The Permanent Portfolio

Abstract

We investigate the performance of the ‘Permanent Portfolio’ in the United States and international markets. This simple approach to asset allocation involves investors splitting their portfolio equally between stocks, bonds, gold and cash. The Permanent Portfolio does not consistently generate returns that are greater than those to a buy-and-hold stock portfolio or to stock and bond portfolios. By construction, its returns are the average of the four component asset classes. However, the Permanent Portfolio does outperform traditional portfolios on a risk-adjusted basis. It generates larger Sharpe ratios, larger Jensen alphas and has less downside risk.

Keywords:

• Permanent Portfolio
• asset allocation
• diversification

JEL Classification:

• G11
• G15

Notes

¹ The Global X Permanent ETF (ticker PERM) invests in stocks, long-term US Treasury Bonds, short-term US Treasury Bills and Bonds and gold and silver http://www.globalxfunds.com/PERM/FS. The Permanent Portfolio Mutual Fund invests in growth stocks, US Treasuries, gold, silver and Swiss franc assets. http://www.permanentportfoliofunds.com/pdfs/perm/PRPFX.pdf

² Browne (1999) indicates that some investments should be kept in a different country. We do not factor this aspect into the bills, bonds and stock components of the PP we implement. Each of these investments is assumed to be in home country assets. However, our analysis assumes the gold component of the portfolio maybe held either within or outside the investor’s home country.

³ Browne (1999) suggests that rebalancing does not need to occur in instances when none of the weights have moved to less than 15% or more than 35%, but we take adopt the most straightforward approach and simply rebalance each year.

⁴ Italy has the highest bill, bond and stock returns of any country. The PP strategy in Italy also tended to be overweight (prior to the annual rebalancing) those asset classes that were performing well in a given month.

⁵ Business cycle data were not available for the Netherlands.