Harry Browne permanent portfolio: investing with confidence

Have you ever thought about having a stock portfolio that could keep you relatively calm no matter what the times are like? Something that would offer you a certain threshold of profitability—and even more so in these inflationary times—while prioritizing financial conservatism, protecting the wealth accumulated over the years?

That’s what the creator of the strategy I’m going to present to you in this article must have thought: The Harry Browne Permanent Portfolio.

Who is Harry Browne?

Harry Browne, recognized for his financial vision and investment strategy, was a unique figure in the world of finance and investments.

He was born in 1933, and although he did not have a formal education in finance, he showed a keen understanding of the markets and the economy from an early age.

In the 1960s, Browne stood out by predicting the end of the gold standard (a vision that was judged radical and anti-system at the time), a monetary system in which the value of the US dollar was directly linked to the value of gold. And as it turns out, his forecast was correct when, in 1.971, President Richard Nixon finally put an end to the dollar’s convertibility to gold.

In this way, Browne not only predicted this monumental change in monetary policy but also managed to capitalize on it. He understood that the end of the gold standard would lead to an insatiable appetite of politicians to print money and “inflate” the currency to pay for all their misdeeds, which would lead to high inflation during that same decade, and therefore, an increase in the price of gold.

And as we can see, the man was not wrong, Look at the US inflation rate during the 1970s; it even exceeded 10% on two occasions.

So what he did was simple, he invested in this precious metal before Nixon’s announcement. As a result, he achieved a considerable fortune when the value of gold skyrocketed.

And by the way, as a curiosity, he was presidential candidate for the Libertarian Party on two occasions, in 1996 and 2000 (the third most voted force in the US). At that time, another fervent militant of the mentioned party was Clint Eastwood, the film director.

But beyond his success in predicting and capitalizing on economic events, Browne is best known for his conservative and protective approach to investments. His investment philosophy focused on protecting the patrimony over the search for extraordinary returns. For Browne, investment was not about getting rich quickly, but about securing wealth in the long term and against any economic adversity.

This philosophy was reflected in his “Permanent Portfolio”. Let’s see what it is.

Permanent portfolio: What is it?

The Permanent Portfolio was an investment strategy, created by Browne himself, with the aim of providing both capital growth and protection against the various economic cycles. We could say that it is based on the idea of ​​seeking a balanced portfolio to reduce risk and volatility through diversification in different classes of assets that perform differently in different economic conditions.

How does the permanent portfolio work?

Consequently, the Permanent Portfolio is divided equally into four categories of assets:

• Stocks
• Long-term bonds
• Gold
• Cash

Each of these four categories of financial assets should occupy only 25% of our portfolio so that they complement each other and balance our portfolio in the face of the different economic scenarios to which we may be exposed.

The idea behind this strategy is that no matter what economic cycle is in progress (prosperity, inflation, deflation, or recession), at least part of the portfolio is thriving. In this way, Browne intended that the Permanent Portfolio provide investors with a kind of insurance policy against economic uncertainty, helping to protect their patrimony.

The stages of the economic cycle, according to Browne

According to Browne, the stages of the economic cycle are divided into four phases, therefore, by investing in these four types of assets at the same time, we will balance any scenario of the cycle, whatever it is. Let’s see them:

Scenario 1: Prosperity

In this scenario, the economy flourishes, interest rates are reduced – sometimes even zero – and there is no unemployment, yet, there is a lot of effervescence, and it is time to take advantage of the opportunities.

Focus your attention on the stock market, where profits abound. Bonds can also offer good returns.

On the other hand, gold, but above all, money in liquidity, will be the assets that will weigh your portfolio towards stability.

Scenario 2: Inflation

Well, we are seeing it, whenever there are bubbles, sooner or later, inflation will arrive. But don’t worry, in this scenario, gold will be your lifesaver.

And not in vain, since inflation will start to be unleashed around April-May 2021, the price of the ounce of the precious metal par excellence, has appreciated more than 20%, exceeding on certain occasions 1,800 euros/ounce.

On the other hand, due to the inflation situation itself, your money in liquidity will decrease and balance your portfolio, while the stock market, if short-term rate increases are expected, could start to suffer.

Scenario 3: Money shortage

The central banks will start to raise rates, a credit will sooner or later be scarce, economic activity will be shown, and even a recession could occur if the slowdown is very abrupt.

