Leveraging the Permanent Portfolio

The 4×25 is a solid diversified portfolio choice. It was present by Harry Browne and has performed well for decades. There are already many great resources including his books to outline the idea so I will not do that here.

The portfolio consists of stocks, bonds, cash, and gold with 25% in each. The bond portion is all long term treasuries. If we examine the duration of bonds we will see that the portfolio essentially is 50% in intermediate term bonds.

The permanent portfolio is unique that it holds so much in cash. One can think of it as a portfolio using -25% leverage. So the first way to increase possible return would be by dialing up the risk by removing the cash.

This would result in a 3×33 of long term treasuries, stocks, and gold. This would get us to a 100% position or 33 1/3% more juice than the original.

With extended duration bonds we can ramp up the leverage even further. TLT/VGLT are popular ETFS that track long term treasuries. They have a duration around 18 as of this post, while EDV (extended duration treasury) is above 24.

We can replace TLT with EDV to increase the bond power, while using less allocation to bonds. So we could increase gold and stocks to 36%, but reduce the bonds to 28% using EDV. This would effectively give us an additional 6% of exposure compared to the 3×33. or about 41% more juice than the 4×25.

*The 28% allocation to EDV would still have an effective bond duration similar to 33% of TLT.

Backtests show similar sharpe ratios. This added risk of course will amplify losses and there is no guarantee one would do better than the original 4×25.

Leave a Reply

Your email address will not be published. Required fields are marked *