A permanent portfolio is the combination of financial assets present in an investment portfolio for long periods of time. Thus, constant investment in chosen securities or sectors is maintained.
In the field of investment, one possibility within portfolio management is the maintenance of a permanent portfolio, that is, of positions in securities on a constant basis.
In other words, an investor or his manager decides to adapt the investment strategy to holding a series of financial instruments or stock market sectors on a constant basis.
This portfolio model was developed by the American economist, politician and popularizer Harry Browne in the second half of the 20th century.
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This is a way to achieve a certain level of risk reduction, since this investment profile facilitates the reduction of the existing volatility in the market.
In the financial day-to-day it is possible to find portfolios that maintain a percentage defined as permanent and that, at the same time, make sporadic investments in other securities with the idea of taking advantage of market opportunities without incurring significant risks.
Main features of a permanent portfolio
In addition to the concept explained above, this type of investment strategy has some other distinctive aspects to take into account:
- Time frame: From an accounting point of view, we speak of permanent portfolios when they hold positions for more than twelve months (one calendar year).
- Diversification yes or no: that a portfolio is permanent does not mean that it is not diversified. An investor can maintain long-term investments in very diverse sectors.
- Security condition: Maintaining permanent positions facilitates knowledge of the titles and securities held, avoiding incurring in unnecessary risks or unpredictable sectors.
- Stable profitability: the maintenance of certain values and the reduction of speculative actions facilitates constant yields although of small and medium value.
- Little seasonality: This type of portfolio configuration largely ignores the ups and downs of economic cycles, establishing a constant investment criterion.
- Proportionality: As indicated, the composition of a portfolio can be designed according to the profile of the investor. For example, there are 80/20 configurations, with 60% being permanent investment and 20% sporadic.
Nature of a permanent portfolio
The composition of this type of investment portfolio is generally related to certain groups of securities.
In this sense, it is common to find in the same financial instruments such as public debt, treasury bills or fixed income securities.
Browne’s model established a proportional portfolio distribution following the above:
- Fourth part of actions. Investment of around 25% of the portfolio in equity securities, preferably of a US nature or market.
- Fourth part of fixed income securities. The American recommended having representation of public debt securities in deflationary situations.
- Prayed. Although it also conceives the possession of other precious metals in the portfolio, gold is understood as a safe value in cases of volatility or other financial drifts.
- Fourth part of currency. This last percentage would represent the money in the portfolio, expressed through investment in different currencies.
On the other hand, this type of portfolio configuration is more common in new investor profiles or those who do not have exclusive dedication to this sector. For this reason, it is more common in family economies or small investment funds.