Is There a Perfect Portfolio Allocation?

Economically speaking, at any point in time, the world is typically in one of four scenarios: prosperity, inflation, recession or deflation. For most folks, their investments tend to do well in times of prosperity, but not so well in other conditions.

For example, stocks perform very well during prosperous times. On the other hand, stock prices tend to fall during deflation and recession — which is why cash is the preferred holding during those times.

Cash’s weak link is inflation, which results in lost purchasing power for those who hold it.

Bonds not only perform reasonably well during periods of prosperity — but also during recessions and deflationary periods. Bonds aren’t so hot, though, when inflation is running rampant.

Gold shines during times of turmoil; it doesn’t matter whether economic conditions are inflationary and deflationary — unlike cash, which loses value during times of inflation, or becomes scarce when the economy is deflating. Its weak link is that it badly underperforms other assets during prosperous times.

So … wouldn’t it be great if we could create a portfolio that was able to perform well even during times of inflation, recession and deflation?

It turns out that many decades ago, a man named Harry Browne did just that. He called his creation ‘The Permanent Portfolio’ and it was allocated like this:

• 25% in stocks
• 25% in bonds
• 25% in cash
• 25% in gold

And it stays that way. Forever.

Browne’s idea turned out to be genius. From January 1970 until December 1998, the economy toggled between periods of prosperity, inflation, recession and deflation. Meanwhile, Browne’s bullet-proof portfolio averaged an annual returns of 10% each and every year. There were just three down years during that time — the other 26 years saw positive returns.

But that was then. Today is a very different world — which is why investors who subscribe to Harry Browne’s Permanent Portfolio will not be as fortunate as their fellow investors who went that route in the 20th Century.

The trouble with the Permanent Portfolio is that fully half of it is allocated in cash and bonds. That was fine when nominal interest rates were averaging 5% — but not so much when they’re hugging the zero bound. It also doesn’t help that the bond market is in a 36-year bull market. After all, with many bond yields in negative territory now, how much longer can the bond bull run?

As for stocks, bargains are still out there for those who are willing to do their research, but the market is clearly in bubble territory by almost any measure — and that makes it harder to find good deals with each passing day.

When one considers that the Ponzi scheme better known as the dollar-based International Monetary System is in its death throes, gold is the only asset class remaining from Browne’s Permanent Portfolio that has a positive outlook as long as the current system remains in place.

It’s no coincidence that, unlike the other three asset classes, gold is the only real asset — and you can bet that’s exactly where everyone is going to try to run and hide when all of the over-issued paper “wealth” flooding the world is finally returns to its true intrinsic value: zero.

Unfortunately, at that point it will be too late because there won’t be any gold (or silver) available. In fact, when the stampede begins, the only people enjoying real gains will be the ones who had the foresight to protect themselves ahead of time.

That’s when everyone else will finally understand why gold (and silver) have always been considered “precious” metals.

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