Craig Rowland had a lot of money to invest after he sold his computer-security company to Cisco Systems Inc. in 2002. An unsatisfactory period of picking stocks followed. Then he read many investment articles and books. What resonated was the Permanent Portfolio set out by Harry Browne in the 1981 book Inflation Proofing Your Investments.
Mr. Rowland got to know this low maintenance, all-weather strategy so well that he co-authored a book of his own: The Permanent Portfolio: Harry Browne’s Long-Term Investment Strategy, published by John Wiley & Sons in 2012. After his book was published, Mr. Rowland founded another computer-security firm, Sandfly Security, where he currently serves as chief executive officer.
He recently took some time out from his busy schedule to talk about his portfolio.
What is the Permanent Portfolio?
The basic idea is to grow, or at least preserve, your capital regardless of the state of the economy. This is accomplished by having significant exposure to assets that do well in different business environments: stocks for steady growth and low inflation, long-term government bonds for deflation, cash for recession and gold for when things appear to be going off the rails – such as with high and accelerating inflation.
The stock and bond components are represented by index funds, cash is held in government treasuries and gold is stored as bullion in secure locations. The implementation gives equal weights of 25 per cent to each of the four assets of stocks, bonds, cash and gold – then rebalances whenever market forces push one below 15 per cent or above 35 per cent.
Wouldn’t many investors these days want to have a higher proportion in stocks?
The problem with unequal weights is the assumption that you know what’s going to happen in the future. A high allocation to stocks is popular these days because studies of historical data show that stocks earn the best long-term returns – but past results do not guarantee future results even for the long run.
Backtesting of market data only shows a tendency, not a certainty. Look at Japan: owing to a lengthy deflation, their stock market is still way below the levels it reached three decades ago. And since the First World War, capital held in many stock markets has been lost because of wars, revolutions and economic calamities.
Even if stocks put up the best long-run returns over the next few decades, they come with a lot of volatility. If you can hang on for the ride, then go for it. But each bear market shows that many people panic and sell at the bottom.
How has the Permanent Portfolio performed?
As noted in my book, it registered 9.5-per-cent compounded annual growth over the 40 years from 1972 to 2012. The average annual return has edged down since then, as I’ve noticed on the Permanent Portfolio that I’ve had for the past 10 years.
But the Permanent Portfolio is not just about performance. Also important is minimizing the big drawdowns that can cause investors a lot of anxiety. When the 2008 financial crisis was unfolding, for example, it declined by less than 3 per cent.
How much time does it take to manage?
It takes almost no time. I maybe check it once a quarter and that’s mainly for tax-planning reasons. I’m too busy with my new startup. Besides, personal experience and research shows over and over again that the more you trade your portfolio, the less money you’ll make long term.
Why no corporate or intermediate bonds in the portfolio?
The default risk of corporate bonds would be at odds with the Permanent Portfolio’s priority to preserve capital. As for bonds, interest-rate and other risks have been diversified for the most part by the barbell approach of long-term bonds and treasury notes. Moreover, I like having a large slug of cash because its stability is a comfort when other parts of the portfolio are gyrating, and it can be a source of funds to cover unexpected expenses and emergencies.
What about those who say a low allocation is appropriate for bonds at this time because yields are so low and their prices are about to decline?
They have been saying that for years now but bond prices are still trending upward because deflationary forces have been more persistent than imagined. Eventually deflationary forces may ebb but we don’t know when. And when they do, the baton will be passed to other components in the Permanent Portfolio.
This interview has been edited and condensed