The Permanent Portfolio

Harry Browne's Long-Term Investment Strategy

Craig Rowland, J. M. Lawson

• Publisher: Wiley
• Year: 2012
• ISBN:
  9781118331569
• Edition: 1
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

An up close look at an investment strategy that can handle today's uncertain financial environment

Market uncertainty cannot be eliminated. So rather than attempt to do away with it, why not embrace it? That is what this book is designed to do. The Permanent Portfolio takes you through Harry Browne's Permanent Portfolio approach—which can weather a wide range of economic conditions from inflation and deflation to recession—and reveals how it can help investors protect and grow their money.

Written by Craig Rowland and Mike Lawson, this reliable resource demonstrates everything from a straightforward four-asset Exchange Traded Fund (ETF) version of the strategy all the way up to a sophisticated approach using Swiss bank storage of selected assets for geographic and political diversification. In all cases, the authors provide step-by-step guidance based upon personal experience.

• This timeless strategy is supported by more than three decades of empirical evidence
• The authors skillfully explain how to incorporate the ideas of the Permanent Portfolio into your financial endeavors in order to maintain, protect, and grow your money
• Includes select updates of Harry Browne's Permanent Portfolio approach, which reflect our changing times

The Permanent Portfolio is an essential guide for investors who are serious about building a better portfolio.

Chapter 1

What Is the Permanent Portfolio?

Golden Beginnings

The Permanent Portfolio is an investment strategy designed to grow and protect your life savings under any set of economic conditions. It will work during good and bad markets, and it will even work in markets experiencing extremely serious and unexpected events.

The idea for the portfolio was first proposed in the 1970s by the late Harry Browne, who had gained fame by betting against the dollar with his first book How You Can Profit from the Coming Devaluation. The premise of that book, published in 1970, was that the United States would soon break the last vestiges of the gold standard and the resulting inflation would be so bad that gold and certain other hard asset prices would skyrocket. Harry Browne therefore advised readers to purchase assets like gold and silver, and to invest in strong currencies like the Swiss franc as hedges against inflation.

As it turned out, in 1971 President Nixon in fact did break the gold standard and the results were spectacular. Starting from $35 an ounce at the time of Nixon's announcement, gold ended the decade near $850 an ounce (over $2,200 in 2012's dollars). Assets like silver and the Swiss franc experienced very high returns as well.

That market call was quite good and there was now a real need to protect those profits once the bad inflation of the 1970s ended.

A Simple Idea

In response to the need to diversify their profits, Harry Browne and his team, which included Terry Coxon, John Chandler, and Charles Smith, began working out early versions of a new strategy. This strategy would allocate their money not just into assets like gold, but into stocks, bonds, natural resources, and cash as well. Further, unlike Browne's prior bets on the market moving in a certain direction, the new strategy would avoid market timing entirely and be completely passive—something almost unheard of in the investing world at the time outside of a few lone voices.

Browne's new strategy would be called the Permanent Portfolio. The original strategy held the following:

Stocks

Bonds

Cash

Gold

Silver

Swiss francs

Natural resources

This mix of assets was reached after extensive research into market history, economics, and the potential for a passive strategy to perform well under any environment. This research even included computer analysis, which at the time in the late 1970s wasn't yet in wide use due to the expense involved. Harry Browne, who was interested in the emerging personal computer technology, even did the programming necessary to conduct the research.¹

As the Permanent Portfolio idea began to take shape, readers of Harry Browne's newsletter—Harry Browne's Special Reports—were puzzled by his recommendation to consider owning stocks and bonds in a portfolio (which had done poorly in the 1970s inflation). Yet, Browne stuck to his advice that strong diversification would be a good long-term strategy.

Harry Browne and Terry Coxon then wrote a book in the early 1980s, Inflation-Proofing Your Investments, that (contrary to its title) presented a comprehensive review of this new way of thinking about investing that would do well when inflation came back under control. This is actually a pretty remarkable thing for an investment advisor to do. He built his career in the 1970s advocating hard asset investing (like gold) to fight inflation and all of the sudden he advises readers to sell a portion of their hard assets and buy something completely opposite like stocks or bonds? This was heresy!

Well, Browne turned out to be exactly right. In fact, gold soon did settle down by the early 1980s from the previous highs as inflation came under control and the stock market took off in response.

Over time, Browne simplified the Permanent Portfolio to make it easier to implement and more balanced. This effort culminated in Harry Browne's 1987 book Why the Best Laid Investment Plans Usually Go Wrong. This book, which is probably one of the best ever written on the flaws in many popular investment strategies, reduced the portfolio down to the core components that are still in use today.

A Simple Allocation

Now that the background of the strategy has been discussed, we can look more closely at the approach that evolved into the following deceptively simple asset allocation:

25 percent—Stocks

25 percent—Bonds

25 percent—Cash

25 percent—Gold

The allocation above is the strategy in its most basic conceptual form. Now, how you implement these 25 percent allocations is just as important as the allocation itself. This book will help you understand how to do that.

Simply Great Results

Don't let the apparent simplicity of the allocation fool you. 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.

If you walk away from this book with anything, it should be the idea that you do not need a complicated investment strategy to do well in the markets. In fact, it's just the opposite. A simple strategy will often outperform complicated ones over time. It will do it with less risk, less management, lower costs, and more profits to compound. The Permanent Portfolio still remains not only one of the most simple asset allocations you are likely to encounter, but also one of the best in terms of risk versus return.

Note

1. Personal interview with John Chandler, Harry Browne's former newsletter publisher and colleague.

Chapter 2

The 16 Golden Rules of Financial Safety

Golden Rules and Uncertainty

Over the years, Harry Browne developed a set of rules he used to guide his own investing decisions and offered them as general guidelines for all investors in his book Fail-Safe Investing. Browne called these maxims the 16 Golden Rules of Financial Safety. These Golden Rules are integral to the design of the Permanent Portfolio and represent timeless advice borne out of witnessing all manner of events in the markets. This chapter provides a summary of the rules that will be helpful in understanding the philosophy behind the Permanent Portfolio.

First, know that the markets are uncertain. There is no way to escape this basic premise. You must accept the idea that the markets are uncertain just as the rest of life is. Yet, investors often find the most trouble through the innocent belief that they have somehow conquered uncertainty. 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.

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The Permanent Portfolio is a strategy to embrace uncertainty in the markets.

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The Permanent Portfolio is a strategy to embrace uncertainty in the markets. It is not just a way to invest, it is an entire philosophy about how to grow and protect your money from risks that can have devastating results. Part of the Permanent Portfolio philosophy involves following the rules outlined below, and one of the benefits of this approach is that it will make it very hard to lose your life savings no matter what the markets decide to do. These rules are the foundation of virtually all of the advice you will read in this book, and the logic of the Permanent Portfolio is more easily understood after an investor has spent some time familiarizing himself with these rules.

Rule #1: Your Career Provides Your Wealth

Most of the money you make in your lifetime will come from your profession. It's true that investing can be very powerful in growing your money, but it's normally your career that provides the funds that allow you to invest in the first place and continue adding to your nest egg over time. It is easy to be drawn in by stories of people who experience sudden financial windfa...