If the name Harry Browne doesn’t ring a bell, I wouldn’t be surprised. Though he was twice a presidential candidate, he never captured more than 1% of the vote. To my knowledge, though, Browne was the only financial advisor ever to run for the White House.
As a Libertarian, some of Browne’s economic proposals were extreme. He wanted to abolish income taxes, for example. But one of his ideas has stood the test of time: In his 1981 book Inflation-Proofing Your Investments, Browne introduced the concept of the “Permanent Portfolio.”
In Browne’s words, the Permanent Portfolio was designed to make an investment portfolio “bulletproof,” able to withstand these four types of extreme events:
1. Hyperinflation, like what Germany experienced after World War I.
2. Deflation (the opposite of inflation), along the lines of what Japan has experienced over the past 15 years.
3. Confiscation of assets, as seen in Venezuela, for example.
4. Devastation, including war and natural disasters.
How would the Permanent Portfolio simultaneously protect against all four of these extreme possibilities? Browne’s approach was to identify at least one asset that would survive each type of calamity. When there is deflation, for example, cash turns out to be a great investment. And when there’s inflation, stocks do well. Using this logic, Browne was able to construct a portfolio that wasn’t necessarily immune to losses, but would at least be more immune than other approaches. And thus was born the Permanent Portfolio, which was comprised of four asset classes, in equal amounts: stocks, long-term government bonds, gold and cash.
How has the Permanent Portfolio done over time? The answer is that it depends how you look at it. From a performance perspective, it has lagged. Since 2001, the Permanent Portfolio has grown by a cumulative 170%, while the U.S. stock market has returned 278%—a material difference. But that ignores risk, which was Browne’s primary concern, and on that score, the Permanent Portfolio was a star exactly when investors needed it most. In 2008, when the U.S. market lost 37%, the Permanent Portfolio gave up less than 1%.
Others have followed in Browne’s footsteps. Notably, hedge fund manager Ray Dalio has popularized what he calls an All Weather Portfolio, which is a near carbon copy of Browne’s portfolio. And in fact, the concept pre-dates Browne himself. Two thousand years ago, the Babylonian Talmud included this exhortation: “Let every man divide his money into three parts, and invest a third in land, a third in business and a third in reserve.” Similar ideas can be found in the writings of King Solomon, Shakespeare and others.
So is this the best way to invest? With the market again at all-time highs, this is a question that many people are asking. The answer, as always, is that it depends. There is no such thing as the perfect portfolio—delivering strong returns with no risk. Everything involves trade-offs. And in any case, I don’t believe in a one-size-fits-all approach. Everyone is different. To help choose the approach that’s best for you, I suggest asking these questions:
How much risk can you afford to take? This was Browne’s primary concern. If you’re in retirement and need a certain amount to pay your bills, you can’t afford to lose all of your savings—but you may be able to afford to lose some. This is a simple mathematical question, and the answer will tell you how much you can afford to put at risk.
How much risk do you need to take? If you’re early in your career, you’ll want to invest in stocks to help your savings grow. But if you’ve already saved enough to retire, and to meet your other goals, then you don’t need to take any risk. You may still choose to, but it’s important to recognize when risk is optional and when it’s required.
How much risk are you willing to take? How much do the regular ups and downs of the market affect you? Taking this a step further, how much do you worry about the sorts of extreme risks that kept Harry Browne up at night?
How much do you care about keeping up with the market? On any given day, how often do you hear references to the Dow or the S&P 500? These numbers are printed and recited innumerable times in the media every day. So it’s natural to compare your own results to these benchmarks. But here’s where it gets tricky. The more you diversify, the more your results will differ from these commonly-cited benchmarks, and this carries a psychic cost: Sometimes you’ll be doing better than the Dow or the S&P and sometimes worse, but you’ll never be able to make an apples-to-apples comparison because you can’t quantify the peace of mind you gain when you opt for greater diversification.
How important is it to accumulate the absolute maximum number of dollars? If your primary goal is to grow your investments, that’s a very different objective from Harry Browne’s. It’s an entirely valid objective, but it’s entirely different.