Permanent Portfolio

Permanent Portfolio – Week in Review

Permanent Portfolio

Permanent Portfolio. One thing about growing older is that you become more concerned about retirement and portfolio strategies. Which one is the best for you is a matter of debate? The best retirement portfolio depends on several factors: age, expected life expectancy, risk tolerance, etc. Several trendy options include the Coffeehouse Investor Portfolio, the Bogleheads 3 Fund Portfolio, the Warren Buffett 2 Fund Portfolio, and the Core and Satellite Portfolio. There are other options too, but these are amongst the most widespread lazy portfolios. Another popular option is the Permanent Portfolio. This portfolio is different in that there is a mutual fund company called the same name. However, it is still a well-liked portfolio that tends to gain in popularity during market downturns.

History of the Permanent Portfolio

The advocate of the Permanent Portfolio is Harry Browne of the Permanent Portfolio Family of Funds. The fund with the asset classes and weightings described below was first created in 1982. Harry Browne later expounded on the Permanent Portfolio concept in his 1999 book “Fail-Safe Investing.” The mutual fund still exists but is more complex than the original concept and now includes a greater percentage of bonds, gold and silver, growth stocks, cash in Swiss francs, and energy, mining, and real estate stocks.

Browne argued that the four asset classes in the Permanent Portfolio would provide growth and stability in all economic and stock market conditions.

Several other books have been written about the Permanent Portfolio, the investment strategy, and returns. A book from 2012, “The Permanent Portfolio: Harry Brown’s Long-Term Investment Strategy,” discusses the benefits and limitations.

What is the Permanent Portfolio?

The Permanent Portfolio is an investment strategy with an objective to perform well in any market condition. It does so through extreme diversification. Most other portfolio strategies diversify asset classes but stick primarily to equities and bonds. A few portfolio strategies add real estate investment trusts (REITs) and cash. However, the cash allocation is usually tiny. This point is where the Permanent Portfolio differs from other retirement investment strategies. The Permanent Portfolio includes a healthy percentage of cash and gold.

The Permanent Portfolio is comprised of the following asset classes and percentages, as shown in the table below. It is rebalanced annually.

WeightingAsset Class
25%US Stocks
25%US Treasury Long-Term Bonds

The actual choice of funds differs. However, a small retail investor can recreate the Permanent Portfolio using exchange-traded funds (ETFs) or passive index funds. The basic choice of funds is a total stock market index ETF, a US Treasury long-term bond fund, a gold fund, and a US Treasury short-term bond fund.

Other options for funds include an S&P 500 Index fund instead of a total stock market fund. A US Treasury T-Bill fund can be substituted for a short-term bond fund. Finally, actual gold coins can be used instead of a gold fund. The rationale here is that many gold funds invest in gold and gold mining stocks.

It is important to note that the Permanent Portfolio does not include REITs, international stocks, or international bonds. In addition, the Permanent Portfolio does not split US equities into growth, value, large-cap, mid-cap, or small-cap.

Pros and Cons of the Permanent Portfolio

The pros of the Permanent Portfolio are that it is simple and index funds are low-cost. It is also easy to understand and implement in this era of ETFs. Index funds have low expense ratios reducing the cost drag on total returns. In addition, index funds tend to reduce the short-term trading mentality.

On the other hand, the Permanent Portfolio has several cons. Many investors do not want to invest in gold. Gold can be a good investment during inflationary times and recently is has been trading at a record. Gold can also be a bad investment since it is volatile, may underperform for decades, and does not produce wealth. Investors also may not want to invest in such large percentages for gold or cash. Gold can have decent returns in inflationary times, but there have been long stretches where gold has not performed well. In addition, the interest rate on T-bills is currently meager.

Popularity of the Permanent Portfolio

The popularity of the Permanent Portfolio has waxed and waned mainly depending on market conditions. In the 1990s, the Permanent Portfolio performed poorly compared to many stock funds. In addition, gold did not perform too well during this time. However, from about the dot-com crash to early-2011, the Permanent Portfolio outperformed the S&P 500 Index. This performance during times of economic turmoil is when the Permanent Portfolio performs best in relative terms.

Permanent Portfolio Returns During the Dot-Com Crash (March 2000 – October 2002)

The table and chart below compare returns and volatility of the Permanent Portfolio (portfolio 1 – blue line) versus the 60% total stock / 40% total bond portfolio (portfolio 2 – red line) and the Bogleheads 3 fund portfolio (portfolio 3 – orange line). We assume the portfolios are rebalanced annually. Focus on the compound annual growth rate (CAGR), standard deviation, and max drawdown numbers. It is clear why the Permanent Portfolio became popular for many investors during the dot-com bust. The returns were even better than the Coffeehouse Investor Portfolio during this time.

