This portfolio works in all market conditions! Will you invest?

This all-weather portfolio is likely to make an investor financially safe, no matter what the future brings! But will investors choose it?

Published: April 23, 2020 at 11:29 am

Here is an example of an all-weather portfolio that works in all market conditions: bull market, bear market, recession, fear, uncertainty, inflation, deflation. Will you use such a portfolio or invest in such a mutual fund if it is available in a tax-friendly manner?

In July 2013, we had analysed the Permanent Portfolio in an alternative investing paradigm developed by American 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 (Google PLay ebook for Rs. 379), 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 a 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 in Browne’s words, “an investor is financially safe, no matter what the future brings”.

While it is quite easy to dismiss this portfolio as conservative, it is naturally low volatile, but still effective combination. In this article, the July 2013 study is updated with better data. A tax-efficient alternative is also presented.

  • Stocks: Sensex TRI from Sep 1996.
  • Cash: NAV of JM Liquid fund India’s oldest liquid fund is used. The fund was launched on 31st Dec 1997. We have a used a simple extrapolation based on the average of the first 100 daily returns to generate data until Sep 1996
  • Gold: Gold price in INR per troy ounce from Sep 1996
  • Long Term Bonds: I-BEX Long Term Gilt Index from Sep 1996.

This would be the performance of a mutual fund following the permanent portfolio since Sep 1996 with monthly rebalancing.

Normalized Performance of the permanent portfolio Sep 1996 to April 2020
Normalized Performance of the permanent portfolio Sep 1996 to April 2020

Now, it is easy to be dismissive that the permanent portfolio “has done well only after a market crash”. Not true at all when you look at 165 10-year SIP returns.

Permanent Portfolio Compared with Sensex 10-year SIP Returns
Permanent Portfolio Compared with Sensex 10-year SIP Returns

The spread in returns is less and until recently it has managed a double-digit return. The general downward trend is also true for equity as well. The permanent portfolio has also done well with respect to the 50% stocks + 50% bonds portfolio of Ben Graham discussed yesterday.

10-year SIP Returns of Permanent Portfolio Compared with 50% Sensex + 50% Gilts
10-year SIP Returns of Permanent Portfolio Compared with 50% Sensex + 50% Gilts

Now such a portfolio will not be tax efficient even with annual rebalancing and even if a mutual fund adopts this, it will only be classified as a debt fund by the IT depart. Can this idea be implemented via arbitrage?

  • Direct Equity 25%
  • Arbitrage 40% (total equity 65% to qualify as an equity fund by the IT dept)
  • Gold 25%
  • Gilts 5%
  • Cash 5%

Using Kotak Arbitrage (oldest in the category) this is a comparison of the permanent portfolio with an equity-oriented permanent portfolio. The agreement is reasonable to say the least!

Equity oriented permanent portfolio compared with permanent portfolio from Oct 2005 to April 2020
Equity oriented permanent portfolio compared with the permanent portfolio from Oct 2005 to April 2020

The other asset classes have been included for reference.

Equity oriented permanent portfolio since October 2005
Equity oriented permanent portfolio since October 2005

In conclusion, the permanent portfolio is an excellent all-weather portfolio. A simple annual rebalancing is sufficient if an investor implements this, but most will not as they fear taxes more than a capital loss! Mutual funds can implement it with monthly rebalancing but would be treated as debt funds. An equity-oriented variant can easily be constructed.

The key result is, such a portfolio is capable of producing a reasonable return with significantly lower uncertainty. An investor might be quick to criticise, “will such a portfolio beat inflation over the long term?”. Sadly, even a traditional long-term portfolio stuffed with equity does not do this!

An investor who finds this mix appealing also finds the lower uncertainty in future returns appealing. That is prudent thinking, not conservative. Multi-risk funds would do better if they adopt strict asset allocations such as this instead of the vague “min 10% weight to each asset class”.

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About the Author 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 money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
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