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The Permanent Portfolio

Ever heard about the “Permanent Portfolio”? The genesis of this investment strategy lies in a book – “Fail Safe Investing – By Harry Browne”, written way back in 1999. This portfolio is quite unique and contrarian in the sense that it proposes one quarter of holdings each in investments such as gold (not jewellery), cash equivalents, long durations bonds and broader equity indexes. The premise is - "Every investment has its time in the sun - and its moment of shame". However, put together, such highly uncorrelated investments let one be one up on bad financial times of any kind. I admit this is the first time I have heard of such high gold and cash holding in any investment program. 5% to 10% is more like it. I would have mostly trashed this portfolio as some marketing gimmick if I had not come across excellent analysis done in this blog. While the said blog is in UK context, I would tend to believe same would be more or less true in Indian context too. Maybe better as our currency depreciates against developed world currencies and gold would do even better in such a situation. While you can have a detailed look at the blog, here is the gist: it seems “Permanent Portfolio” has:

-          Managed to deliver real return (positive inflation adjusted return) in longish periods

-          Managed to cushion the fall in extremely tough environments

That said, a key point in the said blog caught my attention – in the worst case market situation, permanent portfolio was back in green much quicker than equity heavy portfolio.

That set me thinking – can permanent portfolio strategy be an alternative to aggressive equity heavy portfolios in certain situations? I can clearly think of two scenarios:

Scenario 1: Maybe one can consider emulating the permanent portfolio kind of allocation for goals which are between 5 years to 10 years when safety and bouncing back quicky from any set back assumes more importance than maximizing returns. The notional losses, if we again hit a real bad patch in such a set up would be much lesser than say in an equity overweight portfolio – if we assume that history will approximately rhyme with future. Having some money in a bucket which holds good even in a real bad times when investing for bit shorter horizons gives lot of confidence and enhances staying power for other much more aggressive bucket. And anything which lets one stick to a chosen plan will mostly end up adding to net worth given sufficient time!!!

Scenario 2: Another situation when such a portfolio can be considered: deaccumulation phase. After one has won the game by investing in aggressive assets during his / her earning phase and amassed a decent corpus, particular individual may decide that conservation of accumulated capital assumes more importance than swinging for highest possible return. Permanent portfolio strategy can very well give one extremely good shot at securing inflation beating returns while reducing portfolio volatility to a great extent. High cash holding in this kind of portfolio also ensure income generation will never be a problem in any kind of market situation.

Here's the link to the book  which started it all for further reading. Aside, the author has also penned a very short and unique chapter in this book – “Enjoy Yourself With A Budget for Pleasure”. Again a first for me to read about spending in an investment oriented treatise.

Have fun exploring “Fail Safe Investing”!!! 

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