Permanent Portfolio Returns Dot-Com Crash
Source: Portfolio Visualizer

Permanent Portfolio Returns from January 2000 – October 2021

How does the Permanent Portfolio do over more prolonged periods assuming a buy and hold strategy in a retirement plan? We ask this question since there are many choices for retirement portfolio strategies. In this comparison, we examine the Permanent Portfolio (portfolio 1 – blue line), the 60% total stock / 40% total bond (portfolio 2 – red line), and the 3-fund Boglehead portfolio (portfolio 3 – orange line). We assume the portfolios are rebalanced annually. Again, focus on the compound annual growth rate (CAGR), standard deviation, and max drawdown numbers. It is clear that the Permanent Portfolio comes out ahead in this period. Of the portfolio that I have examined, only the Coffeehouse Portfolio has come out ahead.

Permanent Portfolio Returns
Source: Portfolio Visualizer

Final Thoughts on the Permanent Portfolio

The Permanent Portfolio is a viable strategy assuming that all the asset classes are available as index funds in your retirement portfolio. The portfolio strategy has performed well during market volatility and times of economic uncertainty. The main challenge for the Permanent Portfolio is that not many 401(k) retirement plans offer gold funds or gold coins as an option. Hence, the Permanent Portfolio may be something to consider for a Roth or Traditional Individual Retirement Account (IRA) or a self-directed retirement plan.


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Chart or Table of the Week

Today I highlight Northrop Grumman (NOC). The company is one of the largest US aerospace and defense contractors. It has a focus on strategic manned and unmanned aircraft. Northrop Grumman is also a significant player in missiles and space. After third-quarter results, defense stocks are down due to supply chain delays, labor shortages, slowing US defense budget growth, and the withdrawal from Afghanistan. The stock is down about (-10%) from its recent and all-time highs. The stock is trading below its 50-day EMA and near its 200-day EMA. The price-to-earnings (P/E) ratio is the lowest in some time. The dividend yield is not too high, but the dividend safety is excellent. Investors may want to look at this Dividend Contender. The screenshot below is from Stock Rover*.

Source: Stock Rover*

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements. I update this list weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at the end of October 2021. The number of companies on the list has risen to 538. Thus, we are well over 10% of companies that pay dividends, having cut or suspended them since the start of the COVID-19 pandemic.

There were seven new companies added to the list this past month. The seven companies were International Paper (IP), CatchMark (CTT), Permian Basin Royalty Trust (PBT), Permianville Royalty Trust (PVL), San Juan Basin Royalty Trust (SJT), PermRock Royalty Trust (PRT), and Sprague Resources (SRLP).

Market Indices

Dow Jones Industrial Averages (DJIA): 36,100 (-0.63%)

NASDAQ: 15,861 (-0.69%)

S&P 500: 4,683 (-0.31%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 29.5X, and the Schiller P/E Ratio is about 39.5X. These two metrics were down the past three weeks. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I view anything over 30X as overvalued based on historical data. The S&P 500’s valuation came down as the index companies reported solid earnings for the second consecutive quarter.

S&P 500 PE Ratio History


Shiller PE Ratio History


Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was flat this past week to 16.29. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 index options. It is commonly referred to as the fear index.

Source: Google

Fear & Greed Index

I also track the Fear & Greed Index. The Index is now in Extreme Greed at a value of 83. The Index is down two points this past week. This Index is a tool to track market sentiment. There are seven indicators in the Index that are measured on a scale of 0 to 100. The Index is calculated by taking the equally-weighted average of each indicator.

These seven indicators in the Index are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Market Momentum indicates Extreme Greed.

Safe Haven Demand is in Extreme Greed.

Junk Bond Demand indicates Extreme Greed.

Put and Call Options are signaling Extreme Greed.

Stock Price Breadth indicates Greed.

Stock Price Strength is signaling Greed.

Market Volatility is set at Neutral.

Source: CNN Business

Economic News

The US Bureau of Labor Statistics reported the US producer price index up 0.6% in October, increasing 0.5% in September. The US PPI is up a record 8.6% for the 12 months ending in October; this is the highest annual pace going back to November 2010. Over 60% of the number can be credited to the increase in final demand goods. Three-quarters of the advance of the final demand goods can be attributed to a 4.8% increase in final demand energy prices. The Core PPI, which excludes the more volatile food and energy prices, was up 0.4% month-over-month and 6.2% for the 12-months ending in October; this is also the highest annual pace going back to November 2010.  

The US Bureau of Labor Statistics reported the consumer price index rose 0.9% in October; this follows a 0.4% increase in September. The index’s year-on-year rate is up a seasonally adjusted 6.2%, the fastest annual pace since 1990. Price increases were broad-based with the indexes for energy (+4.8%), used car and truck (+2.5%), new vehicles (+1.4%), food (+0.9%), and shelter (+0.5%) all contributing. The energy index has been up around 30% over the past 12 months. The gasoline index rose 49.6% over the last year; fuel oil is also up 59.1% year over year.  The food index has been up 5.3% over the past 12 months. 

The Labor Department reported a decrease in initial jobless claims for the week ending November 6. The seasonally adjusted initial claims came in at 267,000, a decrease of 4,000 from the previous week’s upwardly revised level. In addition, the four-week moving average was 278,000, a decrease of 7,250 from last week’s revised average; this is the lowest average since March 2020.

Thanks for reading Permanent Portfolio – Week in Review!

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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