Gyroscopic Investing

Hi

If you’re familiar with the Permanent Portfolio strategy proposed by Harry Browne, you know the concept is elegant in its simplicity:

The economy moves through 4 macro scenarios:
Expansion
Recession
Inflation
Deflation

So, you diversify your assets equally:
25% Stocks (for growth)
🏛 25% Bonds (for recession)
25% Gold (for inflation)
25% Cash (for deflation)

The logic is sound — but here’s the real question:

Have these economic environments really happened 25% of the time each?

Not exactly. Historical data for the U.S. (since 1900) and Europe (mainly post-1950) tells a different story:

⸻

Historical Occurrence of Each Scenario

United States (NBER, CPI, FRED data):
• Expansion (GDP growth, low inflation): ~65–70% of years
• Recession (GDP contraction): ~15%
• High Inflation (CPI > 5%): ~10–12%
• Deflation (CPI < 0%): ~3–5%

Europe (post-WWII OECD/ECB data):
• Expansion: ~60–65%
• Recession: ~20%
• Inflation: ~10–15%
• Deflation: Very rare — mostly post-2008 in some eurozone countries

⸻

So… Is the 25/25/25/25 allocation realistic?

From a hedging strategy, it works — because you’re always protected.
But from a probability-weighted perspective, expansion dominates, and deflation is a rare outlier.

Still, Harry Browne’s genius was in building a “sleep-well-at-night” portfolio that doesn’t require prediction — just preparation.

⸻

Why This Still Matters

“Most of the time, economies grow. But when they don’t, you better be ready.”

⸻

Question for Permanent Portfolio followers:

We know the classic split is 25% each — but based on modern macro data, what percentages do you actually use today?

Do you keep it pure, or do you tweak based on inflation risks, global instability, or regional factors?

Let’s hear your version.

Have you read Deep Risk, by William Bernstein? It’s about your question, including the PP.

I Shrugged wrote: ↑Wed Jul 09, 2025 7:27 pm Have you read Deep Risk, by William Bernstein? It’s about your question, including the PP.

Hi I Shrugged,

Thanks for the recommendation! I haven’t read Deep Risk by William Bernstein yet.

Could you please share the main conclusions or insights from the book related to the Permanent Portfolio and the historical occurrence of each scenario?

I’d really appreciate a brief summary!

Thanks in advance!

Best regards

pretty much that the pp flaw is it bets equal amounts of dollars on anything but equal amounts of risk playing out .

deflation being the last likely and prosperity being the most likely

markets are up 2/3’s of the time typically.

for more than the last two decades we have had gold beating bonds …

equity and gold has beaten equity and bonds over just about every time frame.

it seems what’s been good for bonds has been better for gold .

i will dabble in long term bonds as a trading vehicle because they have been fairly consistent at cycling up a day and then down but i dont see them in today’s world which is quite inflationary and getting worse

mathjak107 wrote: ↑Thu Jul 10, 2025 3:02 am pretty much that the pp flaw is it bets equal amounts of dollars on anything but equal amounts of risk playing out .

deflation being the last likely and prosperity being the most likely

markets are up 2/3’s of the time typically.

for more than the last two decades we have had gold beating bonds …

equity and gold has beaten equity and bonds over just about every time frame.

it seems what’s been good for bonds has been better for gold .

i will dabble in long term bonds as a trading vehicle because they have been fairly consistent at cycling up a day and then down but i dont see them in today’s world which is quite inflationary and getting worse

### **7-Point Summary of *Deep Risk* – William Bernstein**

1. **Deep Risk vs. Shallow Risk**

* *Shallow risk* is temporary volatility — price fluctuations that recover over time.
* *Deep risk* refers to **permanent loss of capital** caused by events like war, hyperinflation, confiscation, or deflationary collapse.

2. **Four Types of Deep Risk**
Bernstein identifies four main categories of deep risk:

* **Inflation** (erodes real purchasing power)
* **Deflation** (debt defaults and falling asset prices)
* **Confiscation** (government seizure or heavy taxation)
* **Devastation** (war, geopolitical collapse)

3. **Asset Classes Behave Differently Under Each Risk**

* Stocks typically survive inflation and deflation over the long term.
* Gold and real estate hedge against inflation.
* Foreign diversification and hard assets protect against confiscation and devastation.

4. **Global Diversification is Essential**

* Staying invested solely in your home country increases exposure to confiscation and devastation.
* Investing across multiple jurisdictions (especially stable democracies) spreads out deep risk.

5. **Bonds and Cash Offer Limited Deep Risk Protection**

* While useful for shallow risk, fixed-income assets are vulnerable to inflation and currency collapse.
* Long-term inflation can destroy bond returns permanently.

6. **The Investor's Time Horizon Shapes Risk Exposure**

* Over short periods, volatility matters more (shallow risk).
* Over decades, **deep risk becomes the main threat**, especially to retirement and intergenerational wealth.

