Harry Browne's Permanent Portfolio & Rental Real Estate
Rental Property Investor · Springdale, AR · Member since 2019 · 28 posts · 7 votes
I'm a huge proponent of asset allocation and diversification, and I was just wondering if anyone has ever read about Harry Browne's Permanent Portfolio which splits investments equally between stocks, cash, long-term treasuries, and gold. Each one of those asset classes is tied to a phase of the economy (prosperity, recession, deflation, and inflation), and the idea behind the portfolio is that at least one of those categories will be performing well at any given time regardless of what's happening in the economy. I specifically bring this up because it is one of the most conservative portfolios out there, and I think it could be used as a holding place to park your money while you're saving up for your next real estate deal? Does anyone else think like this? I definitely don't want to concentrate my bets in just one of those asset classes while I'm saving up for my next deal because it's possible that my account would be down significantly around the same time that real estate prices look attractive. Does anyone have any other thoughts on how to invest your money while saving up?
@Patrick Davis, I would agree with you that mortgaged, cash flowing real estate would do well during high inflation. In fact, the risk adjusted return (return per unit of risk, typically measured in standard deviation) would probably be significantly higher than that of holding gold. However, my main thought process was where do you invest your money while you save up for your next real estate deal? For me, taking a somewhat neutral position by holding all of the major asset classes (stocks, government bonds, cash, and gold) held in equal weightings has been working well for me. I'm just curious what others are doing.
Good points and thanks for your response. Glad your neutral position is working! What's your opinion (in general) of substituting and/or adding real estate to the gold quarter of the pie in Harry Browne's allocation?
tl:dr Ya, I'm definitely looking at more things that perform well when inflation is higher, but have been basically holding a potential downpayment in cash/bonds. But, it's also why I was searching Bigger Pockets for Harry Browne, too :)
(Imho - this is all more of a tangent) In general, in terms of saving up for real estate downpayments, that's a tough call and I couldn't speak as an expert or tell others what to do, but ya I think (imho) I would ideally want to try to hold some less volatile but somewhat inflation-protected as well as cash if I was looking at a mortgage in 1-2 years.
Also, it may depend on projected personal income during that period, too, I would imagine.
But I will say "drawdowns" depend on the length of holding for the down payment, in other words what's the time horizon?
One rule of thumb (this might change in higher inflationary periods) - if someone plans on spending money within 12 months then hold in mostly cash, if 12-24 months then more bonds, if longer, like, 5+ years then add more equities, etc. For example (https://steadyoptions.com/arti...) This rule of thumb usually doesn't include precious metals, etc.
Basically the shorter time period, the more someone would want to increase liquidity, minimize volatility, and not lose real money.
In terms of higher inflation, then yes the risk/return/reward ratios for asset classes may arguably change - I'd be curious what others think? This is a tough call (and why I was looking into Harry Browne, etc)
Harry Browne's asset allocation was designed (I assume) for longer-term holding and lower volatility, so it might be good to run simulations on previous periods using similar time horizons. Depending on the time horizon, one might consider also include REITs, TIPS, crowdfunding stuff especially since that might correlate with changing real estate prices.
This is a pretty cool tool to compare how historically (in the US) different asset allocations worked (https://www.portfoliovisualize...). One could set the clock to the early 70s, set the buzzer for their time horizon, and try out some different possibilities.
That being said, there's plenty of arguments how the 2020s and 1970s are different eras in many regards. In any case, best wishes!
P.S. As an aside, the asset allocation that seems to have performed best for the US is the modern portfolio theory - it's what the managers for Yale/Harvard/etc have done. It basically incorporates real estate, privately-held equities and other stuff. (https://www.advisorperspective...)
I was just thinking about this also. How would I try to force rental property into the four sectors of the Permanent Portfolio designed for Prosperity/Recession/Deflation/Inflation. I see several possibilities...
Stocks/Prosperity - Positive
Stocks are doing well. Low interest rates. The economy is doing well. People buy houses and the price goes up.
Bonds/Recession - Negative
Stocks slump. The economy is shakey. Lending tightens. House price goes down.
Gold/Inflation - Positive
Inflation is too high. Everything gets more expensive. Houses price goes up... but unaffordable? Rents go up also
Cash/Depression - Negative
Stocks crash. Everyone loses their job. Great depression. No money. Sell assets. Property value drops
Over all I would say rentals are mostly in the Stocks/Prosperity section but with some overlap into Gold Inflation hedge. A low, fixed rate loan is more valuable as interest rates rise and therefore inverse to bonds that lose value as interest rates rise. Bonds/Recession seems most opposite. Cash/Deflation all bets are off I think but not good as assets are sold in desperation.
Overall though the permanent Portfolio is very resilient against draw downs while providing better than cash only returns. I think it is a solid choice when saving for future property.
@Phil Mcnally - I would agree with you that rental property would fall mostly into the prosperity bucket with some overlap in the gold bucket since a fixed rate mortgage is a great inflation hedge. I probably wouldn't completely forego holding gold just because real estate may do very badly during a hyper inflationary environment where fiat currency becomes worthless. While this is a remote possibility, it could happen and it could become confusing as to how to collect rent. It's highly unlikely that your tenants will happen to own gold or silver coins, foreign currency, or cryptocurrency that they can pay you with. And with no point of reference like the US dollar, it would be hard to know how many silver coins, or what fraction of a bitcoin to charge someone.
@Patrick Davis - You make some good points about the timeframe of when you'd want to make a purchase. I would agree that if you're planning your next purchase within the next year or so, you could just hold mostly cash. But in a scenario where you are neutral about the timing of your next purchase, I think you could own something like the Permanent Portfolio.
I'm glad to know there are others out there thinking about asset allocation outside of real estate because it can sometimes seem like an unpopular topic here on Bigger Pockets. :)