The Permanent Portfolio: A Fascinating Low-Volatility Option For The Long Term Indian Investor?

Published: July 3, 2013 at 6:00 am

Last Updated on

Worried about fluctuating stock market returns? Worried about sliding gold prices? Not sure how much to invest in equity or in gold? Here is an example of a portfolio based on an ingeniously simple notion that has proved to be remarkably stable irrespective of market conditions – stock/commodity/debt/currency markets!

The Permanent Portfolio in an alternative investing paradigm developed by Amercian investment adviser Harry Browne in 1981. The permanent portfolio comprises of stocks, bonds, cash and gold in equal  proportions (25%)!  This sounds bizarre because for long term goals most investment advisers would recommend (1) significant equity exposure. Typically 100-age. That is 65% equity allocation for a 35 year old and rest in debt. (2) little or no gold  exposure (not more than 10%)  (3) little or no cash.

How can such an unconventional portfolio allocation work for long term goals? The idea behind the permanent portfolio is fascinatingly simple. In his book, Fail-Safe Investing: Lifelong Financial Security in 30 Minutes, Browne writes about four possible economic conditions:

  • Cover of "Fail-Safe Investing: Lifelong F...Prosperity when markets do exceedingly well
  • Recession  a general slowdown in one or more aspects of the economy
  • Inflation No need to explain this one, right?!
  • Deflation Negative inflation. Believe it or not, has occurred in the past!

The idea of the permanent portfolio is to choose instruments which will do well in one or more of the above conditions. According to Browne these are:

  • Stocks When the markets do well. Direct equity or mutual funds. Even an index fund should do.
  • Cash during recession. For example a liquid fund
  • Gold during inflation
  • Long Term Bonds during deflation and prosperity

Thus the permanent portfolio is: 25% Stocks, 25% Cash, 25% Gold and 25% bonds. To ensure “an investor is financially safe, no matter what the future brings”. Read more: The Permanent Portfolio Allocation

An ideal portfolio should provide returns that beat inflation with low volatility. Low volatility here means the compounded annual growth rate (CAGR) at the end of each investment year should not vary too much from the final CAGR. Why low volatility? Too much volatility will kill the fruits of compounding, that is why. The permanent portfolio has measured up to these two requirements in the US quite impressively for the last 40 years! For details: Performance and Historical Returns

Will this approach work in India? An expert is likely to say no for several reasons. (1) India is an emerging economy and equity exposure should be higher than 25% for portfolio returns to beat inflation (2) gold is not an effective hedge for inflation (at least in India) (3)  ‘cash’ or liquid debt is unsuitable for long term growth. I am sure there are more. This is as far my thinking takes me. Feel free to add to this in the ‘comments’ section.

Why not check for ourselves? I  have simulated the performance of the permanent portfolio by considering historical Sensex, gold, fixed deposits (instead of bonds) and savings bank returns (instead of money market instruments or liquid funds). One could simply add 1-2% to the SB interest rate to make it resemble a liquid fund. The allocation is 25% in each category, rebalanced each year as noted by Browne in Fail-Safe Investing. You can use the attached Excel file to analyze the performance of the permanent folio for any and every duration between 1979 and 2012 for SIP and lump sum investments.

Short term performance: The permanent portfolio has not always produced great returns for short durations. If you have started a SIP in 2009 you would got an impressive CAGR of 13.62%  3 years later. However if you had started it in 2000, you would have got only 2.2% 3 years later.

Five year returns are a little better. All investments made since 2000 would have yielded impressive double digit returns while investments started between 1992 and 1999 would have  yielded dismal returns. If there is a period in time when multiple asset classes under perform simultaneously (for example gold and stocks in the mid 90s) the permanent portfolio fails to impress for short durations. Nothing to shout about though.The investing paradigm is not meant for short term investing (in my view!).

Long term performance: As the investment duration becomes longer, the benefits of the investment portfolio become clearer.  The average CAGR of every possible 15 year SIP  between 1979-2012 is an impressive 11.2% However SIPs started between 1986 – 1992 would have got only singe digit returns (lowest of 7.8% for a 15 year SIP started in 1986).

When the investment duration is increased to 20 years almost every duration has a double digit return or close to it (the lowest is 9.51%). For a 25 year duration the average CAGR is 11.2%. There are a total of nine 25 periods between 1979-2012. The highest CAGR is 11.48% and the lowest is 10.7%.

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Thus for long investment durations (typically more than 20 years!) the permanent portfolio offers a return which is nearly independent of when you start the investment.

Notice the low volatile, steady performance of the permanent portfolio (green line)
Notice the low volatile, steady performance of the permanent portfolio (green line, right axis).

