The Permanent Portfolio: Harry Browne's Long-term Investing Strategy
An explanation of Risk Parity that never utters the words “Risk Parity.” A bit dated and a bit too tied to the simplicity aspect of the portfolio, this book nevertheless clearly conveys the principles behind risk-balanced portfolios, even if it departs on some of the details.
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Important Points for the RP Investor:
At over 300 pages, it’s a bit much to summarize beyond a basic overview of the chapters:
The first five chapters are the introductory chapters where the portfolio (25% each in stocks, long-term treasuries, cash, and gold) and the philosophy behind it are explained. Chapter two is titled “The 16 Golden Rules of Financial Safety,” and includes diverse pieces of advice such as “No One Can Predict the Future” and “Create a Bulletproof Portfolio for Protection,” and then also “Don’t Use Leverage” and “Keep Some Assets Outside the Country in which You Live.” Taken as a whole, the rules are not objectionable, in general, though I wouldn’t say I’m on board with all of them, either.
Chapter four was excellent in its discussion of the principles behind the portfolio: simplicity, safety, and stability. As I was reading, there were parts that could have easily been written by Ray Dalio, Alex Shahidi, Edward Qian, Frank Vasquez, or other proponents of Risk Parity, and it was remarkable how much overlap between the ideas in this book and the world of Risk Parity. Differentiating their portfolio from traditional approaches, Rowland and Lawson write on page 42:
Chapter five lays out the four economic conditions that the Permanent Portfolio is meant to respond to, namely growth, recession, inflation, and deflation, for which there are allocations to stocks, cash, gold, and bonds, respectively. Although the book doesn’t mention Ray Dalio of Bridgewater Associates, you can see here the similarity with their work dividing the possible economic environments into four quadrants, with particular assets chosen for each one.
Chapters six through nine cover the four main asset classes, with thorough explanations of the role of each in the portfolio. Some of the details on these are dated, but overall, the principles endure. The chapters feature some history lessons as the authors account for the periods when each asset has had its moment in the sun. Of these, chapter eight on cash was the most enlightening, since it is the asset class I’m most likely to overlook. I wouldn’t say the chapter convinced me to increase my cash allocation, but I did appreciate the differing perspective.
Chapters ten through seventeen focus on practical questions about implementing the portfolio. Chapter eleven had some helpful ideas about rebalancing, but in general, these chapters are dated by now. If you’re really into gold, and want to figure out how to buy actual gold bullion and then how to store it, then chapters ten and fifteen have advice on how to do that, though the whole conversation seems a bit over the top to me. The authors fret over the possibility of the government seizing gold, as it did in 1933, so they come up with all these round-about ways to make sure you can still access your gold bars.
I’ve focused on whether the book will help advance your knowledge of Risk Parity, but haven’t addressed that main topic: the value of the Permanent Portfolio. I see this as an early attempt at Risk Parity, and it has some merit, but I think it’s a bit too rigid on the symmetry of having one-quarter of the allocation in four assets. I think its stock percentage is low, while its gold and cash percentages are too high. The Golden Butterfly and the All Seasons portfolios are both similar to the Permanent Portfolio, and both a bit superior. For more, check out this review by John Wlliamson of Optimized Portfolio: