I am a long-time advocate of the permanent portfolio.  This is a portfolio going back several decades, which was promoted by the great libertarian, Harry Browne.

The permanent portfolio is designed to protect your wealth in any type of economic environment.  It is also designed for simplicity.  The allocation is for four equal parts (approximately) in four asset categories.  The portfolio consists of 25% in stocks, 25% in gold, 25% in long-term government bonds, and 25% in cash (or cash equivalents).

Each asset category is there to do well in certain economic environments.  When one or more of the categories does poorly, the others are there to make up the difference.

Stocks are there for times of prosperity.  This would include the current environment where some of the prosperity is illusory and is a monetary inflation-driven boom.

Gold is there for times of high price inflation.

Long-term government bonds are there for times of depression and deflation.  As interest rates go down, the value of long-term bonds rises.

Cash is there to smooth everything out.  In certain periods of recession, it is possible that all assets can perform poorly.  Cash will hold its value and make the portfolio less volatile.

As Harry Browne noted in his book Fail-Safe Investing, recessions are generally short-lived.  The recession will turn into an environment of depression/ deflation, or prosperity, or inflation.

Your permanent portfolio can certainly go down in value.  But it tends to not last long, and the downturns are typically not severe.  It isn’t like owning a 100% stock portfolio where you could lose 60% of the value in the matter of months.

There are no guarantees with the permanent portfolio, just like anything else.  It is also far from perfect.  But I also haven’t seen anything with its simplicity that is better.  Even without regard to simplicity, I don’t think I’ve seen anything better in terms of balancing wealth protection with growth.

With that said, the current environment is difficult.  It seems like nearly everything is in a bubble.  I have been calling this the “everything bubble”.  The one major exception may be gold.  But if there is a major crash/ recession in the near future, gold could easily go down in value (in dollar terms) as well.  I just don’t think it will be as severe as stocks.

Bonds and Cash and a Depreciating Currency

I have received multiple comments recently regarding at least two of the components of the permanent portfolio.  It is hard enough for many people to swallow putting that much into bonds and cash.  It is that much more difficult for someone who is a libertarian.

It is easy to question the permanent portfolio at any time because one of the components will always be doing better than the others.  There will be at least one that is seemingly a loser, at least compared to the others.

The first thing I’ll say is that the permanent portfolio is up, certainly in nominal terms, and probably in real terms.  It is up quite substantially over the last year no matter how you measure it.  If you own PRPFX, which somewhat mimics the permanent portfolio, that is up about 30% from exactly one year ago.

Sure, if you are in the permanent portfolio, you are not up nearly as much as your friends who have 100% invested in stocks.  If you bought the Nasdaq one year ago, you would be up about 50%.

The whole point of the permanent portfolio is wealth preservation, while maintaining some growth over time.  There is nothing stopping anyone from going 100% into stocks, but I don’t think it’s a good idea.  I wouldn’t be sleeping well at night.  And if we hit a bear market with some kind of crash, it is impossible to know when it begins.  Even if we have one big down day where stocks fall 5%, you have no idea if it is the start of a major crash, or if it is just a one-day blip.

Libertarians tend to hate U.S. government bonds and cash for obvious reasons.  The Federal Reserve is creating money out of thin air like crazy, thus causing the money we have to depreciate in value.  The national debt keeps going higher, and some think there will be some kind of default.

I don’t think we will see an outright default in U.S. bonds any time soon, but we will see defaults on a continuing basis by devaluing the money in which they are priced.  That is happening now.

So why would you buy a 30-year bond that pays just over 2% annual interest?  Why would you hold cash/ money market funds that may pay 0.01% interest?

For the bonds, you are buying bond funds.  I don’t recommend purchasing long-term bonds through the actual Treasury. You can buy mutual funds and ETFs that fulfill this role.  If we hit a major crash, the long-term interest rates could go back down to near zero.  There would be significant appreciation in long-term bonds that would help offset the likely fall in stocks.  It is even possible that interest rates could go negative, as we have seen in other countries and regions.

If interest rates rise, then the value of the bonds will go down.  But then you will get the benefit of higher interest rates on your cash and bonds in the future.

It is important to remember that you rebalance the permanent portfolio.  If any one asset class strays too far from the 25% mark, then you rebalance.  You lighten the load on the assets that have gone up, and you add to those that have gone down or have not performed as well.  In other words, you are buying low and selling high.

It is important to stay disciplined with the rebalancing.  It is probably best to do it on a certain date a couple of times per year.  Or, if you are saving money by adding to your investment portfolio, then take your additional contributions and add it to whatever asset class is the lowest percentage at that point.

It is possible that bonds could go into a long bear market with interest rates going up.  If that is the case, then your other pieces are likely to do well, particularly gold.

I completely understand why people are concerned about investing in bonds and cash equivalents.  But you have to take in context with the entire portfolio.

I have previously offered alternatives to the bond portion, such as paying down debt, including a home mortgage.  But even here, I would still recommend having at least 15% allocated towards bonds.

There is a final important point to be made in all of this.  In Harry Browne’s book, he differentiates between speculation money and money you cannot afford to lose.  With the money you cannot afford to lose, it should go into the permanent portfolio or something similar.  You can set aside “play money” to speculate with, where you won’t be devastated if it doesn’t work out.

So if you believe that stocks and/ or gold are going to go sky high (in dollar terms) over the next several years while watching bonds get destroyed with higher interest rates, then you should speculate as such.

You could take 75% of your money (as an example) and put it into the permanent portfolio.  Take the other 25% and speculate in gold, mining stocks, Bitcoin, tech stocks, or whatever your heart desires.  Just make sure that it will not be devastating if those speculations do not turn out well.  For more conservative investors, maybe you will want to put 95% of your financial assets into the permanent portfolio, while playing with the remaining 5%.

As I have stressed a lot lately, this “everything bubble” is going to end at some point, and it isn’t going to end well for most people.  There are very few people who have cleaned up with speculative investments who will be satisfied and go completely conservative before the trouble hits.

Most of the people who have been invested heavily in stocks will be invested heavily in stocks when the crash eventually comes.

And for the people who are ultra conservative with their money who have a big pile of cash in the bank, they will end up getting burned by inflation.  The permanent portfolio may be considered conservative, but it does a great job of protecting against a depreciating currency.  In fact, the returns tend to be higher during times of higher price inflation, which is really what you should want.

Any one investment by itself is risky.  This includes holding cash.  The permanent portfolio diversifies this risk, while still providing for growth.