Rules-Based Strategy Summary: Harry Browne Permanent Portfolio
Like the Coffeehouse Portfolio, the Harry Browne Permanent Portfolio is a one of the easiest rules-based portfolios to put together.
It is based on the lazy portfolio principle where the investor simply selects a diversified portfolio of diversified assets, and holds on to them “forever”. However, the ultimate selling point for the portfolio is not in its simplicity, but rather its safety. Here is what Harry Browne had to say about that:
“The portfolio’s safety is assured by the contrasting qualities of the four investments – which ensure that any event that damages one investment should be good for one or more of the others. And no investment, even at its worst, can devastate the portfolio – no matter what surprises lurk around the corner – because no investment has more than 25% of your capital.”
The diversified benefits of being in uncorrelated assets means that if one area of the market tanks, then one, two, or three of the other markets may not see that huge drawdown. Thus, but putting money across assets you are protected more from any downside than just an equity portfolio or just a fixed income portfolio.
As with other portfolios on Robotic Investing, I track real-world implementation of the Harry Browne Permanent Portfolio. To see how the portfolio performs in real-time and the real world, check out all the blog posts tagged with the Harry Browne Permanent Portfolio category.
Rules-Based Portfolio Construction & Management
The rules of the Harry Browne Permanent Portfolio is very simple. It is based on the four different components of the economic cycle. These four basic categories are:
The idea is to allocate 25% of your portfolio to each of these areas, in four different asset classes that perform differently during each of the four categories of the economic cycle.
Therefore, the investor would take their portfolio, break it up into 25% segments, and buy the following asset classes:
- Stocks: stocks go up in times of prosperity.
- Long Term Bonds: Long term bonds do well during periods of declining interest rates and deflation. In addition, bonds can do well during prosperity (although usually not as well as stocks).
- Gold: Gold does well when there is bad inflation. Gold often does well when people want a hedge against currency volatility.
- Cash: When recessions hit, most if not all asset classes take a big hit. Cash however remains stable and holds its value (over the short term, unless inflation is a big problem).
In chart form, here is how a Harry Brown Permanent Portfolio would be structured:
The main decision an investor needs to make with the portfolio is which assets to select. Obviously mutual funds can be used, however given the buy and hold nature of the portfolio and no need to any type of additional management going with the lowest cost options is important here.
Exchange-traded funds would be the best choice here.
Here is an option to do that, and the option that I use on Robotic Investing to track the performance of the portfolio:
- Stocks: VT – Vanguard Total World Stock ETF
- Long-Term Bonds: BND – Vanguard Total Bond Market ETF
- Gold: IAU: iShares Gold Trust ETF
- Cash: SHY: iShares 1-3 Year Treasury Bond ETF
Super easy portfolio to buy and hold. If all you want is a set it and forget it type of fund that is low-cost, then this might be a good alternative. Let’s look at the performance to see how it was fared.
Research & Backtest Results
For more information and detailed research on the Harry Browne Permanent portfolio, here are some key links to review:
- Fail-Safe Investing: Lifelong Financial Security in 30 Minutes
- Harry Browne
- KISS Retirement Portfolio: Harry Browne’s Permanent Portfolio
I set up the portfolio using ETFReplay to see how the portfolio has performed in the past.
Granted, this is not a very long backtest. Going back to 2008 does not give a real strong picture of the results, however, the results are not great from a return perspective. The CAGR since 2008 was only 3.7%, which is contrasted by the 6.2% earned with a classic 60/40 portfolio.
Browne does not tout this strategy as a return beast, however sells it as a much safer portfolio. In that area, it did do well with a max drawdown that is half of the benchmark and lower volatility.
However, not very strong performance and probably not the best portfolio for the typical reader of this site: people who are willing to take on more risk for the higher returns available with the stock market.
As with other portfolios on Robotic Investing, I track real-world implementation of the Harry Browne Permanent portfolio. To see how the portfolio performs in real-time and the real world, check out all the blog posts tagged with Harry Browne Permanent portfolio category.
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