The Permanent Portfolio Proves to Be a Valid Strategy

NEW YORK (TheStreet) -- At the depths of the financial crisis, many investors wanted to forsake equity markets forever in favor of alternatives that would hopefully deliver smoother returns and minimize the fear that was so pervasive back then.

One strategy that got a lot of attention, in both traditional media and the blogosphere, was the so-called permanent portfolio -- a concept attributed to Harry Browne in the 1980s whereby investors put equal 25% portions into equities via a broad domestic index fund, gold, long-dated U.S. treasury bonds and cash. The big idea, as Browne saw it, is that there will always be at least one of the four that's doing well, which should smooth out the more volatile times like what the markets endured in 2008.

The Permanent Portfolio Fund ( PRPFX) is an actively managed fund that stays reasonably true to the Browne concept and has a 30-year track record. Morningstar reports that as of July 31, PRPFX had 13.5% in cash, 32% in equities, 27% in bonds and 26% in precious metals -- most of which was gold. Very little of the bond allocation is actually in long-dated bonds, which is a byproduct of the active management and could spare the fund some performance drag, if interest rates continue to rise.

Over the last 10 years, PRPFX has performed exactly as one could have hoped for, rising 130%, which is more than the S&P 500's 97%, and turned in those gains with much less volatility. As the S&P 500 bottomed out in March 2009 with a 56% decline from its October 2007 peak, PRPFX only went down 23% from its peak.

Perhaps wanting to capitalize on PRPFX's success, the Global X Permanent ETF ( PERM) brought the Browne concept to the market in the exchange-traded fund wrapper a year-and-a-half ago. PERM allocates 25% to long-dated U.S. treasury bonds, while the precious metals allocation includes a little bit of silver and uses short-dated U.S. treasuries as a proxy for cash, but it seeks out a more diversified approach with the equity exposure. Eight percent of the fund is in U.S. large-cap stocks, a similar 8% in materials stocks with smaller weightings to real estate equities, U.S. small caps, foreign stocks and natural-resource companies.

In 2013, gold is down 18%; bonds as measured by the iShares Barclays 20+ Year Treasury Bond ETF ( TLT), are down 14%; cash is, of course, flat while the S&P 500 is up 17%. With two of the permanent portfolio asset classes down double digits for the year, it is not a surprise that PRPFX is down 2.5% for the year and PERM is down 6.5%.

PERM's larger decline is at least partially attributable to having to hold more of the bond allocation in longer-dated bonds in order to adhere to the fund's underlying index, and to lesser extent, the small exposures to materials and resources-related equities that have also struggled this year.

Often we talk about the extent to which no single investment strategy can be the best for all markets and that long-term investing, as opposed to short-term trading, must involve patience. The 10-year result for PRPFX is outstanding. While there is no way to know whether it can turn in a repeat performance over the next 10 years, it has proven itself to be a valid strategy which means there will be periods where it does do well but there will also be future years similar to 2013 where it struggles.

This is where patience becomes crucial to long-term investment success. As an investor, you know that there will be some years where your preferred strategy will work very well and some in which it will not. If you understand that ahead of time, then you will be less likely to get frustrated and throw in the towel. Frustration and impatience are impediments to long-term investment success.

More from ETFs

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Simple Investing Strategies Stand the Test of Time

Simple Investing Strategies Stand the Test of Time

This Technology ETF Could Be Signaling a Looming Tech Stock Rout

This Technology ETF Could Be Signaling a Looming Tech Stock Rout

The End of Retailpocolypse? This Retail ETF Is Soaring

The End of Retailpocolypse? This Retail ETF Is Soaring