Permanent Portfolio ETFs, Theory & Review for 2021

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This particular portfolio has been popularized by Harry Browne in his book Fail-Safe Investing, and it goes on our list of popular lazy portfolios.

As usual, we will look into the theory behind the portfolio components, reconstruct it using the most popular ETFs to minimize fees and maximize ease of setup. Then we will backtest it, compare it to the S&P500 performance and some other lazy portfolios.

Theory

The goal of setting up a permanent portfolio is to create an investment strategy that has been designed to perform well in any conditions, including adverse ones.

A permanent portfolio is equally divided between stocks, bonds, gold, and cash. Twenty-five percent goes into each category.

This portfolio is as straightforward as it gets:

  • 25 percent US Stocks
  • 25 percent Long-Term Bonds
  • 25 percent Cash
  • 25 percent Gold
  • This is one of the easiest portfolios to set up. It is simple, diversified, and should do well in just about every economic condition, at least in theory.

    Here is the thinking behind this particular construction:

  • Stocks perform well during times of economic expansion
  • Cash performances well during times of economic recession
  • Gold performed well during times of economic inflation
  • Bonds performed well during times of economic deflation
  • Sounds familiar? The thinking is close to Ray Dalio’s All Weather Portfolio although the composition is different.

    Right away, the cash portion sticks out to me. I wouldn’t say I like having cash as part of the portfolio. Whenever I see cash, I immediately want to swap it either with TIPS or Treasury Bills. With TIPS, we can get protection against inflation, and with Treasury Bills, we get a small but risk-free return.

    Advantages

    Before we criticize and test this portfolio further, let’s look at some of the advantages this portfolio has.

  • This is one of the easiest portfolios to set up. If you are looking for something that you can set and forget, this is about as straightforward as it gets. You only need to take a look at your portfolio once per year to rebalance it.
  • Well diversified between stocks and bonds with gold mixed in. Cash can be swapped for a risk-free earning asset.
  • If you are someone who is looking for an investment portfolio that is not volatile, this is probably the option for you. With 50% in low-volatility assets, the overall portfolio volatility will be quite low.
  • If you would like to increase the diversification of this portfolio, it is relatively easy to expand the stocks portion to include international stocks as well.
  • Strong hedge against inflation with gold, and if we swap cash for TIPS, that will also add some inflation protection.
  • Drawbacks

    Similar to any other investment strategy, there are a few possible drawbacks of using the Permanent Portfolio. A few potential pitfalls to note include:

  • Only 25% exposure to equities. We cannot expect decent returns from having such low exposure to stocks. This will be an incredibly safe portfolio compared to others in terms of volatility but we have to expect lower returns as a result.
  • As mentioned before, having just cash as part of the portfolio doesn’t make sense. Thankfully we can swap it for a better asset relatively easy.
  • No exposure to emerging markets.
  • Unlike All Weather Portfolio that has broader commodities exposure, this portfolio only has gold. Although gold is considered a safe inflation-oriented investment, gold doesn’t produce anything. I like investing in businesses that can produce something of value rather than something that has to sit in vaults.
  • Permanent Portfolio ETF Reconstruction

    We can take the theory from Harry Browne and reconstruct this portfolio with today’s best ETFs from each category. I will likely use the most popular option first and then look at the cheapest alternatives to minimize fees (MERs).

    Replacing Cash with T-Bills

    As mentioned before, I will go ahead and replace cash with Treasury Bills ETF. It just makes more sense; it will not add anything to the risk level of the portfolio while at the same time generating some return.

    Most Popular/Largest ETFs

    Weight Ticker Ticker Info
    25% VTI
    25% TLT
    25% GLD
    25% BIL

    Backtest

    Although investors often quote that historical performance is no guarantee of future results, which is definitely true, history is not meaningless. Looking at how this portfolio has performed during various economic events can give us an idea of its future potential.

    Below is the summary of key performance statistics of Permanent Portfolio compared to popular S&P500 ETF, SPY.

    Not bad at all. Investing in the permanent portfolio in 2007 would 2.5x your money compared to 3.94x if you bought S&P 500 ETF.

    Sure, S&P 500 showed CAGR that is 4% points higher but with more than double the volatility. While SPY’s worst year was a drop of over 36%, Permanent Portfolio lost just over 3% during its worst year since 2007.

    One thing that this portfolio has going for it is definitely safety.

    Permanent Portfolio vs S&P 500

    Permanent portfolio performance vs. S&P 500

    Note: Because we have reconstructed the portfolio with ETFs, it is fair to compare its performance to S&P500 ETF as well. We chose SPY for simplicity.

