What is the best retirement portfolio, if there is such a thing? In an article I published a week ago, I talked about one of the two best investing portfolios out there, the Ivy Portfolio. In this article, I want to detail the one that Jerry and I are using to finance our super-early retirement.
What is the Permanent Portfolio?
This investing portfolio was created by an economist named Harry Brown back in the 1970s when the market wasn’t doing so hot. Those of you who are around my age and older will remember the high gasoline prices due to the oil crisis. Brown wanted to come up with a portfolio that would be protected from the volatility of the stock market.
He succeeded. Since its inception, the Permanent Portfolio (PP) has had an average return of a bit over nine percent. That is only three percent under the mutual fund average return…with a lot less stress involved than when you’re only in mutual funds.
In the crash of 2008, as I mentioned in the Ivy article, regular mutual fund investors lost over 30% of their fund values, while Ivy investors lost less than one percent. How did PP investors fare? They did almost as well as the Ivy, losing only around five percent of the portfolio value. Of course, they and Ivy investors regained their losses much more quickly than mutual fund investors.
Components of the Permanent Portfolio
The PP is much simpler than the Ivy. It consists of four components.
- 25% of assets in a total stock market fund
- 25% in U.S. long-term treasury bonds
- 25% in gold
- 25% in cash in the form of a money market account
The portfolio will perform better if you invest in physical gold, but it still gives good results if you are lazy like we are 😉 and only invest in gold funds.
How does the PP protect you from the volatility of the stock market? One reason is that a total stock market fund is the most diverse kind of mutual fund. It encompasses all industries, not just one or three, so that when one segment of the economy is hit it does not lose its value like a mutual fund that targets that one segment.
The bigger reason is that three-fourths of the portfolio is not related to the stock market. The cash portion does not lose its value (unless the value of the dollar drops significantly, but in such a case probably no portfolio will be “safe”), the treasury bonds will also make a little, and gold tends to go up when the stock market goes down. Not all the time, but most of the time.
The reverse is also true: when gold is down, the stock market is usually up. Because the PP is balanced, it is protected on all sides from economic ups and downs.
Rebalancing the Permanent Portfolio
Of course, as the market shifts throughout the year, one part of the PP increases in value while another decreases. For this reason, a PP investor needs to rebalance the portfolio occasionally, usually once a year. The rule of thumb is that if the value of one portion of the portfolio gets above 35% the total value, or below 15% of the total value, you rebalance.
One reason we chose the PP over the Ivy was that we did not want to mess around rebalancing as often as once a month.
Our experience with the PP
We are living on a nest egg that is under a million dollars. That’s as specific as I’m going to get – except to say that I’m not trying to deceive you and really mean that we have $999,999.99. I mean, under $1M.
In case any number in the six digits overwhelms you and you’re thinking you can never get there, our number represents about twenty years of smart, consistent investing; not having debt payments beyond a car and mortgage (and the car payment didn’t go on forever); and living beneath our means. If my husband had known about the PP from the get-go, and I hadn’t been afraid of investing when I started my career, we would have been financially independent ten years earlier than we were.
I am trying to make the point that building a $500K + nest egg in 10-20 years is not as impossible as it sounds. For most people, it’s a matter of being willing not to live the extravagant American lifestyle.
Anyway. Now you have some idea of our nest egg value. Our average monthly expenses, not counting house-building expenses, have been around $1800 since we moved here two years ago. We have spent about $60,000 to build and finish out our earth-sheltered house, including the cost of excavation and burial. The surgery for my broken arm back in the fall of 2014 ended up totaling $25,000 (feel free to say, “ouch!”).
Yet, the value of our nest egg is still about the same as it was when we moved here a little over two years ago.
And since we’re done with house-building expenses (and hopefully broken bones for a good long while), we expect that, even as we continue to live on somewhere around $23,000 a year, the value of our portfolio will actually start to increase.
Yes, our portfolio value did go down a few months ago when both the stock market and gold went down. But it’s back up now. If we had been counting solely on mutual funds, the value of our investments would still not have recovered.
I know that for a fact, because I have retirement money that is only in mutual funds and it has been consistently losing value during the past few months. The funds have not yet recovered, as our PP has.
One more quick note: Should you choose to put your investments into the Permanent Portfolio, go to T. Rowe Price or another such online financial service with which you can open a brokerage account. Then, use that account to put the money into the four different parts yourself. Do not get lazy and just throw all your money into the fund that has been named “Permanent Portfolio.” It is not performing up to Harry Brown’s par! (Even J and I are not THAT lazy!)
Time to take action
If you’re frustrated with where you are in life right now, I’d guess that a big part of it has to do with finances. So start taking the action you need to improve your financial situation. A good start is to buy my book, Hatching The Nest Egg, which is a step-by-step guide on how to get your finances in order so that you can have a lot more freedom in your life. It also tells you more about Jerry’s and my personal financial journeys, if you like to be snoopy that way. 😉