Craig Rowland - The Permanent Portfolio: Harry Brownes Long-Term Investment Strategy

Copyright 2012 by Craig Rowland and J. M. Lawson. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Rowland, Craig, 1971

The permanent portfolio : Harry Browne's long-term investment strategy / Craig Rowland, J. M. Lawson. 1st ed.

p. cm.

Includes index.

ISBN 978-1-118-28825-2 (cloth); ISBN 978-1-118-33156-9 (ebk);

ISBN 978-1-118-33377-8 (ebk); ISBN 978-1-118-33488-1 (ebk)

1. Portfolio management. 2. Investments. I. Lawson, J. M., 1970- II. Title. HG4529.5.R69 2012

332.6dc23

2012015383

Foreword

Investing is complicated. It's difficult. You need expert help if you're going to build your wealth so that you can retire on time. Or at least that's what you've been told.

There's a vast financial industry with a vested interest in convincing you that to be a successful investor you have to:

Follow the daily movements of the markets.

Learn how to analyze the nitty-gritty details of stocks and bonds.

Buy and sell constantly to maximize profit.

The truth is that none of this matters. The truth is that smart investing is simple. And easy.

I believe that most investors are better off putting their money into low-cost index funds. (An index fund is a mutual fund that tracks the broad movements of a stock-market index, such as the S&P 500.) Over the long term, this passive investing approach has been shown to produce above-average returns for patient investors. Why? There are many reasons, but primarily because investing in index funds costs much less than nearly any other method.

In fact, Stanford University professor William Sharpe famously demonstrated that passive investing with low-cost index funds must produce better results than traditional investing. The average return of both methods is the average return of the market. But because traditional investing costs so much, investors taking that path necessarily see smaller returns on their investments. (To read more, see http://tinyurl.com/sharpe-rocks .)

But there are other ways to explore passive investing besides index funds.

Three years ago, I read a book called Fail-Safe Investing by Harry Browne. This tiny volume, first published in 1999, champions a method of passive investing that Browne called the Permanent Portfolio. And while it's a little more complicated than simply investing in index funds, the ideas are still fairly simple.

According to Browne, the Permanent Portfolio should provide three key features: safety, stability, and simplicity. He argues that your permanent portfolio should protect you against all economic futures while also providing steady returns. It should also be easy to implement.

There are many ways to approach safe, steady investing, but Browne has some specific recommendations:

Hold 25% of your portfolio in U.S. stocks, to provide a strong return during times of prosperity.

Hold 25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).

Hold 25% in cash in order to hedge against periods of tight money or recession.

Hold 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation.

To use the Permanent Portfolio, you simply divide your investment capital into four equal chunks, one for each asset class. Once each year, you rebalance your portfolio. If any part of your portfolio has dropped to less than 15% of the whole, or grown to over 35% of the total, then you reset all four parts to 25%.

That's it. That's all the work involved.

Because this asset allocation is diversified, the entire portfolio performs well under most circumstances. Browne writes:

The portfolio's safety is assured by the contrasting qualities of the four investmentswhich ensure that any event that damages one investment should be good for one or more of the others. And no investment, even at its worst, can devastate the portfoliono matter what surprises lurk around the cornerbecause no investment has more than 25% of your capital.

Browne's arguments sounded crazy at first far too simplistic! but with time, I've come to believe he's on to something. In fact, over the past three years I've gradually realized that what I need to is move from investing in index funds to establishing a permanent portfolio for myself. Why haven't I done so?

The high price of gold, for one. Plus, I've never really been sure how to implement Browne's Permanent Portfolio in real life. I mean, what are the actual steps for making it happen? Fail-Safe Investing is a good book, but it's long on theory and short on actual details. I'm not a professional investor; sometimes I need to have somebody hold my hand.