The Permanent Portfolio


I will admit, when I first read about the Permanent Portfolio in the late-80s, I was somewhat skeptical, but not totally dismissive.  Here is the classic Permanent Portfolio, equal proportions of:

  • S&P 500 stocks
  • The longest Treasury Bonds
  • Spot Gold
  • Money market funds

Think about Inflation, how do these assets do?

  • S&P 500 stocks – mediocre to pretty good
  • The longest Treasury Bonds – craters
  • Spot Gold – soars
  • Money market funds – keeps value, earns income

Think about Deflation, how do these assets do?

  • S&P 500 stocks – pretty poor to pretty good
  • The longest Treasury Bonds – soars
  • Spot Gold – craters
  • Money market funds – makes a modest amount, loses nothing

Long bonds and gold are volatile, but they are definitely negatively correlated in the long run.  The Permanent Portfolio concept attempts to balance the effects of inflation and deflation, and capture returns from the overshooting that these four asset classes do.

What did I do?

I got the returns data from 12/31/69 to 9/30/2011 on gold, T-bonds, T-bills, and stocks.  I created a hypothetical portfolio that started with 25% in each, rebalancing to 25% in each whenever an asset got to be more than 27.5% or less than 22.5% of the portfolio.  This was the only rebalancing strategy that I tested.  I did not do multiple tests and pick the best one, because that would induce more hindsight bias, where I torture the data to make it confess what I want.

I used a 10% band around 25% ( 22.5%-27.5%) figuring that it would rebalance the portfolio with moderate frequency.  Over the 566 months of the study, it rebalanced 102 times.  At the top of this article is a graphical summary of the results.

The smooth-ish gold line in the middle is the Permanent Portfolio.  Frankly, I was surprised at how well it did.  It did so well, that I decided to ask, what if we drop out the T-bills in order to leverage the idea.  It improves the returns by 1%, but kicks up the 12-month drawdown by 7%.  Probably not a good tradeoff, but pretty amazing that it beats stocks with lower than bond drawdowns.  That’s the light brown line.

ResultsS&P TRBond TRT-bill TRGold TRPP TRPP TR levered
Annualized Return10.40%8.38%4.77%7.82%8.80%9.93%
Max 12-mo drawdown-43.32%-22.66%0.02%-35.07%-7.65%-14.75%


Now the above calculations assume no fees.  If you decide to implement it using SPY, TLT, SHY and GLD, (or something similar) there will be some modest level of fees, and commission costs.


 What Could Go Wrong

Now, what could go wrong with an analysis like this?  The first point is that the history could be unusual, and not be indicative of the future.  What was unusual about the period 1970-2017?

  • Went off the gold standard; individual holding of gold legalized.
  • High level of gold appreciation was historically abnormal.
  • Deregulation of money markets allowed greater volatility in short-term rates.
  • ZIRP crushed money market rates.
  • Federal Reserve micro-management of short-term rates led to undue certainty in the markets over the efficacy of monetary policy – “The Great Moderation.”
  • Volcker era interest rates were abnormal, but necessary to squeeze out inflation.
  • Low long Treasury rates today are abnormal, partially due to fear, and abnormal Fed policy.
  • Thus it would be unusual to see a lot more performance out of long Treasuries. The stellar returns of the past can’t be repeated.
  • Three hard falls in the stock market 1973-4, 2000-2, 2007-9, each with a comeback.
  • By the end of the period, profit margins for stocks were abnormally high, and overvaluations are significant.

But maybe the way to view the abnormalities of the period as being “tests” of the strategy.  If it can survive this many tests, perhaps it can survive the unknown tests of the future.

Other risks, however unlikely, include:

  • Holding gold could be made illegal again.
  • The T-bills and T-bonds have only one creditor, the US Government. Are there scenarios where they might default for political reasons?  I think in most scenarios bondholders get paid, but who can tell?
  • Stock markets can close for protracted periods of time; in principle, public corporations could be made illegal, as they are statutory creations.
  • The US as a society could become less creative & productive, leading to malaise in its markets. Think of how promising Argentina was 100 years ago.

But if risks this severe happen, almost no investment strategy will be any good.  If the US isn’t a desirable place to live, what other area of the world would be?  And how difficult would it be to transfer assets there?


The Permanent Portfolio strategy is about as promising as any that I have seen for preserving the value of assets through a wide number of macroeconomic scenarios.  The volatility is low enough that almost anyone could maintain it.  Finally, it’s pretty simple.  Makes me want to consider what sort of product could be made out of this.


Back to the Present

I delayed on posting this for a while — the original work was done five years ago.  In that time, there has been a decent amount of digital ink spilled on the Permanent Portfolio idea of Harry Browne’s.  I have two pieces written: Permanent Asset Allocation, and Can the “Permanent Portfolio” Work Today?

