Disclaimer from [[Investing Playbook]] still applies. :) # Introduction - This portfolio presented below is not the best investing strategy that exists. - It's just a low-maintenance, low-fees, low-volatility, good-performance strategy, as per the criteria I picked for this strategy here: [[Investing Playbook]]. # The Permanent Portfolio's goal - In our lifetime, we have only been through a few economic cycles. We can easily forget how big the economic swings are. - This portfolio is based on Harry Browne's work in the 1990s'. The goal of the portfolio is to sustain all economic phases and still generate returns. - Harry Browne identifies 4 major phases in economy: prosperity, deflation, recession and inflation. - During each of theses phases, we have different asset classes that perform well: - Prosperity: Good for equities and bonds. - Deflation: Good for cash and bonds. - Recession: Good for cash - Inflation: Good for gold. - Harry Browne thus built a portfolio that is evenly distributed between the different asset classes: - 25% stocks - 25% bonds - 25% cash - 25% gold - Then, once a year, there is a rebalancing so that each asset class stays around 25% (15 min of work per year). - Performance of the portfolio from 1971 to 2012 ![[Permanent portfolio (1972-2012).png]] - Since 2012, the portfolio keeps compounding, I just didn't find a more recent illustration. - By the way, COVID had a very low impact on portfolio performance (-1.7%, when the S&P 500 was at -20.8% the same month, with a new high the following month). # 4 supports : 25%/25%/25%/25% ## Stocks - Here Harry Brown recommends using a basic US-index like the S&P500. - We could argue that for even more diversification and long-term stability, we could prefer buying World Index or even ACWI (All Country World) index (that still have around 60% of US based companies. cf. [[How to pick an ETF (Comment choisir un ETF)]]), or even buy ETFs from different regions (Europe, US, Asia, etc.). ## Bonds - Long-term Treasury bonds - Here Harry Browne advices to buy US-based long-term government bonds. - Because of their volatility, 25-30 year government bonds are the best bonds to face both periods of economic prosperity and periods of deflation. - Why? Because they have virtually no default risk (unless the government goes bankrupt, which is unlikely at this stage in the US). The risk of default is low in the United States (on government bonds), even if they have a national debt similar or higher than other countries, because they use the printing press to create money and always land on their feet. - If you want to diversify and not only have US bonds, German bonds offer the greatest security in Europe. - Long-term government bonds are a very volatile asset, benefiting from periods of deflation and therefore able to offset the losses of stock market indices or gold during such cycles. - If you buy an ETF that is focused on this type of bonds, the ETF will handle the rolling of the bonds, instead of you having to buy a 30 year bond and when there are 20 years left, selling the bond to buy a new 30 year bond. ## Gold - To protect your portfolio, you need to include 25% gold. - Why? - Because it's the only asset that can perform well during certain periods and thus maintain portfolio protection. - It's true that gold is a highly volatile asset, but it's precisely because of this volatility that we can reduce the portfolio's overall volatility. - Gold's purchasing power doesn't diminish over time. - In fact it's pretty stable. The price in gold of a cow is stable in the last 500 years. To buy a cow, the price in the Middle Age was an ounce of gold. Today, it's around the same price. ![[Permanent portfolio - Pouvoir d’achat de l’or depuis plus de 4 siècles.png]] - By comparison, the dollar (or other currencies) are much less stable in terms of purchasing power. - When the state mints its own money or can control money creation, the result is always a loss of purchasing power through money creation. This is how all fiat currencies disappear. - The phenomenon of money creation is a global phenomenon, pushing every country to mint more money in the hope of greater economic growth. ![[Permanent portfolio - La chute du dollar en termes de pouvoir d’achat depuis 1 siècle.png]] - Do you need to have gold at home for my portfolio? - No, there also are ETFs for