The Permanent Porfolio Fund: Long Live Harry Browne's "Fail-Safe" Investment Strategy

by Mark Skousen

The Permanent Portfolio Fund: Long Live Harry Browne's "Fail-Safe" Investment Strategy

by Mark Skousen, Chairman, Investment U

Friday, August 25, 2006: Issue #575

"Stocks, bonds, gold and cash combine to provide balance and safety, one that will do well in any economic environment."  - Harry Browne

This year has been a year of funerals for me. I've lost three friends in the financial world - Louis Rukeyser, Andrew Westhem and Harry Browne. I've also lost a beloved uncle, W. Cleon Skousen.

Harry Browne was especially dear to me in my early career as a financial economist, and I felt it an honor and duty to attend his memorial service last week in Kernersville, a tiny town in North Carolina. Harry lived near big cities all his life - San Francisco, Vancouver, Zurich, Nashville So why Kernersville for his funeral? Because that's where Harry married his wife Pamela in 1985.

Unfortunately, due to the location of his service, not too many of Harry's friends could make it, and less than 100 mourners showed up. Most were political friends who supported Harry's run for president on the Libertarian Party ticket in 1996 and 2000.

He and I became friends on the speaking circuit in the mid-1970s, before he became a political animal, and before his Permanent Portfolio Fund was created. His newsletter was beautifully written and he was known for his impeccable integrity. And his birth date is symbolic: 1933, the year Franklin Delano Roosevelt declared a national bank holiday and made it illegal to own gold.

Harry was destined to be a gold bug.

He was a best-selling author of "hard-money" books of the inflationary 1970s, such as How to Profit from the Coming Devaluation (1970) and You Can Profit From a Monetary Crisis (1974).

And it was Harry's best-sellers that turned me on to my very first investment...

Harry Browne's Surprise: From Gold Bug To the "Permanent Portfolio"

My first investment was not a stock or bond, but a silver dollar. I still carry it wherever I go to remind me of my financial roots

When Harry entered the investment world in the late 1960s, his instincts led him away from the traditional stock and bond markets and into the gold bugs' trinity of "gold, silver and Swiss francs." It was good timing, as these alternative investments skyrocketed.

But then came the disinflationary 1980s and the election of Ronald Reagan, and the gold bugs went into hibernation.

It was at this junction that Harry Browne shocked the hard-money movement: He gave a "sell signal" for precious metals in 1980, and developed a simple investment formula that was "safe and profitable no matter what happens - good times, inflation, recession, war, or even depression."

He called it the Permanent Portfolio Fund. The idea is a variation of "efficient market" indexing, only in Harry's case, he recommended an equal 25% position in four areas (reset every year):

The idea is that precious metals will do well during inflationary times, growth stocks will do well in good times, Treasuries will do well during recession, and T-bills will do well during depression. You can't lose, right?

Testing the Formula Behind Harry Browne's Portfolio Fund

Harry put his money where his mouth is by helping to create the Permanent Portfolio Fund (PRPFX) in 1982. The fund has a mix similar to Browne's original proposal:

  • 25% precious metals (20% gold bullion, 5% silver bullion)
  • 10% Swiss franc bonds yielding less than 2%
  • 15% real estate and natural resource stocks, foreign and domestic
  • 15% aggressive growth stocks; and
  • 35% in government securities, including T-bills.

How well has the Permanent Portfolio Fund done? Not bad. See the chart below.

Chart of the Permanent Portfolio Fund

Since 1982, the fund has had an average return of 6.38%, and over the past five years, has outperformed the stock indexes. During a period of boom and bust, it's been up 20 years, down only three years. Morningstar gives it a four-star rating for its low-risk formula.

But there's a downside: The fund's long-term performance is poor compared to stocks, or even junk bonds. Its average return of 6.38% is only one percentage point higher than safe T-bills! During the roaring 1990s, the Permanent Portfolio Fund seemed "permanently" in a funk, rising only 1% a year while stocks were exploding at a 20%-30% annual rate.

I suspect that Harry Browne's Permanent Portfolio gives too much weight to hard assets, and not enough in stocks and bonds. I like the idea of a permanent portfolio, but you should adjust it to your own comfort level.

Thanks to Harry Browne, our portfolio can rest in peace.

Good trading, AEIOU,

Mark

Investment U Crib Sheet

Uranium Extends Its Red-Hot Streak

by the Investment U Research Team

When the broad market corrected in May and June, nearly every commodity took a hit. Gold, silver, platinum, palladium, copper, aluminum, nickel, zinc Each gave back a portion of their gains. Gold shed 20% in less than two months.

Uranium, however, not only defied the selloff, it continued to move higher. In fact, it has not dropped in price for 38 straight months. In that time, it's up 340%. Take a look at uranium's historical spot prices below.

Jul-03 $10.90 Aug-04 $19.25 Sep-05 $31.25
Aug-03 $11.30 Sep-04 $20.00 Oct-05 $33.25
Sep-03 $12.20 Oct-04 $20.25 Nov-05 $34.50
Oct-03 $12.75 Nov-04 $20.50 Dec-05 $36.25
Nov-03 $13.75 Dec-04 $20.70 Jan-06 $37.50
Dec-03 $14.50 Jan-05 $21.00 Feb-06 $38.50
Jan-04 $15.50 Feb-05 $21.75 Mar-06 $40.50
Feb-04 $16.50 Mar-05 $22.50 Apr-06 $41.50
Mar-04 $17.50 Apr-05 $24.00 May-06 $43.00
Apr-04 $17.60 May-05 $29.00 Jun-06 $45.50
May-04 $17.85 Jun-05 $29.00 Jul-06 $47.50
Jun-04 $18.50 Jul-05 $29.50 24-Aug-06 $48.00
Jul-04 $18.50 Aug-05 $30.20

Source: The Ux Consulting Company, LLC

The uranium run is just getting underway, too

Nuclear energy now supplies 16% of the world's total power; 23 new nuclear reactors are under construction in 10 countries; 441 power plants in 36 countries now depend on uranium to run steel plants, auto assembly lines, mass transportation and thousands of factories; and nuclear power heats, lights and cools an estimated 350 million homes and businesses worldwide, powering computers, bank transactions, telecommunications - and even a third of all the schools in Europe and the industrialized nations.

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