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Harry Browne Permanent Portfolio Review and ETFs To Use - YouTube
Channel: Optimized Portfolio
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the harry brown permanent portfolio is a
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simple straightforward portfolio
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consisting of four equally weighted
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assets here we'll look at its components
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historical performance and the best etfs
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to use in its implementation what is the
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permanent portfolio the permanent
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portfolio is a simple four-slice
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portfolio created by investment advisor
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harry brown in the 1980s and presented
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in his book fail-safe investing in 2001.
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it looks like this 25 total u.s stock
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market 25 long-term bonds 25 cash and 25
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gold not unlike the all-weather
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portfolio the permanent portfolio was
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designed to be a simple diversified
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portfolio that could perform well in all
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economic conditions brown called it the
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permanent portfolio because in his words
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once you set it up you never need to
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rearrange the investment mix even if
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your outlook for the future changes
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having only four assets at equal weights
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it is easily accessible and
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understandable those four assets
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expected behaviors correspond to four
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economic climates as follows stocks for
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economic expansion bonds for deflation
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cash for economic recession and gold for
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inflation i concede that harry brown's
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permanent portfolio is indeed simple and
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diversified and the concept sounds nice
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on paper but i have a few problems with
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it first there's a relatively low
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allocation to stocks we know that
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equities are usually the primary driver
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of a portfolio's returns at just 25
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percent the permanent portfolio doesn't
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give enough room for stocks to shine
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especially for the young investor with a
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long time horizon and a high tolerance
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for risk secondly 25 of the portfolio is
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in cash which just means treasury bills
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i'll be the first to admit that cash is
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an oft overlooked investment but giving
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it one quarter of the portfolio creates
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a significant opportunity cost in my
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opinion especially when considering
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economic depressions are the least
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likely environment of the four
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aforementioned economic climates and
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young investors with a long horizon
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probably shouldn't be holding any cash
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as such i would think it's intuitive to
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lower the allocation to cash creating
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room for more stocks and or more bonds
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in fairness cash is a decent inflation
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hedge thirdly there are no international
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holdings international stocks and bonds
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have just fairly recently become
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accepted diversification boosting
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holdings in the last 25 years or so
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prior to that they weren't popular among
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institutional investors so it makes
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sense that brown didn't include any when
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he designed the permanent portfolio in
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the 1980s ideally i'd probably like to
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see at least an 80 20 split for both
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stocks and bonds between the us and x us
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assets similarly 25 to gold is much too
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high for my tastes if you've read any of
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my blog posts or watched any other
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videos of mine about portfolios that use
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gold you know i'm not a big fan of the
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shiny metal it has a non-negative
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correlation to stocks albeit low or
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small is much more volatile than bonds
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is not a value producing asset i.e it
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has a real expected return of zero and
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has not been a reliable inflation hedge
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historically while it has offered
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protection in some inflationary periods
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in the past we can't reliably predict
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how gold will behave in the future i
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suspect the large emphasis on gold may
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be due at least partially to harry
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brown's being the libertarian party
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presidential nominee in both 1996 and
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2000. the libertarian party platform has
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a historical distrust of u.s monetary
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policy by the federal reserve and a
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suggestion of returning to the gold
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standard wherein money is based on a
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fixed amount of physical gold speaking
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of u.s monetary policy your excitement
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or lack thereof over gold likely also
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depends on your view of it i'm
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personally of the mind that monetary
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policy in the u.s is a fundamentally
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different beast post volcker after 1982
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allowing us to hopefully avoid a runaway
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inflationary environment like we saw in
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the late 1970s when bonds suffered and
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gold did well in my opinion similar to
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my point about the cash position earlier
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in a long-term investment portfolio with
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an investment horizon of 20 plus years
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holding gold only creates an opportunity
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cost where you could have held something
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else in its place that said i'll concede
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that it may offer a short-term
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diversification benefit due to its usual
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uncorrelation to both stocks and bonds
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making for a lower risk profile and
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safer withdrawal rates in retirement so
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adopting the permanent portfolio may
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very well be a prudent move at or near
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retirement or for a risk-averse investor
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who wants to cover all bases for all
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environments to minimize volatility and
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risk but even then i'd probably suggest
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the all-weather portfolio or the golden
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butterfly portfolio for that
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prescription we can explore some
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comparisons of these in a bit because of
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all this generally speaking brown's
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naive equal weighting of these assets
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doesn't make much sense intuitively and
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is almost certainly sub-optimal in my
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opinion this becomes even more obvious
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when we consider the fact that the four
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aforementioned environments do not have
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the same probability of occurrence
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severe protracted deflation for example
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is extremely unlikely brown makes the
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mistake i see far too often of viewing
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each asset in isolation instead of
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looking at the portfolio holistically as
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we would expect compared to something
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simpler and more traditional like a 60
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40 stocks bonds portfolio the permanent
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portfolio tends to look attractive
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during bear markets and unattractive
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during bull markets evidenced by the
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mutual fund's capital inflows and
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outflows during those respective periods
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now let's look at the performance of the
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permanent portfolio versus the s p 500.