that. Just make sure to buy a Gold ETF that does physical replication (i.e. owns gold for real) and that this ETF is audited. (cf. [[How to pick an ETF (Comment choisir un ETF)]]) ## Cash - Short-term Treasury bonds - When investors say they own 'cash', they most of the time don't mean 'cash' in the way you think (i.e. having bank notes or coins, or even having a checking account). - The term 'Cash' is used to say Short-term government bonds, essentially risk-free asset that yields a risk-free interest. - The weak point of cash is that it is not very volatile and therefore vulnerable to inflationary periods (which gold counterbalances brilliantly). - Another major advantage of cash is that, in the event of an exceptional event, you can use it directly to finance a health problem, a car problem or a job loss. - Again, Harry Browne is very US-centric so he only means US government bonds. - If you are European, you probably already have all your assets in EUR. And if American in USD, which makes you very corrolated to monetary risk in your country. - To diversify away from geographic risk, you can get short-term government bonds ETFs from different countries (cf. [[How to pick an ETF (Comment choisir un ETF)]]). ### Risks on having your cash in a bank account - Understanding the risks of only having a classic bank account (checking account oe bank deposit) only in your home country: - 0. If you have cash on your checking account, it doesn't yield any interest. You loose purchasing power due to inflation. At least with a cash ETF, you have some interest on your cash (while lowering your risk, cf. next sections 1 to 3). - 1. If your country devaluate or change currency like it happened in Argentina in Dec 2023 (or your country leaves the European Union), then: - You loose 20% to 50% of your cash value (or purchasing power or networth in cash) overnight. - => This is partially solved if you hold cash ETFs from different countries and currencies (risk diversification). - 2. If your state goes bankrupt completly or partially (like it happened in Cyprus in 2013-2014 : [2012–2013 Cypriot financial crisis - Wikipedia](https://en.wikipedia.org/wiki/2012%E2%80%932013_Cypriot_financial_crisis)), then: - The government defaults on its debt, which means that all the cash in interest-bearing accounts (Livret A, PEL, life insurance money-market funds) will simply go up in smoke. - => In this case as well, a cash ETF is a better option & partially solves that issue (risk diminution), because this debt should default last. And you can also holds cash ETFs from different countries/currencies (risk diversification). - 3. If there is a systemic bank failure (bankruptcy of several banks), then: - Your bank deposits or equivalent are in jeopardy. - Sure, the bank deposit are currently covered for 100 000 EUR par bank account, but for instance in France the national fund that covers that: the "Fonds de garantie des dépôts et de résolution" has only 7 billion EUR (here the official numbers from the fund: [Chiffres FGDR : fonds propres, contributions, adhérents](https://www.garantiedesdepots.fr/fr/a-propos-du-fgdr/chiffres-cles-du-FGDR)). So in the event of a system bank failure or government default, where 30 million French people (let's say half the population) needs to have a cover for their bank deposit, 7 billion euros / 30 million people = 233 EUR / person only are available (not thousands, 233 euros per person). We're pretty far from the 100 000 EUR cover mentioned. - => Cash ETFs are a better option (risk diminution & diversification). - By the way, on risk management, you can read the: [[Risk Management Playbook]]. ### How can you buy cash? - We are looking to have a product with as little volatility as possible. Here, we're looking for the exact opposite of long-term government bonds. We want a short maturity and no risk. - In a portfolio, having cash means that you can withdraw it easily from the portfolio or invest it in another asset. - What to pick: - A good solution is short-term (0 to 3 years usually) government bonds ETFs. ([[How to pick an ETF (Comment choisir un ETF)]]) - What to avoid: - Don't invest your money in funds offering high yields for cash, the so-called High Yield Funds. - In France, avoid Livret A or money-market funds, etc., for the simple reason that these funds invest only in French government (concentration risk). The bank invests your savings in French debt and pays you part of the return it receives. So you might as well direct buy French debt (and debts from other countries/currencies: risk diversification, to lower the risk of a capital loss on all these so-called risk-free remunerations). # Annual rebalancing - Keep things as simple as possible by rebalancing only once a year (quarterly rebalancing doesn't improve performance historically and will increase fees & potentially taxes). You can do that in the 1st week of January for example, so that you know you do it every year at the same time. - Other backward tests have also shown that rebalancing based solely on 35% and 15% bands produces excellent results. In other words, you can choose to rebalance your portfolio during the year only when an asset represents more than 35% or less than 15% of the portfolio. - The advantage of relying 100% on this yearly rebalancing method is that transactions are much rarer. This also means lower tax and fees. - Another way to save taxes and fees on this portfolio strategy is to only buy Accumulating ETFs (more details here: [[How to pick an ETF (Comment choisir un ETF)]]). - Also, if you withdraw money from the portfolio for any reason and the withdrawal brings the cash portion below the 15% weighting, you will need to rebalance immediately, otherwise you can wait until the yearly rebalance. # Going further on the Permanent Portfolio - If you want to read more about the Permanent Portfolio, you can read: **"Fail-Safe Investing: Lifelong Financial Security in 30 Minutes"** (1999), a book written by Harry Browne to present his Permanent Portfolio strategy. - **⚠️ Danger zone - Leveraging your Permanent portfolio, at your own risk:** - You could even imagine doing leverage on the Permanent Portfolio if you wanted the same return as stocks (having your portfolio 100% in S&P500) without the volatility: [The Unreasonable Effectiveness of the Permanent Portfolio - Mutiny Fund](https://mutinyfund.com/permanent-portfolio/) - Leveraging the Permanent Portfolio with x3 ETF to get better performance than the S&P while reducing drawdowns: - [HFEA 7 - Leveraged Permanent Portfolio and Golden Butterfly - 7 Circles](https://the7circles.uk/hfea-7-leveraged-permanent-portfolio-and-golden-butterfly/#Leveraged_PP) - [Harry Browne Permanent Portfolio Review, ETFs, & Leverage (2024)](https://www.optimizedportfolio.com/permanent-portfolio/#leveraged-permanent-portfolio) - [Harry Browne Permanent Portfolio Review, ETFs, & Leverage | by John Tyler Williamson | Medium](https://jtwillia2.medium.com/harry-browne-permanent-portfolio-review-etfs-leverage-253f4022c9fe) - Adding leverage to high sharpe ratio portfolios: [Levered High Sharpe Ratio Portfolios -](https://theitalianleathersofa.com/levered-high-sharpe-ratio-portfolios/) - Leveraged ETFs - What are leveraged ETFs, and the maths on why hoding a leveraged ETF can make sense: [Double-Digit Numerics - Articles - The Big Myth about Leveraged ETFs](http://www.ddnum.com/articles/leveragedETFs.php) - How to beat the market with leveraged ETF: [How To Beat the Market Using Leverage and Index Investing](https://www.optimizedportfolio.com/how-to-beat-the-market/) - People who decided to run a 3x leveraged ETFs portfolio and shared his journey: - [I've been using 3x ETFs for the past few years to pursue a Permanent Portfolio s... | Hacker News](https://news.ycombinator.com/item?id=24024522) - [HEDGEFUNDIE's excellent adventure [risk parity strategy using 3x leveraged ETFs] - Page 68 - Bogleheads.org](https://www.bogleheads.org/forum/viewtopic.php?t=272007&sid=bfa4176bacb99470d72baf74d2284980&start=3350) - [HEDGEFUNDIE's excellent adventure Part II: The next journey - Page 287 - Bogleheads.org](https://www.bogleheads.org/forum/viewtopic.php?t=288192&start=14300) - Harry Browne was very much against leverage, but there was also not leverage ETF at his time. - The risks of using x3 leverage ETFs: - [Understanding Triple Leveraged ETFs: A Double-Edged Sword in the Investment World | by Anchor Kurtosis | Medium](https://medium.com/@anchor.kurtosis/understanding-3x-etfs-a-double-edged-sword-in-the-investment-world-a210ab88280e) - [3 of my concerns with 3x leveraged equity portfolio : r/LETFs](https://www.reddit.com/r/LETFs/comments/si1lmj/3_of_my_concerns_with_3x_leveraged_equity/)