The Permanent Portfolio is a strategy for diversifying your wealth. It’s an asset allocation that looks like it was lifted from the Old Testament:

• 25% in cash
• 25% in gold
• 25% in shares
• 25% in long-term government bonds

Okay, so you’re not shipping corn in a Phoenician galley or laying down shekels at the local moneylender. You’re investing in stock market listed companies and government debt.

Nevertheless for an asset allocation, the Permanent Portfolio is about as back-to-basics as diversified gets – the 25% slug of gold giving it a particularly Old World tang.

The Permanent Portfolio’s roots lie in the high inflation era of the 1970s, when investing was simpler. Forget robot advisors or quant funds¹ – the only thing most people used computers for was playing Pong or Pac-Man. Few had heard of Warren Buffett, let alone Jack Bogle or Ed Thorpe.

Back then people still held active funds and shares for decades. They phoned or visited their stockbroker. Some buried gold coins in their garden or stashed them under floorboards while they hunkered down for the inevitable nuclear conflict.

Nearly 50 years ago – it’s a different world. You might wonder then what the rather presumptuously named Permanent Portfolio offers us 21st Century investors. Surely we’ve nothing to learn from an approach you could write on a fag packet? (If we still smoked…)

Well, I believe it’s worth pondering the Permanent Portfolio, and its deceptive simplicity. While it’s too straightforward for an investing stamp collector like myself, I recognize it as a thing of investing beauty.

The Permanent Portfolio’s returns have historically been pretty special, too.

Not the highest returns, granted. But that’s not the only way to judge how well a portfolio performs.

The history of the Permanent Portfolio

The Permanent Portfolio was the brainchild of Harry Browne, a US writer and politician.

Browne’s life was quite a journey – he wrote a classic of the US libertarian movement and ran for president – but it’s his evolution as an investor that’s relevant to us.

Beginning his investing career as a gold bug and newsletter writer, Browne morphed into a proto-passive investor. He came to believe nobody knew much about the direction of markets or the economy.

Expansions and recessions were inevitable but impossible to time. Investors should be fearful of inflation as well as deflation, and also of government interventions. (Goodness knows what Browne would have made of quantitative easing!)

Finally cheap passive funds were the investments of choice. Why pay a fund manager when nobody knows anything?

This all resulted in the Permanent Portfolio – the pioneering all-weather asset allocation I gave above.

The Permanent Portfolio is extremely simple, but designed to preserve an investor’s wealth whatever fortune throws at it:

• In good times, the cash and equities should do well.

• In retrenchments, long-term government bonds should shine.

• Gold protects you from calamities – as well as, hopefully, the sort of high inflation (double digits) that prevailed in the 1970s.

Rebalance annually and you might benefit from automatically selling high and buying low. More importantly, you keep your ship on an even keel.

Historical returns from the Permanent Portfolio

According to Portfolio Charts, here’s how a UK Permanent Portfolio would have performed since the 1970s. Note that these are real (inflation-adjusted) returns:

What’s most noteworthy about the Permanent Portfolio is the very low volatility.

• The average 5% real return from the Permanent Portfolio came with a standard deviation 0f just 7.3%.

• In comparison, Portfolio Charts calculates a 60/40 UK portfolio split between shares and bonds gave a 5.9% real return but with far more volatility – a standard deviation of 14.2%.

Here’s an alternative way Portfolio Charts expresses the lows of holding the Permanent Portfolio:

…compared to the 60/40 portfolio:

In inflation-adjusted terms, a 60/40 portfolio lost more than half its value in its worst period. Investors in the 60/40 also had to put up with a 12-year run in the worst case before their portfolio regained its old highs.²

In contrast, at worst the Permanent Portfolio declined just 11% in real terms. And even looking at the darkest period, after four scant years it was back into the black.

True, the higher average returns from the 60/40 portfolio translated into higher total gains if you held it over the nearly 50 years covered.

But you could argue the Permanent Portfolio owner was likelier to keep on holding.

Why the Permanent Portfolio works

The key to the Permanent Portfolio’s stabler returns is its diversification, especially the out-sized allocation to gold.

Clued-up passive investors know that all sorts of simple lazy portfolios of index funds will beat most expensive actively managed ‘solutions’.

