Hello, YieldAlley readers! In this issue:

🕵 Does It Pay to Copy Congress’ Stock Trades? (Morningstar)

🤔 What Happens in a Recession? (A Wealth of Common Sense)

📉 15 Funds That Have Lost the Most Value for Shareholders Over the Past Decade (Morningstar)

💰 Roth IRAs Are All the Rage With the Young Crowd (WSJ)

🛫 Why it’s so hard to fix the U.S. air traffic control problems (CNBC)

Last week, we talked about the concept of lazy portfolios. Simply put, lazy portfolios contain low-cost funds that are easy to rebalance, but typically you maintain the same asset allocation for an extended amount of time. This week, we're exploring the permanent portfolio, a lazy portfolio approach that takes this concept even further.

The permanent portfolio, developed by investment analyst Harry Browne, represents the ultimate "set it and forget it" strategy. Once established, you never reconsider the asset allocations - you simply maintain the same investments in the same proportions indefinitely. This might seem counterintuitive in a world of constantly changing markets. However, Browne's insight is that an investment portfolio doesn’t need to predict the future; it only needs to be prepared for the broad economic conditions that might occur.

The Permanent Portfolio strategy was developed by investment analyst and author Harry Browne in the late 1970s and refined through the 1980s. Browne, who had gained prominence for predicting the dollar's devaluation in the early 1970s, recognized that economic forecasting was ultimately unreliable. He concluded that no one—no matter their credentials or experience—could consistently predict future economic conditions.

Instead of trying to predict the unpredictable, Browne designed a portfolio that would perform adequately regardless of what economic conditions might arise. The philosophy behind the Permanent Portfolio is strikingly different from most investment approaches: rather than maximizing returns during favorable conditions, it aims to provide reasonable returns while protecting against catastrophic losses during any economic environment.

At the heart of the Permanent Portfolio is Browne's insight that despite the seemingly infinite complexity of economic systems, the economy can only exist in four basic states:

Browne’s perspective is that the economy is experiencing one of these conditions or transitioning between them. Since no one can predict which condition will dominate in the future, the Permanent Portfolio holds assets that perform well in each scenario.

The Permanent Portfolio consists of equal 25% allocations to four asset classes:

What makes this allocation so effective is the way these assets interact with each other. They each respond differently to economic conditions, creating a natural hedging effect:

The equal weighting ensures that no single economic condition can devastate the entire portfolio. Each asset serves as insurance against certain economic scenarios, and collectively they cover virtually all possible economic environments.

The Permanent Portfolio is remarkably straightforward to implement:

For stocks, a total stock market index fund like Vanguard's Total Stock Market ETF (VTI) works well. These provide broad exposure to the U.S. stock market with minimal expenses.

For long-term government bonds, you can use ETFs like iShares 20+ Year Treasury Bond ETF (TLT) or directly purchase 25-30 year Treasury bonds through Treasury Direct or a brokerage.

For gold, you don't need to store physical gold in a vault (though that is an option). ETFs like SPDR Gold Shares (GLD) track the price of gold effectively without the hassle of physical storage. For those who prefer physical gold, services exist that provide allocated storage.

For cash, Treasury money market funds like Vanguard Treasury Money Market Fund or short-term Treasury ETFs like SGOV, USFR, and TFLO provide exposure to effectively risk-free yields. while minimizing counterparty risk.

Rather than timing markets or making predictions, the Permanent Portfolio rebalances when any asset class reaches either 35% of the portfolio (due to appreciation) or 15% (due to decline).

When this happens, the entire portfolio is rebalanced back to the 25% allocation for each asset class. This approach forces investors to sell assets that have appreciated significantly and buy assets that have declined in value—effectively implementing a "buy low, sell high" strategy without requiring market timing skills.

In practice, rebalancing typically only happens every few years, making this a truly low-maintenance approach. The infrequent rebalancing also minimizes transaction costs and tax consequences.

Despite its seemingly simple approach, the Permanent Portfolio has delivered impressive results. According to historical data analyzed by Craig Rowland and J.M. Lawson in their book "The Permanent Portfolio," this strategy has provided annual returns of approximately 9-10% over 40+ years with remarkably low volatility. More impressively, the strategy's worst annual loss was only about -5% in 1981, even when compared with much larger losses in stock-only portfolios during various market crashes.

During the 2008 financial crisis, when the stock market dropped over 36%, the Permanent Portfolio remained essentially flat. Similarly, during the high inflation period of the 1970s, when stocks and bonds struggled, the Permanent Portfolio delivered positive real returns thanks to its gold allocation.

While the Permanent Portfolio offers many advantages, investors should consider these potential drawbacks:

Psychological challenges: During bull markets in any single asset class, watching that portion of your portfolio limited to 25% while others hold much more can be psychologically difficult. For example, during the stock bull market of the 1990s, many Permanent Portfolio investors felt they were missing out as their stock allocation was capped at 25%. Yet this same limitation protected them when the tech bubble burst in 2000.

Tax inefficiency: Rebalancing can trigger capital gains taxes in taxable accounts. Strategic placement of assets (keeping bonds in tax-advantaged accounts, for instance) and careful tax planning can mitigate this issue somewhat.

Low yield environment: In extended periods of very low interest rates, the cash component provides minimal returns. However, this cash component still serves an important function as portfolio ballast and rebalancing ammunition.

Less than optimal for retirement withdrawals: The strict allocation can make implementing systematic withdrawal strategies in retirement challenging. Some retirees might need to modify the approach slightly for income purposes.

Gold volatility: Gold can be extremely volatile when viewed in isolation, sometimes experiencing dramatic price swings. While this volatility is part of what makes gold effective in the portfolio, it can unnerve investors who focus too much on individual components rather than total portfolio performance.

The Permanent Portfolio offers a compelling alternative to conventional investment approaches. It acknowledges that the future is unknowable and builds a strategy around that reality rather than fighting against it. For those accepting that markets are unpredictable, the Permanent Portfolio offers a path to long-term investing success without requiring market timing or economic forecasting.

As Harry Browne himself often emphasized: "The future is uncertain; the Permanent Portfolio doesn't gamble on one particular vision of the future being right. Instead, it's designed to profit from uncertainty by holding assets that will perform well during any of the economic environments that might occur."

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

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