Book Reviews, Macroeconomics, Methodologies

Book Review of The Permanent Portfolio by Craig Rowland and J. M. Lawson

The full title of this book is The Permanent Portfolio: Harry Browne’s Long-term Investment Strategy by Craig Rowland and J. M. Lawson (2012).

This is a book about the Permanent Portfolio investment strategy suggested by Harry Browne, which is a simple asset allocation strategy that historically has provided steady returns over the long-term while having very low drawdowns. The strategy rebalances among (i) cash, (ii) long-term risk-free bonds, (iii) stocks, and (iv) gold, in order to protect itself against all economic conditions.

The basic idea is that there are two variables that together broadly define any economic condition: (i) the economy can be strong (prosperity), or weak (recession), and (ii) inflation can be high (inflation) or negative (deflation). In each economic condition, one asset in particular would do well. During prosperity, stocks do well. During recession, cash does well. During inflation, gold does well. During deflation, bonds do well. By rebalancing among the 4 asset classes whenever any asset class goes too far out of proportion, it ensures that you would buy low and sell high for each asset class, and be protected against huge drawdowns through owning the 1 or 2 asset classes that would do well for each economic condition.

While I can appreciate how low drawdowns can be achieved using such a strategy, the part about making consistent positive returns frankly still puzzles me. The explanation given in the book is that winners would routinely give returns in excess of 100% while losers would typically drop ~50%. That is something that I have not seen the data for, and would require more research to verify. I know that large funds typically take on a lot of leverage in order to make the volatility of their bond position comparable to the volatility of their stock position, but I have not seen that in the Permanent Portfolio especially when strategy requires capital to be evenly divided. Any readers who know why the Permanent Portfolio should consistently give positive returns please do share in the comments section of this post.

On a related note, AQR had a piece that wrote about why risk parity works even in periods of rising bond yields.

  • Markets can be surprising. We believe our best defense against surprise is building a strong foundation that doesn’t rely on our forecasts being right, but instead relies on a long-term expectation that markets will provide risk premia in return for capital invested and that diversification is the best way to enable us to stay invested through the tough periods for any one particular asset class.

Another issue that warrants a bit of thinking / research is on the use of ETFs to take positions in the asset classes. My impression of ETFs is that they are meant to mimic the daily return of the asset class they are tracking, and are not meant to mimic the long-term return of the asset class. And because of the daily rebalancing by the ETF, there tends to be a persistent downward drift in an ETF’s price. As the Permanent Portfolio is a long-term strategy where you would expect to hold each asset classes for a number of years before rebalancing, is there any issue with using ETFs to implement this? Granted this is more of an issue for investors choosing to use ETF vehicles, as the authors recommend using money market funds for cash, holding physical gold, and buying long-term bonds direct from the U.S. Treasury.

One interesting bit about this book is that unlike other books on investments, the authors do not have careers as investment professionals. Craig Rowland is a software entrepreneur that focused on network security and J. M. Lawson is an attorney that provides consulting on retirement plans. In my opinion, this does not in any way imply that the advice in the book is flawed or ill-conceived. I would definitely focus more on the content, than the background of the authors.

In conclusion, if I can better appreciate how the Permanent Portfolio makes money, and get comfortable with using ETFs as vehicles (this would be particularly pertinent for international investors who wish to invest in the U.S. but may not be able to easily open accounts for mutual funds + U.S. Treasuries), I think this is a great long-term strategy that is easy to implement and is the best type of strategy for investors that want a simple, fuss-free, low-risk approach to investing their money.


Harry Browne’s Permanent Portfolio

  • Asset allocation
    • 25% in U.S. stocks, to provide strong return during times of prosperity.
    • 25% in long-term U.S. Treasury Bonds, which do well during prosperity and during deflation.
    • 25% in cash in order to hedge against periods of tight money or recession.
    • 25% in precious metals (gold) in order to provide protection during periods of inflation.
  • Once a year, rebalance your portfolio. If any part of your portfolio has dropped to less than 15% or grown to over 35%, then reset all four parts to 25%.

