Rowland and Lawson, The Permanent Portfolio

Talk about simple. Investing doesn’t get much simpler than The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy (Wiley, 2012). Craig Rowland and J. M. Lawson explain how to implement the 25%-25%-25%-25% (stocks, bonds, cash, gold) asset allocation strategy that Harry Browne recommended in his 1987 book Why the Best Laid Investment Plans Usually Go Wrong.

Browne assumed that financial markets are uncertain, which to him meant that no can predict what the market is going to do next and, as a corollary, that no one can time the market. He also admonished investors not to depend on any one investment, institution, or person for their financial safety. He even urged investors to keep some of their assets outside the country in which they live as protection against natural or manmade disasters and “against a government that may try to solve its financial problems by confiscating citizens’ private property.” (p. 11)

The Permanent Portfolio is a steady Eddie performer. Starting in 1972 after the gold standard ended and then looking at annualized real returns by decade (ending in 2009), the Permanent Portfolio returned +5.7%, +4.7%, +4.3%, and +4.2% with less volatility than competing portfolios. A 75/25 portfolio returned -2.3%, +10.5%, +12.4%, and -1.2%; a 50/50 portfolio -2.1%, +9.1%, +9.8%, and +0.6%; and a 25/75 portfolio -2.0%, +7.6%, +7.2%, and +2.2%.

Although there is a Permanent Portfolio mutual fund (with a different allocation: 20% gold, 5% silver, 10% short-term Swiss government debt, 15% real estate and natural resource stocks, 15% aggressive growth stocks, and 35% U.S. Treasury bills and bonds) and a new Permanent ETF, the authors suggest that investors, unless they want convenience, can get better diversification geographically and institutionally on their own.

It is somewhat amazing that the authors can fill over 300 pages writing about Browne’s 25-25-25-25 asset allocation strategy, but they manage—and in a way that investors searching for a way to grow their wealth can learn from. For instance, Rowland and Lawson explain rebalancing bands, tax considerations, and buying and storing gold (yes, they suggest holding at least some physical gold and storing part of it locally for emergencies and the rest abroad if you are able).

Browne’s strategy won’t appeal to those who are convinced they can outsmart the markets. It may not even be the best passive asset allocation plan. But it’s certainly better than investing on a wing and a prayer.