Many people obsess about which stock to buy and when to sell it, but research shows that asset allocation is the largest determinant of portfolio performance. Back around 1980 Harry Browne proposed what he called the Permanent Portfolio. He advocated that you could set it up in 30 minutes and have lifelong financial security. He published a book called Fail-Safe Investing in 2001. Most research has shown that the permanent portfolio has held up pretty well.
The Permanent Portfolio
What does the permanent portfolio look like? It is deviously simple:
- 25% Total US Stock Market
- 25% Long-Term Bonds
- 25% Cash
- 25% Gold
I remember the first time I heard about the permanent portfolio, it sounded so alluring. I was fascinated by the idea, but once you really look at that portfolio and think about it, virtually no one is going to own that portfolio. I might be fine with 25% in stocks, but 25% in bonds? Have you seen what bonds are yielding today? And 25% in cash? Do you realize what banks are paying in interest? Finally, most gold bugs that I hear on podcasts recommend holding putting some portion of your portfolio in gold, say 1%, or 2%, maybe 5%. I have never really heard of anyone saying to put 25% of your portfolio in gold. Maybe if gold fell back to $400 per ounce, but not at these prices.
It seem Harry Browne choose those four assets because their behaviors correspond to the four possible economic regimes:
- Stocks – economic expansion
- Bonds – deflation
- Cash – economic recession
- Gold – inflation
These all make sense, except gold did not perform in 2021 and so far in 2022 as one would have expected given the inflation numbers that have been reported, but gold is well known for not doing what investors except it to do, and certainly not in the time frame they expect. Gold seems to confound everyone.
The Permanent Portfolio Redux
I have spent some time thinking about my portfolio allocation in relation to the permanent portfolio and this is what I am thinking:
- 20% Total US Stock Market
Long-Term BondsDigital Assets
GoldPAX Gold token (PAXG)
- 20% Real Estate
I am proposing two main changes to the permanent portfolio. First, add an additional category for real estate and second, replace some of the holdings with crypto versions. Let me explain the rational for each category. Since I added a new category, I am going to address then in reverse order stating with the addition.
You can easily get exposure to real estate by buying a REIT, but owning a home is one of the best ways the average person can build wealth. This is not financial advice, but if you are renting, you really should consider buying a home instead. The long term average appreciation of real estate is around 6% and mortgage rates are under 3%. So you can borrow money at 3% and buy something that goes up in value at around 6%, and while it is going up in value, you also get to live there. You will have additional costs such as insurance, maintenance, and improvements, but those will likely be far less than what you would spend on rent. As a bonus, you are repaying the mortgage with money that is depreciating over time so the real cost is far less than the nominal (current dollar) cost.
I don’t consider myself a gold bug, but I do own some gold and I believe that gold should have a place in everyone’s portfolio. 20%? Probably not that high, but again, I kept the equal balance for simplicity sake. The easiest way to by gold is with an ETF, but the gold bugs out there will tell you that paper gold is not the same as physical gold and is likely over-hypothecated and should the day come when you really need the gold, you won’t be able to get your hands on it.
The main disadvantage of gold is that it doesn’t pay a dividend. Thus it does not compound over time, which is a major disadvantage when you expect to hold a asset for a long time (like your entire life). Plus, if you want to hold physical gold, there are insurance and storage costs, so the yield is actually negative. You can create a DCF model for a negative yielding asset, but you won’t like the outcome!
PAXG is a digital token form of gold issued by PAXOS. Each PAXG token is backed by an ounce of allocated (physical) gold. Plus, you can hold PAXG on Celsius and earn 5.5% annual yield. So with PAXG you are allocated to physical gold, you get a nice yield so your holdings compound over time, and you don’t pay any insurance or storage costs. This makes holding gold much more appealing.
Instead of cash, I hold stablecoins, which are digital tokens pegged to the USD (and other fiat currencies). Examples of stablecoins are USD Coin (USDC), Geimini UDS (GUSD), and Tether (USDT). You can earn yield on your stablecoins. For example you can earn around 8.5% from Gemini, BlockFi and Celsius, as well as many others I didn’t mention. Terra has an algo stablecoin called UST that you can earning almost 20% yield using the Anchor protocol. There are other DeFi ways to earning even more, many of which I have posted about before.
Of course there are some risks involved and stablecoins are not FDIC insured, but these are the choices we are forced to make thanks to financial repression. Banks don’t pay 6% on savings accounts like they used to.
I have replaced long-term bonds with digital assets. This is by far the most controversial change to the permanent portfolio. Digital asset could not be more different from long-term bonds, but in my opinion government bonds are un-investable at the current yields. Also, I don’t believe that yields can go up very much given how high the debt level is, so I don’t have much interest in bonds.
Digital assets are the future. Some day all the stocks you buy will be tokenized, your house may even be tokenized and your proof of ownership will be recorded on th blockchain, so you might as well start buying some digital assets now. Again, you can make this as complicated or as easy as you would like. You can buy Bitcoin and call it a day. Or you can buy Bitcoin and Ethereum and that will probably be just fine. I like to dabble in smaller tokens as well, but the choice is yours.
This one is probably the easiest and least controversial. Most people have come to realize that stocks are one of the best ways to achieve long-term capital appreciation. Harry Browne used the total US stock market, but you could just as easily use the S&P 500 and choose some inexpensive ETF. If you are more aggressive you could use the Nasdaq composite. Or you could diversify and add some emerging market exposure. The idea is simple, but you can, and probably should, add some complexity to it by being more diversified.
The weighting of 20% is probably too low, but keeping with the theme of being super simple I have kept it that way. Normally I would probably suggest 40% stocks by reducing the other categories slightly, but that would take away from the simplicity. Besides, by all traditional measures, the US stock market is overvalued at this time, so it may be safer to keep it at 20%.
I don’t think the Permanent Portfolio Redux is perfect, but I do think it is a good start and a good framework about thinking about your own portfolio. Feel free to move the allocation around to suite your risk tolerance. This is not financial advice and my allocation is not exactly in line with these weights, but I do use it as a frame of reference.
These posts are for informational and educational purposes only and should not be construed as investment advice or a recommendation to buy or sell any tokens. In this series I am just outlining what I am doing to learn more about the crypto space. Just because I am comfortable doing this, that does not necessarily mean these activities are suitable for you. I have not received any compensation from any of the products or services mentioned herein. Please do your own research and stay skeptical. These markets are not normal.