The Permanent Portfolio Allocation

Harry Browne and Terry Coxon formally introduced the Permanent Portfolio in their 1981 book entitled: Inflation Proofing Your InvestmentsLike most great ideas, the Permanent Portfolio was simple, but was not simplistic.

The Permanent Portfolio investment strategy is the first one I’ve seen that developed an allocation based on economic cycle analysis. The Permanent Portfolio idea separated these economic cycles into four basic categories:

  1. Prosperity
  2. Inflation
  3. Deflation
  4. Recession

At any one time the economy will be in one of these phases or transitioning from one phase to another. This is the secret of the strategy and why it works. The strategy does not attempt to predict when these things happen or guess how long they may last. Instead, it holds specifically chosen asset classes that respond well to these cycles no matter when they happen or for how long. 

By 1987, Harry Browne took the more complicated asset allocation presented in his and Coxon’s first book above and refined it to make it easier to implement. This version of the allocation was presented in his book Why The Best Laid Investment Plans Usually Go Wrong (Find a used copy if you can. Like all of Browne’s books, it’s a must read.). The allocation remained the same in all his investing books that followed. Here it is (Preferred investment vehicle in parentheses):

  • 25% – Stocks (S&P 500 Stock Index Fund)
  • 25% – Long Term Bonds (US Treasury 30 Year Bonds)
  • 25% – Gold (Physical Gold Bullion)
  • 25% – Cash (Treasury Money Market Fund)

These assets are always present in the portfolio in a balanced way no matter what is going on in the economy. Why were these assets chosen? Because they respond to the four economic cycles listed above:

  • Stocks – During prosperity, stock Index funds capture the full market returns available.
  • Long Term Bonds – During times of deflation, US Treasury long term bond prices will go up quickly in value. Bonds also do reasonably well during prosperity. 
  • Gold – During bad inflation, gold bullion is the only asset that provides strong protection against a falling currency. 
  • Cash – During a recession, no particular asset class is going to do well. The cash in a Treasury Money Market Fund acts as a buffer for losses while the markets adjust during these relatively short times of underperformance. It also does well during deflation. 

Remarkably, these four asset classes are all you need to handle good and bad markets. Again, it’s simple but not simplistic. 

Even better, this allocation provides safe growth of your money. This means you won’t have to worry about the crazy swings in the stock market that may cause large losses of your life savings.

In fact, over the 30+ year history of this portfolio strategy the worst loss it ever had was about 4-6% in 1981 with an annual growth of 9-10% since 1972. The portfolio has prospered and protected its money through bear and bull markets alike. 

What this means is the Permanent Portfolio strategy will move along through the years providing stable and secure growth. 

How stable and secure? We’ll talk about that in my next post. But I feel if you combine the Permanent Portfolio with the 16 Golden Rules of Financial Safety you will have a very solid investing foundation that will get you to your ultimate destination in one piece. 

In the meantime, if you haven’t purchased a copy of Fail-Safe Investing you should really consider doing so. This book explains the method to the strategy in a very easy to read and understand form. My postings here will clarify some common questions, provide you with insight into ways to implement the ideas, and delve deeper into the economic mechanisms that make the portfolio work. 

Harry Browne also discussed the Permanent Portfolio Allocation in this radio show link.



Fail-Safe Investing

Fail-Safe Investing

Craig Rowland

I own the place.

36 Responses

  1. Brad says:

    Hi, great blog. I’ve read many of your posts at the website. A couple of questions for you…

    1. I see that you do your own 4×25 permanent portfolio. What do you think of the retail mutual fund “Permanent Portfolio” and why don’t you just use that?

    2. In using the ETF GLD or IAU in your set up aren’t those taxed as collectibles (added to you taxable income – no eligible for capital gains tax rates, etc.) when you sell/rebalance out of it?

    3. Do you use the 10% bands and/or yearly rebalancing Harry Browne talked about when trying to keep components of the portfolio in balance?

    Thanks, Brad

  2. craigr says:

    Hi Brad,

    1) The fund is a fine choice for those who don’t want to run their own portfolio. The allocation mix it uses is a little different (it also holds silver and Swiss Francs for instance), however the long term results appear to be about the same. You also have to pay a higher expense ratio than doing it yourself. However if you don’t feel comfortable running your own portfolio, or don’t have the resources to do the 4×25 allocation yet, or just want something simpler, then the Fund is a good option.

