The power of gold and rebalancing in a portfolio

The Permanent Portfolio is an investment strategy developed by Harry Browne in the 1970s that advocates splitting your money equally across four assets – cash, gold, equities and bonds – and rebalancing back to that split whenever they diverge too much. Mainstream financial planners would probably balk at a 5% allocation to gold, let alone 25%, but how does such a strategy perform in reality and could you get your financial planner to consider it?

For Australian investors hard numbers on the Permanent Portfolio strategy can be found by looking at the Cor Capital Fund, run by Davin Hood. His latest Quarterly Report is out and his fund’s performance, as summarised in the chart below, I think justifies giving the strategy some consideration.

It is important to note that the blue line is the theoretical performance of the strategy before the fund started and the while line is its actual performance. What is clear from this chart is the low volatility of the fund’s performance – yes, you don’t get big gains (as the Australian Equities line shows in 2006 & 2007) but nor do you get the big losses (as happened in 2008). For those looking for a consistent and safe investment plan for the long run, this chart shows that the strategy has merit.

Part of the performance comes from not just the choice of asset classes to allocate to but the disciplined rebalancing between those asset classes. Unless you are willing to hold all of these asset classes, and sell those which are up and buy those which are low, the strategy probably will not work as indicated.

Unfortunately, if you are looking for someone else to be that disciplined investor for you, Cor Capital is currently limited to sophisticated/wholesale investors, which means, for example, an initial investment of $500,000. For US investors there is a fund which follows the concept but it tends to be overweight on inflation fighting assets and they also hold 12% in gold coin, which in my opinion adds unnecessary costs for a fund of this size which could hold cheaper 400oz bars.

If you are interested in investigating this strategy further I would recommend The Permanent Portfolio book by Craig Rowland and also Craig’s blog and associated discussion forum.

To be clear, I am not saying you should invest according to this strategy, just bringing it to your attention and of course you should discuss any investment strategy with your financial advisor – at a minimum it will force them to justify why their current advice is better than Cor Capital’s performance.

Even if you are not comfortable with the 25% allocations and have your own allocations between asset classes, the idea of forced rebalancings back to your target allocations is a good discipline to follow in my opinion. Looking through our Depository client account I see a many who have never sold their gold or silver, or bought additional, since they first purchased many years ago. It is hard to believe that their initial percentage allocation to precious metals has remained the same for their entire portfolio over that time.