Harry Browne’s 16 Golden Rules of Financial Safety

  1. Your career provides your wealth
  2. Don’t assume you can replace your wealth
  3. Recognize the difference between investing and speculating
  4. No one can predict the future
  5. No one can time the market
  6. No trading system will work as well in the future as it did in the past
  7. Don’t use leverage
  8. Don’t let anyone make your decisions
  9. Don’t ever do anything you don’t understand
  10. Don’t depend on any one investment, institution, or person for your safety
  11. Create a bulletproof portfolio for protection
  12. Speculate only with money you can afford to lose
  13. Keep some assets outside the country in which you live
  14. Beware of tax-avoidance schemes
  15. Enjoy yourself with a budget for pleasure
  16. Whenever you’re in doubt about a course of action, it’s always better to err on the side of safety

Performance of the Permanent Portfolio

  • Annualized returns of 9.5% a year from 1972 to 2011 (40 years). Worst loss was -5% in 1981.

Factors Leading to Poor Diversification

  • Strategy took too much risk in a single asset class
    • While stocks may have impressive gains over certain periods of time, there is no guarantee that they will perform well on your particular timetable. Any asset can go into a bad market for extended periods and stay there for years.
    • A strongly diversified portfolio should assume that the future might not resemble the past and hold a balanced allocation that will position the portfolio well for whatever the future may bring.
  • Portfolio held assets that ultimately were exposed to the same types of risk
    • During the 2008-2009 crisis, all stocks dropped, including many bond funds.
  • Strategy was designed based upon false assumptions about asset class correlations
    • Simply relying upon historical asset class correlations is dangerous because many asset class correlations do not explain why the correlations exist, and what might cause them to change in the future. E.g. the correlation between stocks and bonds in the
      • 1970s was 0.51
      • 1980s was 0.32
      • 1990s was 0.54
      • 2000 to 2009 was -0.83, and
      • 40-year period from 1972-2011 was 0.06.
    • Assets move for very specific reasons having to do with what is going on in the overall economy, and not what each other is doing as asset class correlations assume. Stocks do not go up because bonds are going down, and vice versa.
    • Strong diversification is not built by looking at asset class correlation data. Build strong diversification by looking at the underlying causes. Understand how different assets respond to changing economic conditions.
  • Portfolio held no hard assets
    • Hard assets are subject to different market forces than paper assets.
    • In some economic conditions, hard assets are the only component that can provide protection from serious losses when currencies, stocks, and bonds are all performing poorly.
  • Portfolio had little or no cash reserves
    • During a market crash, a cash allocation can provide a source of funds that can be used to purchase assets at deep discounts when everyone else is fleeing those assets in panic.
    • Cash can also provide stability and liquidity to support living expenses and cover any emergency needs.


Four Economic Conditions

  • Conditions
    1. Prosperity
    2. Deflation
    3. Recession
    4. Inflation
  • Notes
    • The four economic conditions (or some combination of them) are the only ones that can exist in a modern economy. In other words, at any point in time, the economy is either expanding (prosperity) or contracting (recession) and the money supply relative to the supply of goods and services is either expanding (inflation) or contracting (deflation).
    • [My note: There are essentially two variables: economy (strong/weak) and inflation (inflation/deflation)]
    • It is possible for more than one economic condition to be present. Thus, an economy can be experiencing prosperity with somewhat high inflation, no inflation, or even pockets of deflation.

Economic Condition – Prosperity

  • Condition
    • Rising productivity and profits, low unemployment, stable or falling interest rates.
  • Asset classes
    • Stocks – Good
    • Bonds – Good
    • Gold – Bad, other markets are doing well, inflation is low and stable, gold has no interest or dividends

Economic Condition – Deflation

  • Condition
    • Some economic shock (e.g. credit crisis, market panic) sets off a cycle of declining prices (people reduce their spending), falling interest rates (demand for loans dries up), and rising currency value.
  • Asset classes
    • Cash – Good
    • Bonds – Good
    • Stocks – Bad, corporate profits decline
    • Gold – Loses value same as other assets, however can do well if inflationary policies are taken and the market anticipates serious future inflation. Can do well if negative real interest rates are present. However real interest rates are often not negative during serious deflation.

