StockWatch

An Antidote to Volatility

By Mark Hulbert,
Editor of the Hulbert Financial Digest, a service of MarketWatch.com

Would you be interested in an all-weather portfolio that, despite hardly ever changing its composition, performs creditably in almost all market environments?

I thought so -- especially given the markets’ extraordinary volatility over the last month.

Well, consider the so-called "Permanent Portfolio" that Harry Browne recommended to his clients in the late 1970s. At the time, of course, Browne was editor of an investment newsletter called Harry Browne’s Special Reports. Several decades later, he became the Libertarian Party’s candidate for President. He died in 2006.

Several of the investment books that Browne wrote during the 1970s and 1980s became best-sellers. One, Why the Best-Laid Investment Plans Usually Go Wrong, published in 1987, was devoted, in large part, to introducing investors to the virtues of a diversified portfolio whose composition would stay constant year in and year out -- permanent, in other words, except for annual rebalancing.

Though Browne’s idea is not new, the markets of late have led to a renewed interest on the part of many investors. First, it was the worst bear market since the Great Depression, being quickly followed by one of the strongest 12-month rallies in history. And, then came the "Flash Crash" in which nearly a thousand Dow points vanished in a period of minutes.

Investors are beginning to wonder if the markets are rigged against them.

Browne’s idea was to invest in a basket of asset classes, each one of which has a low correlation with the others. As a result, when any one of the asset classes is performing poorly, there is a good chance that the others will at least be holding their own -- if not actually appreciating in value.

The resultant portfolio should provide a decent -- though not spectacular -- return with relatively low volatility along the way.

The basket that Browne recommended was equally divided among stocks, long-term Treasury bonds, gold and Treasury bills. In his 1987 book, he reported that, over the prior 17 years, back to 1970, this portfolio had produced a 12.0 percent annualized return. This was better than a buy-and-hold in either stocks or bonds -- though behind gold.

As Browne wrote, "The gain is remarkable when you consider that the portfolio required virtually no attention by its owner. No attempt was made to outguess the future; no speculative decisions were made or needed."

Browne’s approach in the decades since then has continued to perform as advertised. Consider the Permanent Portfolio fund (PRPFX), which was created in large part out of Browne’s work. Its current target allocations are 25 percent in gold and silver, 35 percent in U.S. Treasuries, 15 percent in aggressive growth stocks, 15 percent in real estate and natural resource stocks and 10 percent in Swiss-franc denominated assets.

This fund, over the last 15 years (through April 30), has produced an 8.2 percent annualized return, which is remarkable, given that stocks, gold and bonds did not, individually, do as well: The Wilshire 5000 index gained 7.9 percent over the same period, the Shearson Lehman Treasury Index produced a 6.3 percent annualized return and gold bullion rose at a 7.7 percent annualized pace.

In fact, the Permanent Portfolio fund has done better over the last 15 years than 74 percent of the investment advisers I track.

You might, therefore, want to remember Browne’s investment approach as you suffer through yet more of the markets’ frightening volatility. His permanent portfolio serves as a reminder that we don’t have to constantly bet on the markets’ short-term gyrations, nor suffer from huge losses along the way, in order to produce decent long-term returns.