The most important feature of the permanent portfolio is its low volatility. That is the CAGR at the end of each investment year does not vary too much from the final CAGR. For example a lump sum investment in the permanent portfolio started in 1987 would have yielded a CAGR (geometric mean) of 11.9%. The arithmetic mean is 1.4% more than the CAGR. This difference between the two means can be considered as a measure of volatility.

If we compare this to a more common asset allocation in which we use 70% equity exposure and 30% debt (FD) exposure, the same lump sum investment started in 1987 would have yielded a CAGR of 15.1% for annual rebalancing. The volatility however is 3%. Thus the yearly returns of a permanent portfolio fluctuate considerably lower than a typical long term portfolio. Lower returns is the price one must pay for this low volatility. You can play with this rebalancing simulator to gauge the performance of conventional equity:debt portfolios.

Note: In the simulation I have used a SB account and added 2% to it so that returns resemble that from a liquid fund. This is not really necessary since it does not make a significant difference to long term returns.

What about risk? Assuming that the permanent portfolio minimizes volatility for long term investments, we need to consider risk. For long term investments the risk of importance  is loss of value. That is the returns should comfortably beat inflation in order for any corpus to be effective. In this regard I am not too sure about the performance of permanent portfolio. While it does provide consistent returns of 10-11% for durations above 20 years or so, it is important to recognize that I have not included taxes in the calculation. I would think post-tax returns would hover around 8-9% for a net 11% pre-tax return. This just about equals inflation. Not a bad performance at all, but not great either.Not great because such a return may or may not be sufficient for a financial goal. It certainly good enough for someone with a frugal lifestyle with retirement 25 years away. A long term (~ 15 years) portfolio with (100-age)% in equity still remains the best bet (historically) for comfortably beating inflation.

So why bother? The Indian investor should take the permanent portfolio seriously for several reasons:

  • It is a good option for the investor with a volatile temperament. Many investor get jittery and all worked up when equities do badly for many years together. The (100-age) equity exposure formula may not be well suited for such investors. Panic is likely force them make dramatic mistakes and kill the power of compounding. The permanent portfolio with limited exposure in equity (and gold!) maybe better suited for such investors. Of course I am assuming such people look at the overall portfolio growth and not at individual asset classes! A little too much to expect?
  • It is a fantastic illustration of how proper diversification can protect a portfolio. In the 2008 market crash the permanent portfolio fell only by a remarkable ~ 2%!  The % allocation to each asset class need not be 25%. The key is to choose asset classes with little or no correlation in performance.
  • It seems like a good option for someone in their mid-20s planning for retirement at 60.
  • It is certainly a good option for the contended investor. Someone who does not worry about what returns others are making (others refer to friends and asset classes!). Someone who is clear about what return is required for his/her goals.
  • As the Indian market evolves and (assuming) the economy develops, the gap between actively managed funds and index funds should narrow. Under such circumstances the permanent portfolio should offer much more consistent returns rivaling long term equity returns.

Who is it not for? It is certainly not for those constantly obsessed with returns. Not for those who wish to ‘build wealth’ (someone please explain to me what that means). Not for those who question the 25% allocation: Since gold has crashed, why should I not increase exposure in gold now? If I maintain 25% exposure in equity at all times? Will I not miss out on chances to invest more during market crashes?

Implementation: There are many ways in which a permanent portfolio can be constructed. Ways which are far more rewarding and maybe tax efficient than the one I have used for the simulation:

  • 25%  good large cap fund, 25% gold etf, 25% ‘income’ debt fund and 25% ‘liquid’ fund. (1/4 asset classes has no long term capital gains tax)
  • 25% good large cap fund, 25% gold etf, 25% ‘income’ debt fund and 25% arbitrage fund. (2/4 asset classes has no long term capital gains tax)
  • 15% good large cap fund, 10% good mid-cap fund, 25% gold etf, 25% ‘income’ debt fund and 25% ‘liquid’ fund
  • Can you suggest ways in this can be done better?

What do you think about the permanent portfolio? Do you think it is suitable for Indian retail investors?

Download the permanent portfolio simulator: Indian Edition


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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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  1. A good analysis of generating good/ above average return with low volatility with passive investing. Vary good writing using basic terminology. Just a thought, What would have been the result if some portion of GOLD exposure is replaced by some other metal like SILVER etc. Enjoyed reading the article.

    1. Thank you. I had replied to earlier, but it seems to got lost. I searched for historical silver returns. I have not been able to get something which is readily useable Will keep looking. Thanks again and sorry for the lates response.