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going back to 1978 we can compare the
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permanent portfolio to the s p 500 index
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through july 2021 as we'd expect the
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permanent portfolio does a pretty good
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job of mitigating volatility and
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drawdowns providing a much smoother ride
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than the s p 500 its volatility was less
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than half that of the s p 500 and its
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max drawdown during the global financial
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crisis of 2008 was roughly one-quarter
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that of the s p 500 but notice how the
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risk-adjusted return in this case
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measured by sharp is nearly the same for
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these two very different portfolios
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basically the permanent portfolio has
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still delivered a pretty low return
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given its risk profile that's why i said
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i'd be more likely to use the golden
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butterfly portfolio or ray dalio's
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all-weather portfolio i'll show those
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comparisons in the next sections the
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golden butterfly portfolio simply takes
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those same assets in the permanent
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portfolio and specifically adds small
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cap value a move that i'm a fan of this
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invariably makes it comparatively more
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aggressive than the permanent portfolio
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but we're still talking about a
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relatively low volatility all-season
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strategy in taking up a larger stocks
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position we're also tilting toward an
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expansionary economic environment i'm
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okay with this the economy grows more
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than it declines your adoption thereof
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may depend on your economic outlook
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we're also simultaneously decreasing the
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allocations to cash and gold which
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should also bode well for higher returns
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over the long term here's a back test
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from 1978 through july 2021 comparing
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the permanent portfolio and the golden
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butterfly portfolio as we'd expect going
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back to 1978 we see greater general and
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risk adjusted returns for the golden
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butterfly with slightly more volatility
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and a larger drawdown this is due again
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to its inclusion of small cap value
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stocks looking at the sharp ratios a
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measure of risk adjusted return we can
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see that we were better compensated per
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unit of risk by going with the golden
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butterfly i'd definitely take the golden
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butterfly over the permanent portfolio
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again i like small cap value stocks and
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i don't want the permanent portfolios
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extra five percent in gold to be fair to
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harry brown we didn't even know about
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the size and value factors and the
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glamour of small cap value stocks when
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he designed this thing in the 1980s and
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even if we did there weren't really any
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products available with which to invest
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in them compared to raydalio's
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all-weather portfolio we're talking
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about more gold more cash less stocks
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and less treasuries than the permanent
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portfolio like the permanent portfolio
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the all-weather portfolio is designed to
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weather any storm by utilizing
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diversification across assets
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interestingly like brown dalio also
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chooses to be market agnostic with the
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all-weather portfolio admitting that we
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don't know what the future will hold yet
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the allocations therein are obviously
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very different with data for commodities
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funds only going back to 2002 here's
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what the comparison looks like through
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july 2021 while the permanent portfolio
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is very simple and easy to understand
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with its equal weighting of four assets
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that's also its downfall in my opinion
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i'm of the mind that we can much more
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effectively deliver on the permanent
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portfolio's goal of de-risking the
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portfolio using different allocations
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especially given our most recent
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understanding of asset pricing and how
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we might weight those assets more
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efficiently in diversified portfolios if
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you do want to invest in the permanent
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portfolio i think a broker like m1
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finance is a great fit thanks to its
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zero transaction fees intuitive pi
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interface dynamic rebalancing for new
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deposits and one-click manual
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rebalancing as you would want to
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rebalance the permanent portfolio
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regularly i'll provide a link to my
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comprehensive review of the platform
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utilizing mostly low-cost vanguard funds
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we can construct the permanent portfolio
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with the following etfs vti at 25 vglt
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at 25 vgsh at 25 and sgol at 25 as i
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noted earlier the permanent portfolio
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doesn't have any international exposure
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as i've noted elsewhere it's probably a
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good idea to diversify geographically in
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stocks taking the stocks global simply
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requires replacing vti vanguard's total
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u.s stock market with vt vanguard's
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total world stock market fund the
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portfolio then looks like this vt at 25
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vglt again at 25 vgsh at 25 and sgol at
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25 in conclusion the permanent portfolio
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is basically a good introductory lesson
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on asset class diversification in my
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opinion and props to harry brown for
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making the concept more mainstream the
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permanent portfolio does a pretty good
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job of mitigating volatility and
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drawdowns but in practice i'd be more
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likely to use the all-weather portfolio
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or the golden butterfly portfolio to
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achieve that goal they seem demonstrably
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superior as the permanent portfolio's
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simplicity is ironically also its
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weakness in my opinion if all this
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multi-fun stuff still seems daunting
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there's a permanent portfolio mutual
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fund for which the ticker is prp fx but
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it's pretty pricey at 0.83 percent you'd
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come out far cheaper just using the
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funds i've listed here and doing it
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yourself what do you think of the
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permanent portfolio let me know in the
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comments thanks for watching some of the
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links below are referral links at no
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additional cost to you if you choose to
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make a purchase or sign up for a service
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after clicking through those links i may
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receive a small commission this allows
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me to continue producing high quality
[653]
content on this channel and pays for the
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occasional cup of coffee i have
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first-hand experience with every product
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or service i recommend and i recommend
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them because i genuinely believe they
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are useful
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