ve come full circle. Despite another bull market from 2003 through 2006, the returns on stocks over the last dozen years have been dismal, while gold has regained its lustre. The Permanent Portfolio mutual fund posted an annualized return of 11.8% over the 10 years ending June 30, and even managed to eke out a small positive gain in 2008, when just about everyone else took a bath. With stocks in the toilet again this summer—and gold up about 30% year to date—I expect it will begin attracting interest once again.

With this in mind, I wrote about the Permanent Portfolio in my most recent column in MoneySense, and interviewed Craig Rowland to get his insights. Craig, a DIY investor in Portland, Oregon, has kept Browne’s ideas alive on his website Crawling Road. He writes a blog about the Permanent Portfolio’s ongoing relevance, hosts a discussion forum about the strategy, and has even archived episodes of Harry Browne’s radio show, recorded in 2004 and 2005, shortly before Browne’s death. They’re well worth a listen if you’re interested in learning more.

Later this week, I’ll share some highlights from our chat. While I’m not ready to adopt the Permanent Portfolio myself, I do find it a fascinating idea, and index investors can learn a lot from what Craig has to say. Stay tuned to see what Browne can do for you.

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