Economic Condition – Recession

  • Condition
    • This is a “tight money” recession. Central bank elected to repeatedly raise interest rates to help tame high inflation in an economy that is already weak, leading to a recession.
    • This usually lasts 12 to 24 months, until consumers begin spending again or the economy adjusts to a lower level of overall demand.
  • Asset classes
    • Cash – Good, can purchase assets at depressed prices
    • Bonds – Bad, interest rates rising
    • Stocks – Bad, economy contracting
    • Gold – Bad, inflation is slowing down, stopping, or coming back down.

Economic Condition – Inflation

  • Condition
    • Too much money circulating in an economy relative to the available supply of goods and services. Prices go up, accompanied by rising interest rates because lenders demand higher returns on borrowed money to compensate for the reduced purchasing power of future dollars.
    • Wage-price spiral
      • Too much currency in circulation
      • Currency worth less. Business costs escalate
      • Prices go up to compensate
      • Workers can buy less, so they demand higher wages
      • Process repeats
  • Asset classes
    • Gold – Good, value of currency dropping
    • Bonds – Bad, rising interest rates
    • Stocks – Tread water, often match inflation growth
    • Cash – Bad, high inflation destroys purchasing power

How the Permanent Portfolio Works

  • It’s impossible to predict what the next change is going to be, so there is the need to have constant exposure to assets that will protect you in all four economic environments.
  • The winners will routinely provide gains far in excess of the losses incurred by the losers. E.g. when an asset is rising in value, it will routinely see gains far in excess of 100%, while the losers can never lose more than 100% (and usually not more than 50% except under unusual circumstances).
  • Over time this process of the winners providing gains in excess of the losses elsewhere in the portfolio translates into a steady positive inflation-adjusted return on the whole…. The winners will have enough power on the upside to absorb the losses of the underperformers.

Historical Annualized Real Return of the Four Asset Classes

  • 1972 to 1979 (high inflation years)
    • Stocks: -2.8%
    • Bonds: -4.0%
    • Cash: -1.5%
    • Gold 24.1%
  • 1980 to 1999 (prosperity years)
    • Stocks: 13.3%
    • Bonds: 6.4%
    • Cash: 2.8%
    • Gold: -6.1%
  • 2000 to 2009 (recession years)
    • Stocks: -3.4%
    • Bonds: 5.0%
    • Cash: 0.2%
    • Gold: 12.1%



  • Requirements
    • Own the cheapest and most broadly based stock fund that tracks the S&P 500 Index or Total Stock Market Index (e.g. Russell 3000 or Wilshire 5000)
    • Expense ratio below 0.5% per year (with no front-end load)
    • Passively managed (check the turnover)
    • From well-established companies
    • 100% invested in stocks at all times.
  • If buying an ETF instead of a mutual fund, limit your commission cost by buying in bulk.
  • S&P 500 Funds
    • Vanguard: VFINX
    • State Street: SPY
    • iShares: IVV
    • Fidelity: FSMKX
    • Schwab: SWPPX
  • TSM Funds
    • Vanguard: VTSMX / VTI
    • iShares: IWV
    • Fidelity: FSTMX
    • Schwab: SWTSX
  • International Stocks
    • Vanguard: VEU/ VFWIX / VGTSX / VTWSX / VT
    • iShares: EFA
    • Fidelity: FSIIX


  • The only bonds that are appropriate for the Permanent Portfolio (PP) are 25- to 30-year U.S. Treasury nominal long-term bonds
    • No default, credit, call, political, currency, manager risk
    • Long maturity provides maximum volatility to profit from periods of deflation
    • Fixed-rate, without inflation adjustments built-in
    • Avoid bond problems such as credit risk, political risk, and currency risk
  • Implementation
    • To maintain the desired volatility within the PP’s bond allocation, investors will sell a treasury bond when it reaches 20 years of maturity, and then purchase a new 25- to 30-year bond to replace it.
  • Historical examples
    • In 2008, long-term U.S. Treasury bonds gained nearly 35% as the stock market tanked. TLT moved up 5% from August – Oct 2008, and up another 30% from November – December 2008.
    • In 2011, U.S. stock market returned 1%, the Euro was on the verge of problems with a Greek default, and long-term Treasury bonds gain 33%. TLT moved up 30% from August – December 2008.
  • Ways to purchase
    • Treasury Direct
    • Mutual fund or broker
    • iShares ETF (TLT) – Beware that the securities are being lent out
    • Fidelity TF (FLBIX) – Not so good, can hold 20% in other bonds
    • Vanguard (VUSTX) – Not good, mixes in other securities


