Permanent, but Not Perfect

In the 1980s, Harry Browne devised what was, in theory, the only investment allocation mix you'd ever need. Unfortunately, his so-called Permanent Portfolio (PRPFX) might do a little better if it had room for a few tweaks.

The properties of a permanent portfolio
Browne, a libertarian and former presidential candidate, drew up the following recipe for success:

Source: Permanent Portfolio Funds.

On the plus side, this plan offers diversification over a broad range of assets, many of which don't typically march in lockstep. Its annual expense ratio of 0.84% is reasonable for an actively managed mutual fund, and its minimum investment is a low $1,000.

It's also performed well, averaging about 9.9% over the past decade and 8.4% over the past 15 years. Those S&P 500-beating results reflect the fund's strong performance in tough economic times, and suggest that it's well-positioned to combat inflation.

The problem with permanence
Despite this portfolio's impressive achievements, it's got plenty of flaws.

For one thing, 2008's market implosions make its long-term track record look a lot more favorable. During the periods when the stock market soared, this fund had much more trouble keeping pace. Its average return since its inception in late 1982 has been 6.5%, considerably lagging the S&P 500's 8.1%. And even as the S&P 500 jumped more than 20% annually in the five years between 1995 and 2000, this fund posted pre-tax returns of 15%, 2%, 6%, 3%, and 1%, respectively.

In addition, a whopping one-fourth of the fund holds gold and silver. Gold in particular is permanent in one unfortunate sense: After 204 years of ups and downs between 1802 and 2006, research by Jeremy Siegel showed that the value of gold barely doubled. If you're looking for truly shining performance, many stocks can beat gold's returns.

Worse yet, this fund keeps more than one-third of its value in U.S. government debt, even though stocks have outperformed bonds over most long periods in American economic history. Professor Siegel's data below reflect how often stocks beat bonds during various rolling periods between 1871 and 2006:

Source: Stocks for the Long Run, Jeremy Siegel.

While the Permanent Portfolio fund's aggressive stocks are not listed, I've rounded up some of the top holdings from the same fund company's "Aggressive Growth" fund, which may offer an idea of what the fund managers favor. While our CAPS community of investors seems to favor many of these stocks, you can see that many aren't exactly daring growth engines:

Prepare for perpetual performance
Do the drawbacks above mean you should avoid the Permanent Portfolio fund? Not necessarily. It'll give you a convenient mix of exposure to bonds, commodities, and stocks alike, although you could just as easily create such a combination on your own. While the Permanent Portfolio could provide a good defense against sagging markets, it will also let you down when the bulls start running.

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