Don't know whether tomorrow will bring sunshine, rain or snow? Then your wardrobe holds a swimsuit, an umbrella, a jumper and boots. Nobody asks you to guess the weather: you're ready for anything. That's exactly the idea behind the Permanent Portfolio.
In short: the Permanent Portfolio, devised by the American author Harry Browne, splits money into four equal parts (shares, long-term bonds, gold and cash) to get through every economic "season" without having to predict it.
The Permanent Portfolio: four seasons, four parts
Harry Browne started from one observation: nobody can predict the economy. So he identified four possible "seasons", and an investment that does well in each:
- Prosperity (all is well): shares, small slices of companies, rise.
- Inflation (prices soar, money loses its value): gold holds up.
- Deflation (prices and interest rates fall): long-term bonds, loans to a government over many years, gain value.
- Recession (money becomes scarce): cash, money available straight away, is king.
His rule: 25% in each part. Whatever the season, one part of the portfolio is doing its job while the others wait.
Rebalancing, in figures
A family invests CHF 10,000: CHF 2,500 in each part. A year later: shares +20%, gold −10%, bonds +2%, cash +1%.
- Shares: CHF 3,000; gold: CHF 2,250; bonds: CHF 2,550; cash: CHF 2,525.
- Total: CHF 10,325.
The parts are no longer equal. Browne recommended restoring the balance whenever one part moved outside a band of 15% to 35%; others prefer simply to do it once a year. With yearly rebalancing, you'd go back here to CHF 2,581.25 per part: you sell a little of what has gone up and buy a little of what has gone down. Without forecasting anything, you automatically apply the old rule: buy low, sell high.
Why mixing works
As early as 1952, Harry Markowitz (Nobel Prize 1990) showed that by mixing investments that don't rise and fall at the same time, you reduce the bumps of the whole. The Permanent Portfolio takes this idea a long way, with four parts that each react in their own way.
Its limits
This portfolio is never top of the class. When shares rise strongly for years, it falls behind a bolder portfolio. And each of its four parts can also go through long, difficult years: that's precisely why there are four. Its aim isn't to win the race, but never to fall off the bike, and to sleep soundly. It's a matter of temperament, not a recipe for everyone.
Try this tonight with your child
Take four identical glasses filled to the same level: "prosperity", "inflation", "deflation", "recession". Draw a "season" card at random: the matching glass gets a little more water, another loses a little. After a few rounds, ask your child to bring all four glasses back to the same level. They've just rebalanced their first portfolio.
Read also: Why the economy has seasons · Why "a bit of everything" protects you
Further reading
- Browne, H. (1999). Fail-Safe Investing: Lifelong Financial Security in 30 Minutes. New York: St. Martin's Press.
- Markowitz, H. (1952). Portfolio Selection. Journal of Finance, 7(1), 77–91.
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Educational content, not investment advice. Returns are not guaranteed; the figures come from a simplified example and are not a forecast.