A 'permanent' solution to your investment worries

rcarrick@globeandmail.com

The stock market despair of 2008 gave way to the euphoria of 2009, which in turn led to the uncertainty of 2010. God knows what 2011 will bring to investors.

Sick of worrying about what market ups and downs mean to your portfolio? Then have a look at Harry Browne's "permanent portfolio," a decades-old approach to investing that directly addresses today's uncertainties.

Mr. Browne, an investment adviser, author and onetime Libertarian Party presidential candidate, died in 2006. But the permanent portfolio continues to generate active discussion online by people who like the idea of owning a fortress-like mix of investments that can handle all situations.

The permanent portfolio could not be simpler in concept. You just divide your money into four equal investments in precious metals, stocks, government bonds and Treasury bills. Right away, you can see the relevance of the permanent portfolio to the current debate about whether the global economic growth is increasing or slackening and whether the stock markets are on the cusp of a run higher or a big pullback.

Let's start with the precious metals allocation, which for most investors will mean gold. If global economic growth surges ahead at some point, gold is an ideal hedge against inflation. If the economy falters and we get deflation - that is, falling prices - then government bonds should do well.

The Treasury bills are insulation against the kind of all-encompassing financial market disaster we saw in 2008, while the stocks are there to give you a piece of the action when all's well in the markets.

The permanent portfolio is designed to thrive in all conditions, but it's certainly not for all investors. At times like now when interest rates are low, it's a weak producer of income. And while past results indicate that it particularly shines in troubled times, bull markets may not be an ideal environment for this approach.

One way to track the returns of the portfolio is to look at a U.S. mutual fund that pursues this strategy. Since its inception in 1982, the Permanent Portfolio Fund has lagged the S&P 500 stock index 6.5 per cent to 10.6 per cent on an average annual basis.

But results have been dramatically better both in the past decade, and in the past three years of market upheaval. As of June 30, the Permanent Portfolio Fund (check the latest portfolio report here at bit.ly/bceCRw) had an average annual 10-year return of 9.8 per cent, compared to a loss of 1.6 per cent for the S&P 500 and a gain of 2.6 per cent for the Citigroup 3-Month U.S. Treasury Bill Index. The three-year gain is 6.5 per cent, compared to a loss of 9.8 per cent for the S&P and a gain of 1.4 per cent for T-bills (all returns are in U.S. dollars).

Mr. Browne wrote about the permanent portfolio in his book Fail-Safe Investing: Lifelong Financial Security in 30 Minutes. It's part of an oeuvre that includes How I Found Freedom in an Unfree World, Why Government Doesn't Work and Liberty A to Z. Those titles came from a man who ran for president in 1996 and 2000 for the Libertarian Party.

If his politics seem a bit out there, Mr. Browne's views on investing were way ahead of their time. In the 1980s, he wrote a book called Why the Best-Laid Investment Plans Usually Go Wrong that attempted to discredit the idea of a perfectly reliable system, strategy or indicator for successful investing.

The permanent portfolio seems to have been an attempt to impose order on a random financial world, which is probably why it continues to resonate with investors and bloggers.

There's an active discussion on the permanent portfolio on the Bogleheads investing forum (check it out at bit.ly/9RzF6g), while a forum on the Crawling Road blog (check it out: bit.ly/c8QgLk) includes a thread on applying the permanent portfolio in the Canadian market.

The conceptual simplicity of the permanent portfolio gives way to many interpretations when you try to put it into use. On the HarryBrowne.org website, the permanent portfolio is described as comprising a S&P 500 Index fund, a 30-year U.S. Treasury bond, American Eagle one-ounce gold coins and one-year U.S. Treasury bills.

The Permanent Portfolio mutual fund deviates from the standard portfolio in this recent portfolio breakdown:

Gold: 20 per cent

Silver: 5 per cent

Swiss franc assets: 10 per cent

U.S. and foreign real estate and resource stocks: 15 per cent

aggressive growth stocks: 15 per cent

U.S. T-bills, bonds and similar investments: 35 per cent.

The Crawling Road blog (crawlingroad.com), which spends a lot of time talking about the permanent portfolio, is going with a more conventional four-piece portfolio evenly dividend between:

Vanguard Total Stock Market ETF (VTI-NYSE)

iShares Treasury Long Term 20+ year Bond Fund (TLT-NYSE)

iShares Very Short Term Treasury Bond Fund (SHV-NYSE)

SPDR Gold Trust (GLD-NYSE)

The bottom line here is that the permanent portfolio is more of an idea than an exact blueprint for building a portfolio. This gives us the latitude to try constructing a Canadian version. Although it's certainly possible to buy bonds, T-bills and gold bullion directly, let's use a fund approach to make things as simple as possible. Exchange-traded funds offer the most clarity in terms of what they invest in, so let's go with them over mutual funds.

The first step is to pick one of the broad-based Canadian market funds available from virtually all ETF providers in this country. Alternatively, you could pair up a global and Canadian market ETF to account for one-quarter of the portfolio.

Next, use one of the long-term bond ETFs available from the iShares or BMO ETF families. For gold, there are ETFs that serve as gold bullion proxies from Claymore Investments and iShares. For cash, you could use the Claymore Premium Money Market ETF, or a low-fee money market mutual fund.

Once you've got your four funds, divide your money evenly between them and rebalance your holdings once or twice a year to keep the weightings in line. You can't accomplish all investing goals with this portfolio, but you will be prepared for almost anything.

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The permanent portfolio

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The performance check