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Is the 'Permanent Portfolio' Permanently Broken?

NEW YORK (TheStreet) -- During the depths of the bear market that followed the financial crisis, some investors desperately sought alternatives to the typical equity portfolio. 

One solution, which dates back to the 1980s, is called the "permanent portfolio." In its purest form, this means allocating equal 25% portions to equities (via a broad-based index fund), gold, long-dated bonds and cash. The portfolio is rebalanced once a year.

The basic premise is that one of the four asset classes will always perform well.

The Permanent Portfolio (PRPFX) is a traditional mutual fund based on the permanent portfolio that started trading 30 years ago. More recently the Global X Permanent ETF (PERM) brought the concept to the market in an ETF wrapper.

Both funds are allowed to deviate slightly from the fixed allocation. PRPFX is an actively managed fund. The most recent information from Morningstar shows a bit more than 30% in equities while and the fixed-income exposure currently is invested in shorter maturities as opposed to long-dated bonds.

PERM stays pretty true to the original idea. It holds long-term bonds and uses short-term Treasuries as a proxy for cash, but it includes silver in the precious metals allocation. It also has a globally diversified portfolio of individual stocks that include REITs, instead of a simple index fund.

PERM has only been trading for two years. That isn't very long, of course, but PRPFX has a very long track record, and the long-term performance has been outstanding. For the last 10 years it has slightly outperformed the S&P 500, but with much lower volatility, and for 20 years it has lagged behind the S&P 500. Because of its very low volatility, however, it didn't go down from 2000-2002.

Contributing to PRPFX's success has been the long bull market for bonds and the 10-year rally in gold that ended in 2011.

Things have not worked out well for the permanent portfolio in 2013 regardless of how it was implemented. According to Google Finance, PRPFX is down 1.8% this year while PERM is down 7.5%. PERM's relative underperformance is probably a result of it's holdings of REITs, silver and longer-dated bonds.

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