Part of the recent doubt on the concept has come from three sources:

  • Zero Interest rate policy [ZIRP] since late 2008, (6.8%/yr PP return)
  • The fall in Gold since late 2012 (2.7%/yr PP return), and
  • The fall in T-bonds in since mid-2016 (-4.7% annualized PP return).

Out of 46 calendar years, the strategy makes money in 41 of them, and loses money in 5 with the losses being small: 1.0% (2008), 1.9% (1994), 2.2% (2013), 3.6% (2015), and 4.5% (1981).  I don’t know about what other people think, but there might be a market for a strategy that loses ~2.6% 11% of the time, and makes 9%+ 89% of the time.

Here’s the thing, though — just because it succeeded in the past does not mean it will in the future.  There is a decent theory behind the Permanent Portfolio, but can it survive highly priced bonds and stocks?  My guess is yes.

Scenarios: 1) inflation runs, and the Fed falls behind the curve — cash and gold do well, bonds tank, and stocks muddle.  2) Growth stalls, and so does the Fed: bonds rally, cash and stocks muddle, and gold follows the course of inflation. 3) Growth runs, and the Fed swarms with hawks. Cash does well, and the rest muddle.

It’s hard, almost impossible to make them all do badly at the same time.  They react differently to changes in the macro-economy.


There are a lot of modified permanent portfolio ideas out there, most of which have done worse than the pure strategy.  This permanent portfolio strategy would be relatively pure.  I’m toying with the idea of a lower minimum ($25,000) separate account that would hold four funds and rebalance as stated above, with fees of 0.2% over the ETF fees.  To minimize taxes, high cost tax lots would be sold first.  My question is would there be interest for something like this?  I would be using a better set of ETFs than the ones that I listed above.

I write this, knowing that I was disappointed when I started out with my equity management.  Many indicated interest; few carried through.  Small accounts and a low fee structure do not add up to a scalable model unless two things happen: 1) enough accounts want it, and 2) all reporting services are provided by Interactive Brokers.


Besides, anyone could do the rebalancing strategy.  It’s not rocket science.  There are enough decent ETFs to use.  Would anyone truly want to pay 0.2%/yr on assets to have someone select the funds and do the rebalancing for him?  I wouldn’t.


  1. David,
    This post, and others that you have provided, describes an approach that could improve investment returns over an extended time frame.
    You raise the point at the end of your article…a very fair point…as to Who(?) this approach might be good for.
    Unlike a Pension fund or a University endowment, I am a individual “investor”. The capital that I can apply is, in reality, my savings. As such, I am not looking to “invest” on an infinite basis. Instead, I am looking for a reasonable return on my savings within the time constraints of my lifetime. This translates to a gradual tightening of my margin of safety and exposure to risk (defined by me as losing significant portions of my savings) as this finite time frame plays out.
    Added to this dynamic is the reality that capital inflows will peak, plateau and then fall precipitously from career income and hopefully, if planned well, be replaced, in part or all, by compounded income generated from the accumulated savings over time. This last factor further emphasizes the need for improved margins of safety and risk management to prevent major losses. I only share one characteristic with a pension fund or endowment…..I will be drawing down and out a certain point in my life…to pay for my lifestyle…with the objective that my approach is sustainable for a reasonably long period of time.
    I think this is an oft overlooked reality that the individual investor needs not just embrace but be reminded frequently of.
    Many of your posts describe the unfortunate reality that individual investors often pull their monies out of falling asset classes or funds ( Heebner, Grantham) because of their fear of losing even more.
    So…(my take)….your current discussed idea would be a reasonable approach for an individual investor…..ONLY if at first it is established that this should be applied….instead of passive investing in varied etf’s ( which is clearly on the rise)….with a very long term approach, with monies that are never to be needed during that time frame, and with a target date where gradual draw outs would commence ( assuming this amount of savings was not designed, at the start, to be a legacy fund for children etc).
    This might all be considered obvious, yet the realities of how individual investors put monies into and pull monies out of their investments suggests a need to establish firmer rules out the outset…..thx

  2. “Think about Inflation, how do these assets do? […] Spot Gold – soars”

    It is pretty trivial to show this isn’t the case. Go look at a price of gold in Vietnam. Over the past 5 years it has gone from 36,000,000 VND per ounce to 28,000,000 VND per ounce.

    Over that period, inflation in Vietnam has usually been above 5% and sometimes above 15%. Yet gold didn’t “soar” when priced in VND. It dropped and when measured in inflation-adjusted terms the drop was even more painful.

  3. What happens to your returns if you get rid of the Gold allocation, Buffett preaches gold is an unproductive asset. So what if the Gold allocation was left out, and the remaining is 33% 33% 33%. What’s the CAGR and DD, and winning and losing year %….


