A permanent portfolio is a method of investing money in which an investor is nearly guaranteed to make money. The permanent portfolio centers on distributing money evenly across four different investment groups: stocks, bonds, cash and gold. The basic idea is that while some of the areas are risky, others are very stable. Overall, this dichotomy levels the entire portfolio out to an even amount of risk. This then allows for a small, but constant, increase in the overall value of the portfolio.
The concept of a permanent portfolio is very sound. An investor forgoes large spikes of gain and loss by diversifying his portfolio into four different areas. Each of these areas receives one quarter of the initial investment. When money is added to the portfolio, it is split evenly between the four groups.
The only time money is moved from one area to another is in the case of over or under performing. There are two methods of thought in this case. Some investors feel the areas that are making money should have money put into them, preferably from an area that is under performing. Other investors feel that money should be put into the under performing areas with the understanding that when the market stabilizes, it will all even back out. Even with all that, some investors feel that the four areas should simply be left alone.
There are four areas in a common permanent portfolio. The first one, stocks, is generally seen as one of the more risky. The majority of the stock money typically should be put into a broad market index fund. These multi-company investment groupings protect investors from the highs and lows of investing by dealing primarily with proven money makers. The rest of the money should likely go to a higher-yield and higher-risk stock series.
The second and third areas in a permanent portfolio are bonds and cash. Generally, an investor can make a very stable low-yield investment in government bonds, such as Treasury Bonds and Treasury Bills in the US. While they have a relatively low yield, they have guaranteed output and set time frames. If the investor wants to be a bit more risky, corporate bonds and foreign monetary investments can increase both the yield and risk in these two segments.
The final area that a basic permanent portfolio investment recommends is gold. Gold is a nearly constant money maker. There have been several times in history where the price of gold has dropped, sometimes significantly, but it has always returned and improved. Investing money in gold averages to a low payout with occasional spikes up and down.