  2. Sir, It’s not good to include gold in the portfolio. Only those who have girl children should buy gold others should strictly avoid. Gold being commodity will have adverse effect on poor/ middle class families [ especially in India where gold is demanded during marriages]. We regularly hear news about dowry deaths.. etc., Offering small amount of gold would costs lacs of rupees and again reminds us the adage ” Kalyanam panni par”

    I would recommend 50% equity and 50% liquid.
    I am very much inclined towards liquid fund because:
    1. it’s safe
    2. Provide returns at par with dynamic bod fund
    3. Low expense ratio.

    Stable portfolio can also be achieved with this..

    1. Dear Hari, Like the XIRR problem there are many solutions to any given problem. Every type of
      portfolio has its pros and cons. You cannot argue with history and permanent portfolio has an impressive history.
      Btw I have nearly finished a cal to handle the XIRR issue. Will be posting it soon.

  3. My points:
    1. The equity component is problematic. Because originally it was US Large-cap equities (S&P500). A good large-cap Indian fund is not a proxy for that. You need some kind of international equity diversification for that. Sadly, we do not have decent international index funds.
    2. Even your suggestion of separate large and mid cap funds is making it more confusing and complicated.
    3. The Income fund part should be more related to some govt securities fund. Even PPF can be substituted.
    4. Gold has to be invested in coins/bars, etc (preferably from jewellers and not banks). Despite the ease of ETFs, they are very expensive and their long term stability has not been tested.
    So, my suggestion would be 12.5% IDFC Nifty Index fund (or equivalent), 12.5% (MOst Nasdaq 100 ETF /Frankin / DSP US Feeder Fund / ICICI US Blue chip focused fund, in that order), 25% gold coins, 25% PPF / govt securities fund, 25% liquid or ultra-short term fund.

    1. Ramesh, there are several ways to accomplish this. The idea was to see how PP fares with only Indian intruments. Gold coins are difficult to sell and rebalance and holding it and accessing it is a pain. PPF also has rebalancing issues if one want to remain true to PP. Tax is also a major concern that I have not looked at. It will take quite a bit of sheen from the returns. To me PP is fantastic illustration of diversification. Unless someone is monk-like in nature, sticking to 25% is tough. International equity is a good idea, but tax is an issue since allocation is small. Best to use a fund like PPFAS. Did you see the allocation in PPFAS?

  4. The PP thrives during bear markets. It lags during bull markets. I have developed a portfolio based on the PP called the Wesley. It consists of 30% stocks, 15% gold and 55% 5 yr bonds. It has a CAGR similar to the classic 60/40 portfolios pensions use and does well during bear markets. Like the PP it rarely suffers draw downs

  5. This is an intriguing idea. I suspect the benefits are good for people who don’t like volatility. I see volatility as opportunity, so the permanent portfolio is a little too conservative for my taste.

    I would explore replacing gold with a commodity index ETF linked to something like GSCI. The idea of allocating 25% of total wealth to gold – which ultimately is propped by psychology & has little industrial or growth value – is pretty scary to me. A broader commodity index will correlate with gold while providing commodity diversification, thus reducing the risk that any particular commodity may fall out of favour. Gold’s value is more due to its status as a store of value than it is due to industrial use, but there are other commodities that are very valuable as raw material inputs. GSCI CAGR historically has been encouraging.

    1. Hi Aditya,

      Yes replacing gold with silver or other metals would probably work better.

      I think the idea is for everyone. It is one of the simplest way to reduce portfolio volatility provided tax and exit loads are properly factored.

      I think Vanguard has a FoF based on this idea tracking four indices.

      If I could start a fund on my own, it would be based on this idea 🙂

      1. I can see why this is a very intriguing idea. It will take me some time to think it through, so I will do some thinking aloud here.

        The reduction of volatility comes at some cost. I’m not referring just to return.

        If you look at an index fund,the diversification is extraordinary. If one were to buy two index funds – say CNX 500 in India & VT (Vanguard Total World Stock), you have exposure to:

        1. Lots & lots of countries, economies, political systems etc.
        2. Extraordinary number of sectors – technology, healthcare, manufacturing, services, spanning every production process & its corresponding consumption / lifestyle pattern
        3. Diverse management styles, governance standards etc.

        The other asset classes – except bonds – don’t provide that. They rest firmly on the past economic usage of their underlying assets. For example, if the world shifts to a new paradigm where commodities are useless (I know this is unlikely, but let us think on the lines of science fiction for the sake of hypothesis), 25% of the portfolio is wiped out. Whereas, it is hard to see a paradigm shift in which equity or bonds are wiped out in the long-term because they are linked to extraordinarily diverse underlying economies / sectors / companies / lifestyles. Of all the asset classes, equity stands the best chance of withstanding the turmoil of the unknown and unforeseen over longer horizons.

        By allocating only 25% to equity & bonds, I believe this portfolio reduces the diversification of the overall portfolio tremendously. Diversification across asset classes may not be the same quality of diversification as that provided by equity, which is not necessarily linked to a type of economy or historical pattern.