But away from websites like this, too many people – especially those who’ve yet to get the passive religion – still hold all sorts of active funds in the name of diversification.

This apparent diversification can be a bit of a mirage, as the following matrix from Columbia Threadneedle [PDF] hints at:

The matrix shows correlations over a three-year period, just by way of illustration. You can see that UK equities and global equities typically move in lockstep. Corporate bonds and property don’t provide much diversification, either.

You need to get into government bonds and commodities to see the all-important red numbers that highlight desirable negative correlations. This is where you hope to own assets that will go up when others (typically shares) go down.

In contrast, holding fund manager A’s Active Superstar UK Equity Booster Fund as well as fund manger B’s Tactical Return Boosting Superstar UK Equity Fund and 20 other active funds that own much the same stuff won’t give you true diversification when the returns hit the fan.

The Permanent Portfolio’s large slug of cash also does much to dampen volatility. In nominal terms, cash never declines.

Diversification and gold

The matrix above detailed commodities in general. Here’s one illustration of how gold in particular has historically proved a diversifier for UK equity investors.

Source: The Gold Council [PDF]

This shows gold was most negatively correlated to FTSE 100 shares at times when the FTSE 100 fell sharply. That’s exactly when you’d most want to see something you own go up, to offset the pain!

It’s especially worth noting because in a crash correlations increase – that is, most assets tend to crash together. If you can own something that doesn’t, you’ll be glad of it.

Bottom line: The big allocation to gold is the oddest but perhaps also the most important aspect to the Permanent Portfolio.

What have you done for me lately?

The Permanent Portfolio regained popularity between the crash of 2008 and the peak of the gold market bull run in 2011.

Scared of plunging share prices and attracted by the allure of gold, new adherents flocked to its defensive asset allocation – with hindsight at a pretty poor time.

Since 2011, the gold price has fallen and stock markets have soared. Permanent Portfolio investors have seen equity-laden investors get richer, quicker.

You can easily see this by comparing the returns from one US ‘permanent portfolio’ fund and the S&P 500:

Source: Fidelity

A few caveats. Firstly, this commercial portfolio is a US fund, not a British one. I’m just using it as an illustration of how the strategy has lagged recently. Also note the asset allocation of this fund is more complicated than Browne’s pure formula. (The fund holds silver, real estate, and even Swiss francs.)

I don’t have the tools to show how a simple UK Permanent Portfolio made up of index funds would have done in recent years.

But as a pointer, a British investing service found that between 2011 and 2015, its own take on the Permanent Portfolio³ delivered a compound annual growth rate of 3.2%.

In inflation-adjusted terms that was an annual growth rate of 1.9% – well below their version of the Permanent Portfolio’s long run real returns of 5.1% since 1986.

As I say, these are just examples given to show that owning a steady performer like the Permanent Portfolio is not a panacea. Someone will always be doing better than you.

But we should appreciate that even during this weaker period, the Permanent Portfolio has achieved its goal of delivering above-inflation returns.

Investing in the Permanent Portfolio

The Permanent Portfolio is a self-reliant DIY investors’ dream. Not as simple as the very simplest global shares and bond mix, admittedly. But a Permanent Portfolio shouldn’t take more than half an hour to set up, and the same again once a year to rebalance.

My co-blogger The Accumulator gave an example setup in his review of lazy portfolios. He used funds. You could use ETFs if you prefer.

Note that long-term government bonds are owned in the Permanent Portfolio. Yes, their returns look weak from here, but they are there for a reason. Using, say, corporate bonds instead will correlate you closer to equities. Shorter duration bonds would bring your bond returns nearer to those of the cash allocation.

Private investors should use bank accounts for their cash component – interest rates are higher.

Gold could be owned via ETFs or coins, via a service like Bullion Vault, or perhaps a mix. (I suggest you review the tax differences).

The equity allocation is invariably given as domestic shares. If I was a UK Permanent Portfolio investor, I might split the 25% between UK and global shares. The London market isn’t as big as the US one, where this portfolio originated. True, you probably won’t get much extra diversification benefit, but I think you’ll get some. It’s not much of a complication. Retaining half in UK shares dampens the currency risk.

US investors might be inclined to add inflation-linked bonds to the mix, but it’s worth noting Browne didn’t suggest this, even after they became available during his lifetime.

British inflation-linked bonds are eye-wateringly expensive right now. I would be in no rush to include them.