    2) Gold is taxed as a collectible currently at 28%. I have had to pay the collectible tax and it does hurt just like all taxes do. The bad news is that gold does not give you interest or dividends. The good news is gold does not give you interest or dividends. What I mean by that is you can hold the capital appreciation in gold until you are ready to take it and not have the interest or dividends forced on you whether you want them or not. So there is a small silver lining there (no pun intended).

    3) Harry Browne said you can use 5% bands as well as long as you are aware of the higher costs involved. If you use the 10% bands you will allow 40% gains to accumulate in each allocation before a transaction or a 40% loss. The 5% bands allow for 20% swings up or down before adjustments. I’m a taxable investor and will do buys and sells to minimize tax impacts as well. So I’ll avoid purchasing dividends, do tax loss harvests when I can, etc. This means my own personal rebalancing happens between 30-35% and 15-20% and not on any exact hard number. I try to not rebalance much if I don’t have to though to avoid taxes. Investing is not an exact science and you should do what’s comfortable for your situation.

    I’ll talk more about rebalancing the portfolio in a future post as well.

    Hope that helps.

  3. Brad says:

    Hi, thanks for your thoughts. I would also be using this portfolio in a taxable account and that concerns me. In looking at 15 years of data from PRPFX (after taxes) and an intermediate muni bond fund (I used VWITX) the returns averaged about 2% a year more for PRPFX. I would have thought it would have been more. I know you can’t base future investment decisions on past performance but in a case like this I would have been much more comfortable taking the divis from VWITX (tax free and not worrying about the NAV) than dealing with the volatility (and taxes) from PRPFX. To see you would only gain on average 2% a year more with PRPFX was disappointing. I am trying to look at all angles of this before I commit. Do you have any thoughts on this?
    Thanks, Brad

  4. craigr says:


    Hi Brad,

    Past performance is no guarantee of future results. The past 10 years have been dismal for stocks. Yet they’ve been good for hard assets like gold and commodities and OK for bonds. But that’s the cycle of the markets. It could be that the next 10 years will be great for stocks and horrible for bonds and hard assets. Nobody knows.

    I prefer to look at investing asset classes as each having their own unique risks and rewards. The Permanent Portfolio allocation attempts to balance out the risks and rewards in a balanced portfolio. That means it will never have rocket ship performance. But it also won’t have a rocket ship explosion either.

    Bonds, and especially muni bonds, have their own risks. I can’t go into all the details here (but will in future posts as well), but muni bonds have higher default risk than Treasury bonds (yes it’s small, but still there) and they also have call risk (which is the bigger problem). Call risk means that when interest rates fall the municipality can “call” in the bonds paying higher interest and refinance them into lower interest to save money. This means muni bond prices won’t move as high in price in the markets in a falling interest rate environment. Yet, they can fall in price during rising interest rates (which is bad for all bonds). In effect, you’re paying for all the risk in owning bonds (by rising interest rates), but get none of the benefits during periods of falling interest rates.

    For instance, if you compare VWITX to the Vanguard Intermediate Term Treasury (VFITX) you can see this performance difference in our falling interest rate environment today. Or look at the Vanguard Long Term Tax Exempt (VWLTX) vs. Vanguard Long Term Treasuries (VUSTX) YTD to see a clear example of call risk.

    There are other risks as well to bond holders. The biggest is of course inflation. If we get into a period of high inflation then bonds do horribly. Not only will your bond prices fall, but your payments may not keep up with inflation. If you concentrate your portfolio into tax-free munis you really leave yourself exposed to this scenario.

    So my feeling again is it’s best to stay widely diversified as you can. Even though you don’t pay taxes on the munis, most of the advantage is arbitraged away in the markets plus there are other risks involved. Everything has plusses and minuses and again you’ll just have to decide what is right for your situation.

  5. Brad says:

    Hi, thanks for your thoughts. Are you in the accumulation or distribution phase of life? The reason I ask is I am trying to set up a taxable portfolio for retirement (10 years from now). I would build this sum of money up from now until retirement and then spend it in retirement while the other parts (my 401k and Roth IRAs) continue to “simmer”. I really like the idea of a permanent portfolio for taxable retirement spending because like you said through diversification it is unlikely I would get killed from year to year (unlike just stocks). I do understand also that I would not make a killing either (but that’s not the point of this pile of cash). At retirement I would then do what Harry Browne suggested (I can’t rememeber which book) and withdraw/sell 5% (I may do 4%) of the permanent portfolio balance each year for spending money to be used the next year. I feel using a certain percentage of the portfolio balance each year is much better and safer than using a certain dollar amount. And I can handle variations in retirement withdrawals because of my COLAd pension, eventual SS, etc.
    Thanks, Brad

  6. craigr says:

    Hi Brad,

    Almost all of our income comes from our savings in the Permanent Portfolio allocation. I spend a certain percentage each year from the “cash” portion and replenish the cash during the rebalancing phases. I also direct all interest/dividend payments from the stocks and bonds to go into our cash allocation through the year as this helps make bookkeeping easier and means I have to do less rebalancing and incur less tax charges.