    1. You need to think of gold as money, as a currency. Gold is the world’s leading alternative to the U.S. dollar and when the dollar catches a cold, gold benefits. As currencies are engaged in a race to the bottom, gold will benefit further. Your idea for leaving gold out of the strategy implies that the stock market always goes up. Would your try to cross a river with an average depth of 4 feet without taking precautions? One reason stocks are valued in the billions and trillions of dollars is the reduce value of those dollars:

  4. David, I could see this working if parents/grandparents set up this investment for (grand)children. My children are just starting into their work. They have very few assets. However, if $25,000 could be managed for them starting now, the time horizon would be very long – close to 50 yrs. With someone else managing the rebalancing for them, it’s almost invest and forget.

  5. Followed the same thread of thought as you, but around 2012. Invested according to this and had 2 bad years out of 3. ( 2013, 2015). 2014 wasn’t great either 😊. But definitely one of the better diversification strategies out there.

    Look up the ETF PERM and the mutual fund PRPFX. The ETF follows the strategy and the mutual fund tries to. You will get an idea of the market for this.

    1. I’m not sure how you define a bad year but over the long term, the fund goes up because it is so diversified. With it, capital is always invested and there is no market timing. The lack of new QE programs and nudging interest rates upwards has coincided with a stall in the fund’s results. Over the long term, the fund has caught up after prior low return years. Investing today at a lower price is an advantage over chasing after ever rising stock prices.

  6. What product could be made of this strategy? There’s Permanent Portfolio Fund with a track record going back to 1982.
    Per the Quarterly Fact Sheet on their web site the fund had $2.7 billion of assets on 12/31/2016 and the minimum to open an account it $1,000. The fund is more diversified than the simplified 4-investment plan in the popular books. The pause in the fund’s returns suggests it will play catch-up based on prior experiences with multiple years of low returns. I see the low returns for such a diversified fund of volatile investments as a reflection of the slow down in QE. This fund has been an island of stability at key times such as the Crash of October,1987, the .com crash in 2001, and less so in Global Financial Crisis in 2007.
    The fund’s track record is fine for a fixed strategy, hands-off approach.

      1. Are you comparing annual returns or the chart prices that deduct annual dividend payments? And how do you factor in the need to make adjustments to rebalance the portfolio? Timing will of that will change results. There are limits to comparing hypothetical portfolios to a real one. The performance you note in the simplified 4-way portfolio supports the basic strategy for PRPFX, the fund.
        Your chart start date of 12/1969 catches stock after a tremendous bull market and gold before it exploded upward to 1980 following decades of prices controls. So much history since the 1969 moon year–multiple wars, energy crises, ending the draft, ending all ties for the U.S. dollar to gold, deficits not mattering, deficits monetized, price inflation, endless asset inflation, always more monetary inflation. It’s all an experiment that ends when it ends.

  7. The chart shows that investing 100% in a S&P 500 index fund would have ended with approximately double the amount from investing in the Permanent Portfolio. Also by not doing any rebalancing, no taxes would have been paid for decades. The tax benefit is another valuable benefit which the Permanent Portfolio lacks. I understand that the Permanent Portfolio will hopefully provide protection against events that badly affect the S&P 500, but there is a cost for this protection. Also I understand that there are few people who will invest all of their savings in an S&P 500 index fund for decades and not sell no matter what happens and bad things did happen during the period of the chart.

    1. Good luck driving into the future by looking in the rear view mirror! Losing half your capital is much easier in theory than it is in practice.

  8. De-financialization of gold over the next 30 years seems very likely to me. People with a memory of gold as money are mostly over-50 types. Other risks is a supply side find of gold or something like shale that causes a boom in gold supply. Either happens and the portfolio underperforms significantly.

    Monetary policy is getting better. Gold was a good stabilizer for a while, but outside of 2008 monetary policy has been really stable for 30 years and inflation has been stable. That is what will cause gold to lose its luster if it continues.

    So 30 year yields 3%. Stocks 6% over the long-term I’m guessing. For most of the time of this permenent porfolio it looks like money markets will returns 2-3%. Inflation likely around 2%. Then your adding to gold over the long-term since it doesnt produce income so that should cause you to add to the loser. My guess this portfolio going forward will produce a very low real return 0-2% and 2-4% pre-inflation.

    If you have to include gold I would do it at 5-10%. Gold’s main catalyst is a breakdown of paper money and mostly a collapse of the USA. In that case gold would soar far above inflation and current supply would have to replace all paper money. Even a small bit would be worth a lot. Barring societal collapse gold probably struggles. Other issue is your likely using exchange traded gold in this scheme. Under the one scenario it will really work whats to keep the fund sponsor from hiring an army and taking the gold for himself as law and order breaks down.

  9. The following article by Steve Mathews gives some objective evidence of how gold trades like a currency:
    You may be unaware that inflation statistics such as the CPI have been altered over the years with a result that price inflation may not be the reliable indicator in which you choose to believe. Monetary inflation is out of control by any measure; price inflation has been selective thus far. Gold went to new highs a few years ago; it is likely to reach new highs again in the next few years.

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