Revisiting the Permanent Portfolio

Dear Mr. Market:

It’s been seven years since we last reviewed the Permanent Portfolio. Please click here to view the original article.

Why do we bring up this article now? Lots has changed but lots has not! More than anything we believe that our current environment has so many unknowns embedded in it after one of the wildest rides in stock market history. We won’t dig into the weeds too much but one could easily make the case that any of the following scenarios could take place over the next year:

  1. The Stock Market could absolutely continue to defy odds and climb higher.
  2. We could see another market crash like we saw in the spring this year as there are plenty of issues that have not gone away (Covid-19, political unrest, handcuffed economy, geopolitical concerns)
  3. A deteriorating dollar, inflation on the horizon, a ticking time bomb of debt, and more fear of a prolonged recession, negates any appeal for stocks for quite some time.
  4. We trade up, down, and basically sideways as this market consolidates and digests one of the most tumultuous years in history.

Without rehashing all that has transpired in 2020, we believe that being properly allocated and prepared for just about anything that comes our way seems like a wise way to go. The market is almost always unpredictable but there are times when reading the tea leaves and figuring out clear direction is even more difficult; we believe that’s exactly where we’re at right now.

If you didn’t read our old article from 2013, the basis for the Permanent Portfolio strategy is simple at face value: You divide your portfolio into four distinct and fairly uncorrelated asset classes (Cash, Bonds, Gold, and Stocks). Ideally at any point in most economic cycles one of these asset classes will stink it up but the others could compensate and outperform. During prosperous times Stocks should win. When there is inflation a case can be made for Gold. Should the opposite occur and we get deflation you would ideally see long-term Bonds do well. Lastly, during a severe recession Cash is perhaps your best friend. When coupled together you may never hit a home run but this approach can mitigate disaster and still produce modest long-term returns.

When we first wrote about this investment approach it had just kicked off a relatively miserable year followed by two others that returned negative performance. From 2013 to 2015 the strategy was down -2%, -1% and almost -7%. This would have been a tough pill to swallow as the stock market returned +33%, +13%, and -1% over that same stretch. For the majority of investors that would be enough for them to bail and find the next shiny object.

Permanent Portfolio Returns from 2010 to YTD 2020

The hardest part of following a strategy like this is exactly that…following it! In other words, it’s almost guaranteed that there will be a moment each year where you will see one of the asset classes performing quite well while one or more of the remaining three could be languishing. It’s at this point where it may naturally be tempting to buy more of the strong performer and/or cut one or more of the losers. Our main advice is that if you try and pick and choose from within this small pre-selected menu, you will inevitably defeat yourself and over time underperform the strategy. In summation, a simple investment allocation like this is actually very challenging to follow so either do it with a commitment or have a professional force your hand in being disciplined with it.

My Portfolio Guide, LLC can help with this as well customize the allocation within so that there are layers of added diversification or the ability to customize relative to your appetite for risk. For example: One could buy 5% Silver and 20% Gold to make up one quarter of the assets. In Harry Browne’s model he advocated using longer-term Bonds, as they can produce much higher returns, but they’re clearly riskier relative to short-term bonds. Without trying to dissect his original investment rationale you could have 10% in shorter-term duration bonds and the remaining 15% towards long-term instruments. Again…sometimes not overthinking or trying to second guess the strategy is best but just know that there are ways to make this strategy to your own liking and comfort level; if that helps you stick with it than you’re probably much better off in the long-run anyway.

Regardless of what you do to prepare for 2021, don’t go into next year without a plan. We’re not saying this particular strategy is right for everyone for some of the reasons we touched on earlier, however, if followed through and executed on… your odds of success are immensely higher following something like this as opposed to succumbing to emotions or the chasing the latest white hot strategy.

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