Permanent Portfolio and Dollar Cost Averaging

I am a strong proponent of putting a good portion of your investments in a permanent portfolio setup, as described by Harry Browne in the book Fail-Safe Investing.  You can also use the mutual fund PRPFX as a substitute.

What if you are new to this concept and you want to put a sizable portion of your money into a permanent portfolio setup?  Should you just put all of your money in at once, or should you use dollar cost averaging?

Dollar cost averaging is simply contributing a set amount of money in given intervals for an investment at specific times.  This avoids trying to time the market.  So instead of buying a stock market mutual fund all at once, you may decide to contribute $200 per month to buy it.  This way you won’t be hurt too much if you happen to buy at a high price.

I don’t mind the strategy of dollar cost averaging, but I think the rules change a bit when talking about the permanent portfolio.  If you have $40,000 sitting in the bank and want to invest it in the permanent portfolio, then I don’t think you need to use dollar cost averaging.  The fund itself is set up so that there aren’t dramatic swings.

A problem with dollar cost averaging when you already have a sizable portion of money is that you are defeating the purpose of the strategy of the permanent portfolio.  If you have $40,000 and you start buying $500 of PRPFX every month, then you are leaving the rest of your money exposed.  If there is a big boom in the stock market or if gold goes up due to inflation fears, then you will have missed out on those gains.  You will also lose purchasing power with the large amount of liquid savings.

If you have a sizable portion of money, you are better off putting most of it into the permanent portfolio as soon as possible, without trying to time the market or use dollar cost averaging.

If you don’t have much money but you want to start investing, then you could certainly use dollar cost averaging to contribute to something like PRPFX.  One of the advantages of dollar cost averaging, for anything, is that it disciplines you to save.  You can have your money automatically taken out of your checking account each month.

If you don’t have much money and want to invest in the permanent portfolio without using the mutual fund, this will be a little more difficult.  If you want to contribute $200 per month, it isn’t going to make any sense to buy $50 worth of gold, $50 worth of stocks, and $50 worth of bonds each month.  In fact, you will probably find it impossible to do so.  You may have to extend your time horizon and buy when you accumulate enough money that it makes sense.

In conclusion, I like the concept of dollar cost averaging.  But if you are investing in the permanent portfolio and you have a sizable amount of money, then don’t use dollar cost averaging for that purpose.