  • 1981 Recession Real Return
    • Stocks: -12.7%
    • Bonds: -6.5%
    • Cash: 5.3%
    • Gold: -36.7%
  • Requirements
    • Be very liquid
    • Have no interest rate risk
    • Have no default, credit, call, currency, counterparty, or other common types of fixed income risk.
  • Ways to purchase
    • Purchase T-Bills (12 months or less to maturity) from Treasury Direct
    • Mutual fund or broker
    • Treasury Money Market Funds with low expense ratio (< 0.20% a year)
      • iShares: SHV
      • Fidelity: FDLXX
      • SPDR: BIL
      • Gabelli: GABXX
      • Vanguard: VUSXX – not pure Treasuries
    • U.S. savings bonds (Series EE and Series I)
    • Short-term Treasury notes
      • iShares: SHY
      • Fidelity: FSBIX
      • SPDR: SST
      • Vanguard: VFISX – mixes in other securities


  • When gold works
    • Gold does poorly during periods of prosperity, deflation, and recession. During times of high inflation, or expectations of future inflation, gold will experience large price increases.
    • When there is negative real interest rates (i.e. inflation > nominal interest rate), this mimics higher inflation. Gold then can respond as if it were higher levels of inflation because negative real interest rate conditions are similar to a high inflation environment.
  • Historical examples
    • Gold went from under $100 an ounce in the early 1970s (after breaking the gold standard) to over $800 an ounce by 1981.
    • Gold went from $250 an ounce to $1,600 an ounce from 2000 to 2009.
    • When Iceland’s Krona collapsed by 80% in 2008, and the stock market sank -88%, gold in Icelandic Krona was up 259%.
  • What kind of gold
    • Physical gold bullion safely stored and insured against loss (first choice).
    • Best gold to hold directly are one-Troy-ounce bullion coins. Gold coins that are less than one ounce tend to have a high premium relative to their gold content so you get less gold for your money.
  • Ways to purchase
    • Buy from gold dealers (usually charge a 5% markup to the gold spot price) and store in a bank safe deposit box with insurance
    • Buy and store gold in an allocated account at a bank
    • ETFs
      • Canton Bank of Zurich ETF (ZGLD) – Recommended for non-U.S. investors
      • Sprott Physical Gold Trust (PHYS) – Canada closed-end fund
      • Central Gold Trust of Canada (GTU) – Closed-end fund
      • Physical Swiss Gold ETF (SGOL)
      • iShares (IAU)
      • StreetTracks (GLD)
  • Caution
    • Don’t store gold at a dealer
    • Closed-end fund trades 3, 4, or even 10% above the price of gold. Check the premium/discount to NAV and wait before buying if it is trading more than 5% above NAV.
    • A basket of commodities doesn’t work (look at DBC vs GLD in 2008)
    • Gold mining companies doesn’t work (SPDR metals and mining index dropped 75% in 2008)
    • TIPS has integrity issues with the CPI reporting, and they are not volatile enough to offset the losses in the rest of the portfolio.
    • Small one-ounce bullion bars are not as recognizable as gold bullion coins.


Four Levels of Protection

  • Level 1: All ETFs and/or mutual funds for stocks, bonds, cash, and gold.
  • Level 2: ETFs and/or mutual funds for stocks, cash, and most gold. Bonds and some gold owned directly.
  • Level 3: ETFs and mutual funds for stocks and cash. Bonds owned directly. Gold stored in country securely (e.g. in a bank).
  • Level 4: ETFs and mutual funds for stocks and cash. Bonds owned directly. Gold split between in-country and overseas storage.

Diversify Across Institutions and Geography

  • Diversify by fund providers (e.g. iShares, Vanguard), broker, geography.
  • Keep your account balances below the SIPC limits: $500,000 total ($250,000 in cash)

Buy All At Once

  • Go all in. Waiting is a euphemism for market timing.

Turn off Automatic Reinvestments

  • Turn off automatic reinvestments of fund interest and dividends. Consider having all of the payments deposited into your cash allocation. By using this approach, your recordkeeping will be easier because you will no longer need to track small buy transactions into your stocks and bonds for tax purposes.
  • By pooling your payments into cash, you have the option to use the cash to buy the lagging assets and not be forced into reinvesting into assets that have gone up a lot in price.
  • For tax-free accounts it does not make much difference.