Another variant could be to run your equity and bond allocations via an all-in fund like Vanguard’s LifeStrategy, and to manage your cash and bonds separately.

Talking of investment platforms, you would want to think about your portfolio’s size and how you will be rebalancing your allocations when choosing the best broker for you. Our comparison tools can help here.

Needless to say you should be investing in ISAs and pensions to avoid your portfolio being ravaged by tax.

The four horsemen of the investing apocalypse

The contrarian in me suspects it’d be a great time in invest a Permanent Portfolio.

You never read about it anymore. It has hugely lagged other lazy portfolio allocations for years, and people are worried about all its components:

• Gold – “What, you mean gold gold? Haven’t you heard about bitcoin? Or what about something more useful for the 21st Century, like cobalt or graphite? The gold price has been going down for years, anyway. Hardly a store of value!”

• Long-term government bonds – “Are you having a laugh? Putting 25% of my money into expensive interest rate sensitive bonds just as Central Banks start raising interest rates and inflation is rising? Hah!”

• Shares – “What are you on? We’re nine years into a bull market! I’d rather invest in an alpaca farm than put my money into the expensive stock market!”

• Cash – “What, you mean cash in the bank? Now I know you’re taking the piss. I don’t save money for a 1% return a year. That’s less than inflation!”

All these protestations seem reasonable. But not only do most of us struggle to know the future – some of these scenarios are mutually incompatible. (Gold is its usual joker in the pack. The price could do anything.)

The genius of the Permanent Portfolio is something should do well in pretty much all scenarios. Overall that should make up for some under-performance in its other components – at least compared to share or cash-dominated approaches.

Permanently a place for the Permanent Portfolio

Active investing is my passion. At times I’ve approached a hundred holdings of some sort. I’ll also accept higher volatility for hopefully higher returns. The Permanent Portfolio is too simple for me. And realistically, I can’t imagine putting 25% in gold.

All that said, compared to when I first learned about the strategy almost a decade ago – back when I was happily ‘all in’ on equities – my need to diversify has increased. The absolute amount I have invested has grown a lot, and my time horizon has shrunk.

The Permanent Portfolio – and its history of decent returns with minimal volatility – is a useful reminder that simple and stark diversification need not be a recipe for stagnation.

I think those looking to reduce volatility in their portfolios (such as those approaching or recently into retirement) could do worse than spend a few minutes thinking about what it has to teach us.

• Further reading: A good book about The Permanent Portfolio.

1. Yes, I know there were a handful of pioneering quant funds and already some use of computers. But nothing like the algorithmic trading that dominates activity today. [↩]
2. This assumes no new savings. [↩]
3. It uses the FTSE 250 for shares, apparently for performance-related reasons. [↩]

What caught my eye this week.

People are increasingly reluctant to call bitcoin’s parabolic rise a bubble. With the price hitting $11,000 this week, those who dismissed it as a fad or a fraud at $100 look like idiots.

Those who own bitcoin get it. Those who don’t are antediluvian relics.

There’s nothing like a profit to turn people into prophets.

For what it’s worth (not much) I think bitcoin is in a bubble. Probably.

I’ve spent some time this year trying to understand bitcoin, cryptocurrencies, and blockchain – the distributed ledger technology that drives them – better.

I think I’ve succeeded. This summer I had a eureka moment when I finally got that bitcoin was a financial architecture as much as it was a currency or a store of value, and that owning some meant investing in that platform.

I even thought about buying a little. Alas, bitcoin had just hit $2,500 and I’m cheap.

So I didn’t.

Oops!

Having nerdy friends from my university days means bitcoin bubbled into my consciousness years ago. I even have the archetypal friend who mined them when you could do so without a liquid nitrogen cooled garage full of Chinese programmers.

My friend used his self-mined bitcoins to buy an Apple iPad.

Oops!

Eleven reasons why the price of bitcoin may be a bubble

I’ll spare you a primer on the technology (plenty exist – see the links below). Instead here are some random thoughts as to why I think it’s probably a bubble.

1. This graph

Source: WSJ

There might be another widely traded security that has gone up like that and not come down. But I can’t think of it.