In this scenario, when money is scarce and a recession threatens, liquidity will be your best ally. It will keep you alert to any circumstance that may occur and will allow you to buy at very low prices gold, or stocks if a crash or certain capitulation occurs.

Another option could also be to invest in very liquid assets such as Treasury bills or bank deposits (taking advantage of the increases in central bank rates).

Scenario 4: Deflation

The fall in consumption, due to the recession, leads to deflation. This is the moment when central banks start to lower rates to stimulate the economy again but without immediate joy.

In this scenario, medium-term bonds in the secondary market will be your best allies. If rates fall to zero, the return on new bonds issued will be lower, so the price of old bonds in the secondary market will rise, allowing you to sell them at a good price.

How profitable has the permanent portfolio been over the years?

Has this so-conservative strategy really been profitable over the years? The truth is yes and a lot.

The key is in the starting idea and expectations. Let us remember that the basic idea lies in asset management, rather than in the search for a return. And not in vain, Harry Browne set a target return, once inflation was beaten, of 4%–5%.

And the truth is that, according to a study by Icaria Capital, between 1972 and 2022, Harry Browne’s permanent portfolio had a CAGR (annualized average return) of 7%–9%. Not bad at all, taking into account the extremely conservative profile, and the fact that approximately for the same period, the best value investor, Warren Buffet -who obviously takes greater risks, obtained an average return of 20%

However, this table has a trick because it is based on a portfolio managed in dollars, without currency exchange risk.

So, how do I configure my permanent portfolio in a practical way?

The big question, right? Well, it’s actually not extremely difficult. To start, remember that you only have to combine four types of assets. In addition, to make it easier, we will do it on European assets to avoid currency risk.

Liquidity

To be extremely conservative, in this section, you should only invest in:

• Bank deposits with the highest interest possible: Between 2% and 3%
• Treasury letters
• Debt from corporations or governments of the highest possible credit quality in the short term (for example, in Europe from countries such as Germany, Austria or the Netherlands)

Fixed income

Just like in the previous section, instead of being short-term, it should be long-term government debt. For example, 10-year bonds from countries of the highest credit quality. Again, we could talk about bonds from countries like Germany, which is the country against which the rest of the countries measure their risk premium.

Often, investors have to make the choice between ETFs and indexed funds. This can be a tough call to make. But, not to worry, we’ve compiled an in-depth guide to help with the decision-making. Check it out: Index funds vs. ETFs.

Variable income

You have two options:

• Perform stock picking on some of the most solid European companies of the last 50 years. For example, companies such as Nestlé, Lindt, Danone or LVMH, with which you will not only get some return over the years, due to its gradual but firm growth, but you can also make money in the short term, thanks to the dividends.
• Or hire an indexed fund on value companies.

Gold

The most comfortable options are:

• The most conservative option would be to buy ounces or gold coins and store them at home, safe, bank …
• But if that option does not fit you, another option would be to invest in ETCs backed by physical gold, which are also much more liquid.

Finally, I’d like to remind you that each of these assets should weigh 25%, but if for one of those, you want to give a little more spark to your portfolio, you can always overweight those assets that perform better, depending on the moment of the economic cycle.

For example, if we are in scenario 3, lack of money. Instead of allocating 25% to stocks, and 25% to deposits. You can balance your positions more towards deposits until you reach 35%, reducing your exposure to equity to 15%.

Examples of ETFs

And since I left you some stocks above, this time I’m going to link to some of the ETFs I’ve been describing throughout the news:

Lyxor US Treasury 10+Y (DR) UCITS ETF – Dist

• Type of ETF: Long-term bond
• ISIN: LU1407890620

iShares Germany Government Bond UCITS ETF (Dist)

• Type of ETF: Long-term bond
• ISIN: IE00B5V94313

WisdomTree Physical Gold

• Type of ETF: Physical gold
• ISIN: JE00B1VS3770

Xtrackers EURO STOXX Quality Dividend UCITS ETF 1D

• Type of ETF: Dividend Value Companies
• ISIN: LU0292095535

👉 However, if you want to evaluate more options to buy these or other similar ETFs, you can consult our next article: Best broker for ETFs.

Everything you need to learn about investing in ETFs is in this article: how to invest in ETFs.

In conclusion, the permanent portfolio is based on a conservative strategy and adapts to the cycle to weather any type of situation. And now tell me, what do you think? Are you in favor of this investment strategy? Do you adapt it to your way? I’d like to hear your thoughts in the comments. you in the comments.