Rebalance at 35/15 Rebalancing Bands

  • Entire portfolio should be rebalanced when any single asset reaches either a high of 35% or falls to a low of 15% of the total allocation. These trigger points are called ‘rebalancing bands’.
  • Most PP investors can expect to encounter rebalancing events every few years or so.
  • Purpose
    • Ensures that you are never too exposed to any one asset in the portfolio
    • Forces you to “sell high, buy low”

Withdraw from the Cash Component

  • When an investor is in the process of drawing down the value of the portfolio, such as during retirement, the withdrawals should come from the cash component.
  • Because the stocks, gold, and bonds will likely grow more over time than the cash, an investor in the withdrawal phase is better off leaving those assets alone as long as possible. In this case, taking the cash down to 15% before touching the other components will give them the best chance to grow.

Add New Money to Cash, Then to the Worst Performing Assets

  • Harry Browne suggested that new money be contributed to the cash portion of the portfolio and then rebalanced into the other PP assets when cash reached 35% of the entire portfolio.
  • An alternative approach that might lead to slightly better long-term returns would be to add new money to the cash allocation until it reaches 25% (if it isn’t already at or above 25%) and next add new money to the worst performing of the portfolio’s other three assets (which are on sale at the lowest price) until it reaches 25%.

Two Commercial Permanent Portfolio Funds Available

  • Permanent Portfolio Fund (PRPFX)
    • Weighted towards inflation-fighting assets. Tax-efficient. Since 1982.
    • 20% gold
    • 5% silver
    • 10% Swiss francs (Swiss government short-term debt)
    • 15% real estate and natural resource stocks
    • 15% aggressive growth stocks
    • 35% U.S. Treasury bills and bonds
  • Global X Funds Permanent ETF (PERM)
    • New fund started in Feb 2012.
    • 9% U.S. large-cap stocks
    • 3% U.S. small-cap stocks
    • 3% International stocks
    • 5% U.S. real estate stocks
    • 5% U.S. and foreign natural resource stocks
    • 25% U.S. Treasury long-term bonds
    • 25% U.S. Treasury bills and notes
    • 20% Gold ETFs
    • 5% Silver ETFs


Invest Where You Live for International Investors

  • Stocks
    • Hold stocks mostly in the country where you live, unless you live in a country with a small economy and stock market.
  • Bonds
    • Seek the longest term government bonds that are available that are considered to be more or less risk-free, and ideally issued by an investor’s home country.
    • If 25 to 30 year bonds are not available, buy more of the longest available (e.g. 10 or 15-year) and reduce the cash component (e.g. 15% cash, 35% bonds). This is needed to compensate for the fact that shorter maturity bonds are not as volatile.
  • Cash
    • Hold the shortest-term bond issued by your own government.
  • Gold
    • Same. Hold physical gold.

International Options

  • Canada
    • Stocks: XIU, XIC, VCE, ZCN
    • Bonds: ZFL, XLB
    • Cash: ZFS, XSB
    • Gold: Canadian Maple Leaf, GTU.UN
  • Europe
    • Stocks: Vanguard MSCI Europe Index, STOXX 600 Index, db X-Trackers
    • Bonds: X25E, IBCL
    • Cash: EUN6, ISS, C3M, IBCA
    • Gold: ZGLD, PHAU / PHAUP
  • UK
    • Stocks: ISF
    • Bonds: IGLT
    • Cash: IGLS
    • Gold: ZGLD, PHGP
  • Australia
    • Stocks: VAS, IOZ, STW
    • Bonds: Vanguard Diversified Bond Index
    • Cash: Vanguard cash Plus Index
    • Gold: PMGOLD
  • Asia
    • Stocks: Vanguard Total World Index ETF / Mutual Fund, VTWSX, VT


Original Books from Harry Browne

  • How You Can Profit from the Coming Devaluation (1970)
  • Inflation-Proofing Your Investments
  • Why the Best Laid Investment Plans Usually Go Wrong (1987)
  • Fail-Safe Investing (1999)


Readers’ Forum



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