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The Permanent Portfolio by Craig Rowland and J.M. Lawson

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Permanent Portfolio (PP) is the best investment strategy for anyone. It has low volatility and decent returns that can protect you against all economic situations. It does not require lots of effort to keep up with the market as you only need to review your portfolio once a year.

The Permanent Portfolio

If you do not know about this beautiful strategy, you got to read The Permanent Portfolio. To get you going, I have summarised the book in the following points but nothing beats the detailed explanation about PP and the options available to build your own portfolio. You can also read my interview with Craig done in June this year.

PP consists of 25% allocation in each asset class: stocks, bonds, cash and gold. It may be simple, but the authors explained,

Even though it appears simple, it is far from simplistic. The allocation actually reflects a sophisticated understanding of economics and financial history. It is this understanding of economics and financial history that allows it to perform so well under so many market conditions and provide strong diversification.

And the core philosophy towards the financial market of PP is about embracing uncertainty. The authors said,

You must accept the idea that the markets are uncertain just as the rest of life is… Ironically, it is only when an investor learns to embrace uncertainty rather than trying to conquer it that a strategy can be adopted to deal with it realistically.

PP was the brainchild of Harry Browne and his associates, and was first published in Fail-Safe Investing.

Decent Returns with Low Risks

PP has returned an average of 9.5% per annum for the past 40 years (1972-2011). The downside volatility was low with only 4 years with negative returns. The largest drawdown w as -4.9% in 1981. Many people would underestimate their tolerance of volatility. A typical pure stock portfolio would have almost similar returns of 9.8% for the same period but with drawdowns as much as -30%. Most investors would have sold out their portfolio at the low. But most PP investors would be able to stick around to reap the long term returns.

As much as everyone wants to have the highest returns possible, the authors do not recommend building a portfolio based on returns alone.

Designing a portfolio for high returns alone eventually leads to disaster. Portfolios need the ability to generate growth, but must also have the ability to weather the unexpected storms, including investors’ inevitable bouts of fear when the whole market seems to be falling apart. Portfolios need to take the turns.

Volatility in Each Asset Class is Essential

While PP has low volatility as a portfolio, the individual asset classes must be volatile.

[T]he Permanent Portfolio seeks to increase volatility in each asset class in order to achieve stability across the whole portfolio… [W]hile at least one of the Permanent Portfolio’s assets is normally in the doghouse, one or more of the other assets are usually doing quite well. This zigging and zagging among the assets typically cancels out and translates into a steady rate of overall growth… By staying invested at all times across a variety of assets, an investor will be in a position to grab profits when presented no matter which asset happens to be generating the gains… The Permanent Portfolio depends on volatility in its individual asset classes, and it works as a package. Most attempts to reduce volatility within one of the Permanent Portfolio asset classes will result in greater volatility in the overall portfolio package, which is exactly what the investor was trying to avoid in the first place.

Diversification by Economic Conditions and Not Correlations

The conventional portfolio is constructed with stocks and bonds due to the common belief that the two are inversely correlated. However, the authors cautioned about correlations and how PP’s diversification is based on economics conditions and not correlations.

Stocks do not go up because bonds are going down, and stocks do not go down because bonds are going up. These assets move in price for very specific reasons in the economy. To make a conclusion based on upon asset class correlations alone is going to eventually lead to a bad outcome when that correlation variable suddenly shifts.

Strong diversification is not built by looking at asset class correlation data, but rather through an understanding of how certain assets respond to changing economic conditions.

Hence, the four asset classes in PP are based on the possible four economic conditions. The authors dedicated a chapter for each asset to discuss about their behaviour in all the economic conditions and how they play an important part in PP. A summary will not do justice to the rigour put in by the authors. It is important for you to go through the chapters to have a good grounding about PP assets.