        Having said all this, I do agree that the very low historical volatility is something that would appeal to a person who is risk-averse. Moreover, this could be a good portfolio for a retiree who values capital preservation over growth /return.

    2. Using commodities to replace gold has been discussed on and explains why commodities should not be a substitute for gold. Gold reacts uniquely to various economic conditions, not necessarily in line with commodities. If you look at the 2008-2009 financial crisis, commodities were one of the worst performing asset classes, but gold was the best asset class.
      I think you would still want to have the bulk of your Equity in the Indian economy, but have a portion tied to the wider world economy or maybe split 50-50 between the Indian and US economy, since the US economy is widely diversified and still gives world exposure through its large cap corporations.

  6. Dear Pattu,

    I have been doing some research on this permanent portfolio for quite sometime. Some how I strongly feel that this best investment profitability for individuals how have passion & time with them. I was search for a tool or website, which will help to buy & align stocks, bonds gold & cash. also help the individual in re-balancing year on year.

    thanks again for this great post; your help will appreciated.

  7. Hey thanks for that info, But i’m looking at a tool where i can manage the four economic conditions(stocks,cash gold & funds). the link which you have provided is just fund.

    1. You will have to do this yourself. If you want to do all this in one place, then you may have to go through a broker like FundsIndia.

  8. Good post. Thanks, Pattu.

    My only comment from looking at your graph is that your cash (SB?) component is sitting at a 4% return. I assume you’ve used savings accounts. But Harry Browne’s permanent portfolio uses short term treasury bonds or Certificates of Deposits (CDs, they call them), so our Indian market’s equivalent would be Fixed Deposits – or even short term Government bonds or liquid funds, which return much more than 4%. If we take ‘cash’ to mean Fixed Deposit at a nationalized bank, the average rate of return for one year would be 9%. I think that will change your overall returns a little bit. (Okay, not a little bit. A LOT.)

    For the ‘bond’ part of the portfolio, if you stick to Browne’s technique, you will only invest in Government of India long term paper – which returns around 9% again (at the moment). I think a AAA-rated tax-free bond from a public sector undertaking will work just as well in terms of risk. As I write this, most of the AAA tax free bonds currently under issue give close to 9% (post-tax) on the 20-year.

    For the stock part of the portfolio, I would just invest in any Nifty index fund, until an index fund for a BSE-100 or a BSE-200 becomes available.

    For gold, I would go half-and-half between physical bullion and ETF backed by physical bullion.

    If we do the above, I think your returns will come out much larger than they have. I can’t help but think that the 4% assumption you made for the cash component brought the returns down significantly. In reality, any of us who are investing in cash will invest in Fixed Deposits or a short-term liquid fund, both of which give significantly higher rates than 4%. None of us will just leave cash sitting in a savings account, and that is definitely not what Browne recommends either.

    Without doing much in the way of calculation, the overall returns will be around 1.5-2% larger than what you’ve noted. Suddenly it doesn’t sound that bad any more 🙂

    1. Thank you for your wonderful insights. Yes I was aware of this when I did the post. I did not search for historical returns hard enough. I will do so now and repost an updated version. I am a strong fan of this investment strategy.

  9. Sir, the article was good. The only concern here is if the portfolio (total net worth) is say 20 crores and 1/4th of it is allocated in liquid funds(5 crores) is it a wise thing to keep so much in liquid funds.

  10. Sir, I follow this rule, at any point of time i will have fund to sustain my life for 10 years and rest in equity and try to rebalance it every year.. In case if i have to rebalance it with equity on a year, will do it only if the equity returns has given more than % inflation(9%). This way i am comfortable that i can manage my life always 10 years and use equity only to build wealth…

    Have not done much research on this strategy but some how i have a strong conviction on this…

  11. Please dont invest in Paper Gold it makes no sense if you want to hedge your bets , Invest on Physical Gold and keep in Private Locker so that Banks dont disallow you to take it during Finincial Crisis when you need the most

    My Take would be

    15% good large cap fund, 10% good mid-cap fund, 25% Physical Gold , 15 % Liquid Fund , 5 % Saving Account , 15 % UST/Income Fund , 10 % ST GILT.

    Keep 5 % Cash at home you never know bank would limit your withdrawal limit as it happened in Greece or even in India during demonstration.

  12. Can you please make a video on this in 2020 to re-visit this idea? Do you still think (in 2020) that the strategy you mentioned is good for long-term investment goals like retirement? Is there any downside for this strategy? How can we practically implement it in 2020? For retirement planning, would we need to re-balance such a portfolio as we approach the end? If yes, how? Thank you….

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