Heres why you should adopt Permanent Portfolio Strategy!
Asset allocation is said to be a significant key towards the attainment of better risk-adjusted returns. Having said that, there are various portfolio strategies available like bucket strategy, balanced portfolio strategy, and so on. Permanent portfolio strategy is one of them. Let’s know more about it and how it works!
What is permanent portfolio strategy?
This portfolio strategy was developed by Harry Browne, a free-market investment analyst in the 1980s. This was designed with an intention to perform well in all the economic climates. Harry believed that the equal allocation among growth stocks, precious metals, government bonds and treasury bills (cash) would prove to be an ideal investment mix for those investors seeking safety and growth. He was of the opinion that this portfolio strategy would be profitable in all types of economic situations. This means that the growth stocks would prosper in expansionary markets, precious metals in inflationary markets, government bonds in recessionary phase and treasury bills or cash in depression. Such a portfolio strategy does not support much growth than others as growth stocks just account for 25 per cent of the portfolio. However, in case of downfall, this portfolio is the one that would restrict your losses.
How this strategy works?
When you adopt this portfolio strategy then, you need to divide your investment between equity, government debt, gold and cash with equal allocation, which means 25 per cent each. Also, re-balance it annually. Let’s take an example to understand it better. Assuming that you invest Rs 1 lakh, you would be investing Rs 25,000 each in sensex, 10-year sovereign bond, gold and cash for 20 years from the year 2000 to 2019.
With this permanent portfolio strategy approach, your investment of Rs 1 lakh in the year 2000 would further grow to become Rs 6.47 lakh in 2019. That brings the Compounded Annual Growth Rate (CAGR) of 9.79 per cent, in terms of risk while, its standard deviation stands at 0.08 and downside deviation stands at 0.01. Now, if we look at the CAGR of sensex and 10-year sovereign bond then, they stand at 10.60 per cent and 8.09 per cent, respectively. Also, the standard deviation and downside deviation of sensex stood at 0.33 and 0.17, respectively and for 10-year sovereign bond; it stood at 0.10 and 0.04, respectively. This clearly shows that permanent portfolio strategy works, reduces risk and provides better risk-adjusted returns. However, investing solely in equity has given better returns than this portfolio strategy, but with a higher risk.