2. It’s too volatile to be a currency

A useful currency can’t go up and down 20% against the dollar in 24 hours. If it’s not (at least partly) a currency, then what (partly) is it? If it is a currency then it will have to stabilize. Have we happened upon the right price, right now? Seems unlikely. Are prices going up because they can? Seems likelier.

3. Its ascent is being talked about everywhere

Everywhere! Great sign of a bubble.

4. Seriously, even my girlfriend told me about her bitcoin

I’ve yet to see a woman quoted in an article about bitcoin, which does weaken the bubble case (it might suggest there are still huge demographics to be pulled in). Perhaps it’s begun, though. Plenty of women are into investing. Many are even readers of this blog. My girlfriend is neither. Yet this week she – well – boasted about the value of a fractional bit of bitcoin she picked up along the way. She’s never talked about shares, ISAs, bonds, interest rates, pensions – not even property prices.

5. The overnight wealth creation seems to defy common sense

At $11,000, bitcoin has a market cap of $185bn. Is it reasonable that $185bn has been magicked out of nowhere just because sufficient people believe their bitcoins are worth $11,000 a pop? Perhaps it’s not so ridiculous. Fractional reserve banking means High Street banks add to the money supply all the time. Or is it so different from a stock market being worth 1% more today than yesterday? While $185bn is a big number, it’s a tiny fraction of the world’s wealth. On the other hand, surely that valuation should be tethered to, well, something? States and fiat currencies at least have armies and taxes. And gold has rappers’ teeth. If bitcoin really is on its way to becoming a hybrid of gold and the US dollar, then I can just about accept its rapidly created market cap, except…

6. Governments will want a piece of the action

The bitcoin market is unregulated, and the bitcoin network is creating a store of wealth without governments getting any. Until governments are fully involved, I think the price can’t be trusted. What’s to stop them banning it? Fine, they’d fail, but is the average citizen going to risk breaking the law for an illicit floating world currency – let alone the average billionaire?

7. The price is self-limiting

The higher the price of bitcoin climbs, the less likely people will want to spend their bitcoins. Can it function as a currency then? Hmm, I say. It could still be a store of value though.

8. There are questions about the technology

Initially touted as incorrigible, the cryptocurrency has been splitting. Just keeping the show on the road already consumes as much energy as Ireland. Then there are the hacks that shake faith in a digital currency much more than a bank heist. (Although really stealing bitcoins from a digital wallet or store is just the same. The integrity of the blockchain is the important thing.) Questions about technology don’t mean it’s necessarily a bubble – and they don’t mean it (or blockchain) won’t succeed. Rather, this could be the equivalent of a video-on-demand Internet service in 1999 – right idea, wrong time. But for me these issues do make it harder to trust the price action.

9. Initial coin offerings

Do you know about ICOs? They are unregulated funding rounds for would-be the next bitcoins that have raised more than $3bn globally. Pretty much on the back of napkins. There’s now an estimated 1,200 new digital crypto-currencies out there. On the one hand they might seem to validate the concept – even the failure of all but a couple to gain traction might support the rising price of bitcoin, because it has gained traction. But on the other hand… really? Doesn’t this seem a little, well, nutty? Just a bit?

10. Company name changes

Companies are changing their names to mention bitcoin and seeing their valuations soar. (Here’s a British example, and a US one). Again, not slam dunk proof, but we’ve seen this movie before. Famously, adding ‘dotcom’ to a company name in the late 1990s spiked the price. More recently, I recall a tiny UK music technology firm that changed its name to something to do with rare earth mining at the top of the commodity cycle. At least, it suggests a speculative aspect at play.

11. I’m writing about it

I’ve mostly tried to keep cryptocurrency off this site because it just seemed too iffy. But here I am, adding my two pence worth. When the last blogger turns, you know a bubble is upon us.

True, some telltale signs are missing. For example I haven’t yet heard of babies named Bitcoin or Ethereum. Although this is balanced by football managers getting in on the action.

A bubble does not mean a permanent bust

To end on a hypocritical ass-covering note, I’m not really sure bitcoin is a bubble.

It looks like one, smells the same, and has a letter from its mum. But occasionally the world does change. Perhaps this is one of those times.

I’m also not calling a top. Bubbles can keep climbing for years, and it’s easy to see more catalysts for bitcoin.

Think back to how the first exchange traded gold funds seemed to stoke that boom. Bitcoin futures will arrive in a couple of weeks, and I suspect ETFs will follow.

