The Permanent Portfolio: How to Invest Without Losing

The biggest fear people have when thinking about investing is that they don’t want to lose any money. If you were to do some number-crunching: if you lose 30% of your investment, you need a subsequent 42% gain to recoup your losses. If you were invested into the S&P 500 in 2008 when it lost 50% of its value, you would need a 100% increase to get back to where you were. Seems a little unfair right? But that’s why it’s called the break-even fallacy. This phenomenon is probably why Warren Buffett’s number one rule of investing is simply: “Don’t lose.”

Now that we know how important it is not to lose while investing long-term, how do we go about it?

In How to Own the World, author Andrew Craig outlines a simple portfolio that has only five losing years in the last 37, the worst being only 5.3%. The portfolio even had a positive year in 2008, the same year where the whole world was in financial crisis. The portfolio had an average 7.5% annual gain over the last 37 years.

It might not seem a lot to average 7.5% per year, but putting $100/month in this kind of investment would bring you $17,957.60 after 10 years, $55,500.52 after 20 years, $134,428.85 after 30 years, and $300,363.77 after 40 years. If you just kept the cash you would have amounted to $48,000 in that time. Even worse, if you spent that extra $100/month you’d have $0 after 40 years.

This asset allocation was created by Harry Browne – his idea being that if you owned a diverse range of assets, you should always have something that performs well.

The allocation is:

  • 25% stocks
  • 25% long-term US bonds
  • 25% gold
  • 25% cash

The reason why this combination works so well in managing risk is that these asset classes thrive in different market conditions. Gold is a good bet in times of inflation, while stocks grow in line with economic growth. Bonds are useful to own in times of lower than expected inflation or lower than expected economic growth. Cash gives you liquidity, no fees, an albeit small interest rate, and stability when the others lose value.

The advantage of this type of portfolio is the simplicity – you will only need to buy into two or three different funds and rebalance periodically. Even better, you won’t have to manage your emotions as much because there will be much fewer losing years than with most other types of investment portfolio.