Is the Permanent Portfolio Falling Out of Favor?

I am a strong proponent of setting up a permanent portfolio, or something similar, as described in Harry Browne’s book Fail-Safe Investing.  For this post, I am going to focus on PRPFX, the permanent portfolio mutual fund.  I have my criticisms of PRPFX in that it strays a little from the true permanent portfolio, but a look at the mutual fund will serve its purpose for this post.

PRPFX has performed quite poorly over the last couple of years, particularly by its standards.  As of this writing, the fund’s one-year performance is showing a loss of approximately 2.5%.  This is during a time when the stock market has done quite well.

While this may be disappointing for people holding a large portion of the fund (or some kind of a permanent portfolio setup), we have to remember its purpose.  PRPFX is not supposed to mimic the stock market.  So if the stock market goes up and PRPFX doesn’t go up with it, that is acceptable.  We don’t hold the fund for short-term speculation.  It is for longer-term scenarios.

We also must remember that the permanent portfolio’s primary purpose is one of defense.  We are trying to avoid huge losses, such us what pure stock investors experienced in late 2008.  The primary objective of PRPFX is capital preservation.  Growth is secondary.

I think another important thing to remember is that PRPFX has an inflationary bias.  This is not necessarily a bad thing.  Most people will measure their investment returns on a nominal basis.  So someone could brag about earning an 8% return, but if inflation is running at 3%, then the return is really only 5% (before taxes).

The good thing about PRPFX is that it will tend to provide higher nominal returns during times of higher inflation.  This is really how you should want your investments to perform.

Right now, monetary inflation is high, but the demand for money is also high and bank lending is low.  Therefore, even though the Fed is creating a lot of new money out of thin air, consumer price inflation has been relatively low.  So in that respect, we shouldn’t be expecting huge returns out of the permanent portfolio.

The permanent portfolio is going to be unpopular amongst a lot of people right now, especially the “professionals”.  But this doesn’t make it a bad investment.  Just because it has performed poorly in recent times, it doesn’t mean it will continue to be that way.

I think the permanent portfolio is far from perfect, and you can adjust it if the bond portion scares you too much.  But I really haven’t found a better strategy for preserving capital, while also providing some growth.