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Permanent Portfolio

Reviewed by Sujaini | Updated on Jan 05, 2021


What is a Permanent Portfolio?

Harry Browne, a free-market investment analyst in the 1980s, established the portfolio strategy. It was built to perform well in all of the economic climates. Harry believed the equal allocation of growth stocks, precious metals, government bonds, and treasury bills (cash) would prove to be an ideal investment mix for those investors looking for stability and growth.

He assumed this portfolio strategy would be successful in any form of the economic situation. This means that growth stocks will thrive on expansionary markets, precious metals on inflationary markets, government bonds during recessionary times, and treasury bills and cash during deflation.

Such a portfolio approach does not promote much growth as the growth stocks are just 25% of the portfolio. Nonetheless, this portfolio is the one that will reduce your losses in the event of a downturn.

How Does It Work?

If you then follow this portfolio strategy, you need to break your investment into equity, government debt, gold, and cash with equal distribution, which means 25% each. Re-equilibrate it quarterly, too.

Let's take one example to understand it better. When you invest Rs 1 lakh, from the year 2000 to 2019, you will invest Rs 25,000 each in Sensex, 10-year sovereign bond, gold, and cash for 20 years. For this permanent approach to portfolio strategy, your Rs 1 lakh investment in the year 2000 will expand further to become Rs 6.47 lakh in 2019.

In terms of risk, this gives the Compounded Annual Growth Rate (CAGR) of 9.79%, whereas its standard deviation is 0.08 and downside deviation is 0.01. Now, when we look at the Sensex CAGR and then the 10-year sovereign bond, they are 10.60% and 8.09% respectively.

Sensex standard deviation and downside deviation are both 0.33 and 0.17, respectively, and for a 10-year sovereign bond, it is 0.10 and 0.04, respectively.

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