The general guideline for this portfolio is the following:
25% Stock Index (e.g. S&P 500, NASDAQ, Dow 30, etc.)
25% Gold (no substitutes)
25% Long-term US treasuries (10+ year)
25% Short-term US treasuries, Money Market Funds, or Cash.
These 4 assets, at least in the long term, exhibit low correlations with each other. Despite that the only asset with a positive real return over the long term (S&P500), it seemed to have performed quite well in the past 40 years (but of course, past performance isn’t indicitive of future performance.)
The historical performance of such a portfolio has been one of very low volatility and slow but steady growth of money. Yet, it seems to have stayed well ahead of inflation if rebalanced once or a few times each year to the default 25% weights. The average yearly return since around 1971 to now has been roughly equal to the average S&P 500 return but with very little volatility and only 2 down years (1981 and 1994, NOT 2008.)
What usually happens is that whenever a single asset crashes, another asset will rally strongly to make up for the losses. Stocks depend on a strong economy to perform well. Gold depends on high inflation. Long term treasures depend on deflationary forces. Short-term treasuries depend on an economic slowdown.
What I’m curious is how this portfolio manages to consistently produce positive returns every year, espeically in the face of supposedly “efficient” markets. Over the long run, it also stays ahead of inflation. It seems the gains from any asset will be offset by the losses in one or another asset but it doesn’t seem to be the case in practice. I personally took the plunge and invested a portion of my own money in such an allocation about 1/2 a year ago and made a modest return but I’m sketical about the future prospects (hopefully after completing the CFA, I may have a better understanding.)
Unverified returns found here: http://crawlingroad.com/blog/2008/12/22/permanent-portfolio-historical-returns/
Performance (Jan 2011 to present): http://imageshack.us/photo/my-images/189/permr.jpg/