  • Prosperity – Stocks
  • Deflation – Bonds
  • Recession – Cash
  • Inflation – Gold

Diversification Against Other Risks (Institutional, Geographical, …)

Besides diversifying against the economic conditions, a good PP should minimise institutional risk. The less parties involved between your ownership of the asset class the better. There are four levels of protection as described by the authors,

  • Level 1 (Basic) – All asset classes are held in ETFs and/or mutual funds
  • Level 2 (Good) – Stocks, cash and most gold held in ETFs and/or mutual funds. Bonds and some gold owned directly.
  • Level 3 (Better) – Stocks and cash held in ETFs and mutual funds. Bonds owned directly. Gold stored in country securely.
  • Level 4 (Best) – Same as Level 3 except that Gold stored in country and overseas.

It makes more sense to apply geographic diversification with gold. Storing stocks, bonds and cash in foreign accounts would incur higher taxes, accounting issues, and liquidity issues. Hence, consider storing gold bullion in a secured place overseas. The authors have written a lengthy chapter with recommended institutions for your consideration.

To further diversify your risks, you may  consider having multiple brokerage accounts to implement your PP. Keep your investments below the Securities Investor Protection Corporation (SIPC) limits ($500,000) per account. However, this is only applicable for U.S. accounts. You will need to find the limits for your own country and brokers.

PP works in your country (unless your country is politically unstable)

The authors explain the importance of implementing PP in your own country,

You want to hold these assets, as best as you can, inside your own country’s economy and currency. This prevents having your returns erode through currency fluctuations or being overly impacted by what is going on in a foreign economy.

One country may have low inflation (Germany), another may have higher inflation (UK), yet another could be in deflation (Japan), and another may be in prosperity (Australia). It all varies each year and is not predictable. Most importantly, it is unique to each country.

But there are few exceptions…

If you live in a small country, you may want to buy regional stocks. For example, a Belgian can buy an EU stock index because their economy is closely linked to the EU’s.

If you live in a politically unstable country, you may want to keep your assets out of reach of your government. You can invest in an all-world index fund for stocks, U.S. bonds and store some gold overseas. Keep cash as emergency and hold some gold jewelry if owning physical gold bullion is not possible in your country.


Whenever an asset class reaches 35% or 15%, you are required to re-balance each asset class back to 25% in PP. This is to ensure your portfolio is not weighted too much in any asset class and hence, stay protected against any change in economic condition. Second, it also makes sense to capture profits through capital appreciation. Re-balancing forces you to sell ‘high’ and buy ‘low’.

It is important to receive the dividends in cash instead of re-investing into the same asset class automatically. This provides you the opportunity to buy into lagging assets with your cash portion.

If you are adding money into PP, put it into the cash component until it reaches 35% of the portfolio. You can re-balance the portfolio by buying the lagging assets.

There are other acceptable ways to re-balance. You can re-balance when any asset reaches 30% or 20% of your portfolio. Or you can re-balance annually without waiting for any asset to reach the re-balancing limits.

Variable Portfolio

The authors warned about modifying PP. Any deviation from the 4 asset classes for higher returns or more  safety is likely to backfire. If you want to speculate, you should set up a Variable Portfolio (VP) for that sole purpose. Leave the PP to do what it is supposed to do. There are three rules for VP:

  • It must be money you can afford to lose
  • You cannot move money from PP to VP
  • You cannot expose yourself to losses potentially greater than what you have in VP (leverage and shorting)


If you are not having successes in the market, or you have no interest in spending a lot of time in investing, this book is all that you need to teach you how to put your money to work for the rest of your life. When I first read Fail-Safe Investing, I wasn’t impressed by this concept as Harry Browne did not explain the reasons in detail. Rowland and Lawson did a great job with this book. They continued where Browne had left off and expanded the concept to completeness. Sometimes I wonder, if only everyone understands the Permanent Portfolio, they would have difficulty finding another strategy that offers so much protection with decent returns. It will be hard to say ‘no’ to Permanent Portfolio.

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The Permanent Portfolio has been studied and explained for foreign markets. Many have asked me for help with creating a local version of it. I wrote a localised guide to implementing the Permanent Portfolio in Singapore.

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