    When looking at allocation strategies, it was important to me to have something that could never sustain a large loss. Something like a 20,25,30+ percent loss would be quite painful for someone withdrawing money to live on and I wanted to have a portfolio with enough diversification that those types of losses would be unlikely. Even something “safe” like 100% bonds can be hurt badly during high inflation as happened in the 1970s.

    One could argue a portfolio with 100% TIPS would be a good alternative. And I admit that it has some appeal. But I’m just not that confident that there aren’t some risks with TIPS as well that couldn’t show up (and they are horrible for taxable accounts).

    Overall, I’m not a fan of concentrating my money into any one asset. Unknown risks are often linked to bad losses and I think it’s important to make sure you aren’t wiped out (or nearly wiped out) if something unexpected happens in the markets. The only way to guarantee against that is to remain widely diversified.

  7. Name (required)LEN NOUD says:


  8. craigr says:

    The major index funds that are ETFS are from iShares and Vanguard. If you stick to either of those two providers you should be OK. iShares offers their total stock index fund as the Russell 3000 (Ticker: IWV). Vanguard offers it as Ticker VTI. iShares 20+ year bond fund is Ticker TLT. iShares treasuries for cash can be either Ticker SHV (very short term treasuries more like a treasury money market fund) or Ticker SHY (1-3 year maturity Treasury). iShares also offers a gold ETF as Ticker IAU but there is also a competitor under the ticker GLD.

    It would not be unreasonable if you wanted to just use ETFs to split the providers up for additional safety. So you could use VTI for your stocks. TLT for your bonds. SHY/SHV for the cash and GLD for the gold. That would spread your money across three different ETF companies. While your money should not be at risk in an ETF due to the structure and regulations on them, it’s not a bad idea to spread the money a little just in case a problem develops that we don’t expect.

    If you can, use the ETFs only for the stocks and cash. For the bonds it’s better if you hold them directly and same for the gold. Since there are logistical problems with holding physical gold though, many people may decide to do a hybrid of some physical and some in ETFs.

  9. Name (required)LEN says:


  10. craigr says:

    The IRA should hold the bonds and some cash first as they are the most tax heavy and you want to shelter them. I would keep some cash, stocks and gold in the taxable savings if you have no room left after you put your bonds in. If you still have room then I’d put in the stocks to shelter the dividend distributions. But you will probably still want some money outside the IRA to handle living expenses in early retirement along with rebalancing. For our living expenses during the year we tap into our “cash” allocation and once a year or so we’ll rebalance to bring it back to where it needs to be if it is too low. This way we don’t have to touch the other assets and incur capital gains until absolutely necessary.

    I would not own preferred stocks at all (I’m assuming that’s what you meant) unless it is part of your variable play money portfolio. You want your bonds to be US Treasury long term bonds. You want your cash to be US Treasury money market or possibly US Treasury Short Term Treasury. You don’t want to take any type of credit risk with you bonds and preferreds will not behave like bonds at all. If you are a US investor you really want to own only US Treasury bonds and US Treasury Bills for your bonds and cash respectively.

    Gabelli Global Gold is a mining company/natural resources fund and is not the same as gold bullion. I would not use that as a substitute for gold because mining stocks can move in the market for much different reasons than gold bullion. It may be something for your variable portfolio if you want to gamble though. Also that fund charges an outrageous 1.45% a year expense ratio and I’d never buy any fund that charges more than 1% a year and that’s pushing it. I don’t own any fund that charges more than 0.25% a year. A low expense ratio is a major driver in overall fund performance. Keeping that cost as low as possible is guaranteed money in the bank.

  11. LEN says:


  12. craigr says:

    There is a bond FAQ I have posted that talks about this. Most all brokers can buy bonds for you. You can also buy from treasury direct. Lastly there is one etf and a couple funds that can be used as outlined the FAQ.

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