The All-Weather Portfolio for Uncertain Times

A little while back I was thinking about the type of portfolio allocation that would be most appropriate for longer term investing during what could well be an uncertain future bearing in mind the significant threats posed by climate change. This report from Chatham House is one of many in recent times which highlights some of the risks we face over the coming decade and beyond. So, as I have pondered about these risks and how to position my portfolio, what came to mind was something I have known about for quite some time but until recently had dismissed as too extremely cautious... but the times they are a changin’!

What Is It?

The Harry Browne Permanent Portfolio is essentially an all-weather strategy and was devised in the 1980s by US investment analyst Browne. It is very simple and merely consists of an equal mix of equities, government bonds, gold and cash (or Treasury bills). Browne argued that this mix would be profitable in all types of economic situations. When times were good, equities would benefit; gold would prosper during periods of high inflation ( as we have seen over the past year or so); government bonds should perform better during periods of deflation and cash is king during a depression.

It is recommended that the portfolio is rebalanced every year to maintain the 25/25/25/25 mix.

Performance

Browne eventually created a fund based on his 1982 theoretical portfolio. Over the past 40 year period from 1976 to 2016, a hypothetical permanent portfolio would have given a compound annual return of 8.6% p.a. compared to a more traditional 60/40 portfolio return of 10.1%. The permanent portfolio returns come with much lower volatility. (via Investopedia)

According to Browne, the portfolio provides 3 key features - safety, stability and simplicity.

Possible Constituents

It should be fairly straight forward to set up a simple portfolio.

For equities, a low cost global index fund/ETF should fit the bill e.g. Vanguard All World ETF (VWRL). Personally I would prefer something that avoided fossil fuel companies so would select the likes of iShares MSCI World SRI (SGWS)

For government bonds maybe Vanguard Global Aggregate (VAGP)

Gold could be held via the likes of iShares Physical Gold ETF (SGLN)

For cash, I think the most obvious solution would be a higher interest cash deposit a/c with a building society.

None of us can know what’s around the corner and we live in increasingly uncertain times - climate change, Ukraine, Taiwan/China, inflation combined with high levels of government and corporate debt, the long term threats to humanity from AI chatbots - I just cannot see investment returns over the coming years from a more traditional 60/40 or 80/20 equity/bond mix being anywhere near the average of 8% or 9% we have seen over the past 20 or 30 years.

This excellent article from earlier this year on Monevator makes the case for looking further than just bonds for a truely defensive portfolio.

The benefit of the Permanent Portfolio is that it should deliver a half-decent return for investors in nearly every scenario short of the outbreak of nuclear war or some climate-related tipping point.

Conclusion

For some time I have been prevaricating on how to rebalance my portfolio to reflect the perceived risks ahead. This has resulted in a reduction in equities over the past 18 months or so and a significant increase in cash but of course holding high levels of cash over the longer term in times of high inflation is far from ideal.

There have been a few bumps in the road but on the whole, over the past 50 years, patient investors will have reaped their rewards when the markets bounced back. And after those downturns, investors have not had to wait too long for the 'inevitable' bounce-back...a year or so, maybe two years tops. But the markets don't always rebound as expected and as we are always reminded...past performance is no guide to the future. For example, during the Wall St crash of 1929, the Dow Jones index fell almost 90% from 381 in September 1929 to a low of 41 in July 1932. It was not until the end of 1954 that the index passed its previous peak of 381. The great optimism, consumer spending and economic growth of the 'Roaring 20s' became the Great Depression of the 1930s.

Just looking at my current portfolio mix, I am more or less on track to match the permanent portfolio with cash and government bonds so would just need to cut back on the equities a little more and increase gold quite a bit to create my diy all-weather portfolio. However, I will most likely be holding on to my renewable energy investment trusts which account for around 25% of my portfolio so maybe I will add them to the mix as an additional 5th asset class.

Could this is the ultimate set-and-forget portfolio?

Further reading - The Permanent Portfolio by Craig Rowland & J.M. Lawson

If you have any thoughts on the ideal defensive portfolio mix for an uncertain future feel free to leave a comment below.