    Permanent Portfolio has beautifully outperformed S&P 500 during the 2008 crisis up until 2013. That is to be expected with a portfolio so heavily weighted in “safety” oriented assets like bonds, treasury bills, and gold. After the crisis has passed, however, S&P took off.

    Income & Yield

    Here is the breakdown of the income and yield (%) the portfolio has generated over the years.

    Permanent Portfolio Income & Yield

    Permanent Portfolio Performance Breakdown

    Each ETF will contribute differently to the overall portfolio performance. Typically higher risk components like equities are expected to generate more returns while assets like bonds, gold, and T-Bills will contribute less but will also lower portfolio volatility.

    Permanent Portfolio return breakdown

    As expected, VTI – Total Stock Market ETF generated the majority of the return, followed by bonds and gold.

    Permanent Portfolio Fees

    ETFs are managed by people and have associated management costs to them called Management Expense Ratios (MER). Below is the breakdown of each ETF’s MER and total portfolio cost.

    Permanent Portfolio Fees

    MER is the annual expense in % that you will pay every year of owning this portfolio. If the portfolio earns 10% in a year and total average fees come out to 0.18%, you will make 9.82% for the year.

    Sector Allocation

    When buying this portfolio we are buying just 4 ETFs. These ETFs are then comprised of many company stocks and other assets. Below is the breakdown of the industries you will be invested in if you decide that this portfolio is for you.

    Permanent Portfolio Sectors

    24% of the portfolio is in technology which can be surprising but keep in mind that VTI – Total Stock Market ETF is heavily weighted in technology because technology companies are the biggest stocks on the U.S market right now.

    Permanent Portfolio vs Golden Butterfly

    Let’s do a quick comparison of how Permanent Portfolio stacks up against some of the other popular lazy portfolios, starting with Golden Butterfly.

    Permanent Portfolio vs Golden Butterfly Key Stats

    Permanent Portfolio vs Golden Butterfly Backtest – 10k Investment

    If we were to invest $10,000 back in 2007 here is how these two portfolios would have performed over the years.

    Golden Butterfly outperformed Permanent Portfolio consistently since 2012.

    With CAGR of 1% point higher but low volatility, Golden Butterfly would be a better choice.

    Golden Butterfly is just more diverse. It contains small-cap as well as total stock market ETFs. It also has gold but bonds are split to include both short-term and long-term.

    If you are choosing between the two I would consider Golden Butterfly over Permanent Portfolio.

    Permanent Portfolio vs All Weather Portfolio

    Probably one of the most popular lazy portfolios, and for a good reason is the All Weather Portfolio.

    Let’s compare Permanent Portfolio’s performance to the All Weather.

    Permanent Portfolio vs All Weather Key Stats

    Permanent Portfolio vs All Weather Backtest – 10k Investment

    If we were to invest $10,000 back in 2007 here is how these two portfolios would have performed over the years.

    Permanent Portfolio vs All Weather

    Similar to the Golden Butterfly, the All Weather outperformed the Permanent Portfolio starting in 2013 with slightly higher volatility.

    Drawbacks outway the positives

    Historical results are not a guarantee of future results so we shouldn’t just judge the portfolio on its historical performance. However, both Golden Butterfly and All Weather provide more diversification and have shown better performance with insignificantly higher volatility.

    Please do your own due diligence and in the meantime if you are interested check out our analysis of the Golden Butterfly Portfolio and the All Weather Portfolio.

    Additional resources:

    VTI Fact Sheet – Vanguard ETF Profile | Vanguard

    TLT Fact Sheet – TLT Fact Sheet PDF

    GLD Fact Sheet – GLD Fact Sheet PDF

    BIL Fact Sheet – BIL Fact Sheet ETF

    Notes on results:

  • Performance analysis is not of the exact portfolio offered by a 3rd party service. For back testing purposes, portfolios are reconstructed using best available information. 
  • Past performance is no guarantee of future results, which may vary. Please see our terms of use .
  • Investing involves risk, including possible loss of principal. The value of the investments and the income derived from them may fluctuate over time.
  • All portfolio returns presented are hypothetical and backtested. Hypothetical returns do not reflect trading costs, transaction fees, or taxes.
  • The results are based on information from a variety of sources we consider reliable, but we do not represent that the information is accurate or complete.
  • The results do not constitute investment advice or recommendation, are provided solely for informational purposes, and are not an offer to buy or sell any securities.
  • The results are based on the total return of assets and assume that all received dividends and distributions are reinvested.
  • CAGR = Compound Annual Growth Rate
  • Stdev = Annualized standard deviation of monthly returns
  • The results assume annual rebalancing of portfolio assets to match the specified allocation
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