If bitcoin ETFs track the price by investing in bitcoins (rather than synthetically) then they’ll surely boost the price, at least initially. It’s still a hassle to buy bitcoin, compared to adding some alongside your trackers and bond ETFs on Hargreaves Lansdown.

Millions more punters could flood in and send the price skyrocketing! Or the ETF-afication of bitcoin could strip it of its mystique and the price could crash. Who knows?

A price collapse wouldn’t necessarily mean the end of bitcoin or blockchain, any more than the bursting of the dotcom boom halted the Internet.

Bitcoin could go on to be a household name for the rest of our lives, something we all might use. Perhaps it is the future of currencies? Maybe it is a new store of value?

It seems unlikely that blockchain technology will go away anytime soon – it’s too easy to think of applications. (As a would-be home buyer I’d love all the information pertaining to my potential purchase to have been recorded and distributed for everyone to see. It would save hundreds of emails, dozens of letters, and a wodge of money).

But bitcoin right now?

If it walks like a duck and talks like a duck, it’s a duck.

And Bitcoin is probably a duck.

I mean a bubble.

• Good Bitcoin primer (with more at the bottom) by Bloomberg Business
• This Motley Fool podcast is another excellent introduction [Podcast]
• Smart take on the mania aspect – The Reformed Broker

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Working out the best online broker or platform¹ to use in your investing can be frustrating.

Just when you have got your head around shares versus funds, corporate bonds versus James Bond, and you’re finally ready to start investing, you discover dozens of different brokers to choose from.

All have their own similar-but-different fee structures.

We have long kept track of the different broker platforms and what they charge via our fee comparison table.

But comparing the charges levied by say Hargreaves Lansdown with those of Interactive Investor can be fiddly work.

Details matter. Some brokers charge lower fees for trading but sting you with high withdrawals fees. Others offer cheap trading, but make additional annual charges for each different kind of account you open with them – once for an ISA and again for a SIPP. There may be entry and exit fees, too.

You also need to compare fixed annual platform fees – for instance £15 a quarter – with the alternative method of levying a percentage fee – say 0.25% year – on your investment pot. Which is more cost effective for you?

What’s more, the winner of this equation will probably change as your nest egg grows! You’ll need to run the numbers every few years to keep your costs as low as possible.

Get tooled up to compare investing platforms

If you find all this fun then you’re in the right place. We’re investing nutters around here.

But most people frankly do not.

Out in the wider world, people use interactive tools to compare things like insurance products and energy bills.

Well, that is now possible with investing platforms, too.

We’re hosting an interactive comparison tool created by our partners at Broker Compare. We hope it will help casual investors get their money onto a suitable investment platform with a lot less hassle.

In fact anyone who wants to hone in fast on the best potential brokers will find it a quick way to generate a shortlist of candidates.

True, if you want to work out precisely what you’ll pay – in your specific situation – you’ll always need to do the sums for yourself.

There are just so many quirks out there, and any tool needs to make a few assumptions. Only you know exactly how you plan to invest and why.

But for many people, getting a good idea of the best platform to use quickly is the most important thing.

They’d rather know approximately what they’re going to be charged than laboriously figure out the exact costs from a dozen or more competitors.

Compare the brokers and save hundreds of pounds

Monevator regulars love to debate the minutia of different platforms with all the passionate enthusiasm of trainspotters arguing about the best non-standard railway gauges found in the wilder mountainous regions of Europe.

And long may that continue. (You’re among friends here.)

But the average person has little idea of their broker’s fees – or how what they’re paying compares to the competition.

For these people, five minutes with a comparison tool could be a quick way to save hundreds or thousands of pounds.

So what are you waiting for?

• Try out the interactive broker comparison tool.

• Prefer to DIY? Check out the broker comparison table.

Note that just as with the price comparison websites we all use to compare energy bills or mortgages, Monevator may receive a payment from a broker that you visit or sign-up with via the table or tool. This does not affect the fees you pay – it’s made by the company to us for introducing you to their business.

Happy hunting – and let’s save some money!

1. We tend to use the words ‘broker’ and ‘platform’ interchangeably. A broker is a stock broker – a person or company who trades and holds investments on your behalf. The platform is their website that lets you see and adjust your investments. [↩]