7. **Strategies to Mitigate Deep Risk**

* Own productive assets (equities, global businesses)
* Hold some inflation hedges (e.g., gold, TIPS)
* Diversify internationally
* Stay educated and avoid over-concentration
* Don’t rely on past performance — build resilience

It may well be true that for the limited historical period where we have data, the 4 scenarios did not occur an equal amount of time. However, the idea of the allocation is not to model the frequency of occurrence over a historical period in hopes that it will work in the future.

Instead it is to say "we honestly have no idea what will happen and can't be bothered to figure it out, so we place equal amounts in these 4 largely uncorrelated investments."

In his book "Why the best-laid investment plans usually go wrong & how you can find safety and profit in an uncertain world," he explores the (nearly) infinite number of ways we think that we can predict what will happen with investments, why we are usually wrong, and thus the 4x25% split for your "keep it safe money".

except the portfolio is very rate sensitive at the end of the day .

all assets today also get hit at the same time when risk is , as they say OFF .

Today if someone wants reliable seesaw action between assets there are ways like inverse funds , long short funds and managed. futures .

in harry’s time these never existed for the small investor.

i think we learned many assets thought not to be , are more correlated than un correlated to each other or they just don’t respond the way they are expected.

gold does not respond to inflation well either while the dollar is strong . gold has its own agenda and is dollar driven and rate driven more than anything else.

lots of money that likely would have gone into gold is in crypto as well

mathjak107 wrote: ↑Fri Jul 11, 2025 5:55 pm except the portfolio is very rate sensitive at the end of the day .

all assets today also get hit at the same time when risk is , as they say OFF .

Today if someone wants reliable seesaw action between assets there are ways like inverse funds , long short funds and managed. futures .

in harry’s time these never existed for the small investor.

i think we learned many assets thought not to be , are more correlated than un correlated to each other or they just don’t respond the way they are expected.

gold does not respond to inflation well either while the dollar is strong . gold has its own agenda and is dollar driven and rate driven more than anything else.

lots of money that likely would have gone into gold is in crypto as well

The choice of isolationism by Americans is another driver of crypto (TAA - there are alternatives ... instead of TINA). As Europe, Japan, Australia and maybe even Canada shift eastward (TAA), dump dollars and American investments then a PP under TAA might be something like 7.5/25/67.5 bitcoin/gold/stable coins. Crypto being more of a supplement rather than a replacement for gold - and that is more akin to a leveraged stock holding

https://www.portfoliovisualizer.com/bac ... DJu017IBoE


I suspect that bitcoin might be replaced with another form of 'stock' like crypto asset, one outside of the US, perhaps as agreed/formed by a EU/China coalition additionally supported by the UK, Australia, Japan, Canada.

One thing for sure is that the US is clearly reflecting that it can no longer be trusted or relied upon by other 'West' nations/allies and TAA is a high priority, so likely to arise sooner rather than later (reciprocating US tariffs is pretty much a no-go, instead redirection of trade/partnerships is the main focus - that is already evident in how broadly US trade with others has declined -6% whereas trade between others is up +12% since Trump became President). The EU may soon announce inter-working with the BRICS as may the UK define CommonWealth integration with that collective body. https://watcher.guru/news/de-dollarizat ... -us-dollar

A factor with 'alternatives' is that individually they should at least have break-even (0% real) or positive reward expectancy, inverse funds are inclined to have negative broader expectancy.

frugal wrote: ↑Wed Jul 09, 2025 3:34 pm Have these economic environments really happened 25% of the time each?

Not exactly. Historical data for the U.S. (since 1900) and Europe (mainly post-1950) tells a different story:

⸻

Historical Occurrence of Each Scenario

United States (NBER, CPI, FRED data):
• Expansion (GDP growth, low inflation): ~65–70% of years
• Recession (GDP contraction): ~15%
• High Inflation (CPI > 5%): ~10–12%
• Deflation (CPI < 0%): ~3–5%
⸻

That's a long time period for the United States data. Often a good thing, but in this case maybe less useful pre-1971 when US dollar was convertible to gold at fixed price. Earliest Portfolio Visualizer data that includes all 4 assets is 1978 (due to Long Term Treasurys). Therefore 1978 through 2024 provides 47 full years of each asset's performance. Instead of looking at NBER/CPI/FRED data to determine the dominant economic theme for each year, we might instead just look at the winning asset for each year. Stocks are still the winner, but at 47% instead of ~65-70%. Gold comes in second at 23%, bonds in third at 19%, and cash in last at 11%. Here are the nominal returns for each asset by year (plus inflation column for reference):

frugal wrote: ↑Wed Jul 09, 2025 3:34 pm So… Is the 25/25/25/25 allocation realistic?

From a hedging strategy, it works — because you’re always protected.
But from a probability-weighted perspective, expansion dominates, and deflation is a rare outlier.

"Deflation is a rare outlier", yet in the US long bonds were the winner almost 1 year out of 5.

frugal wrote: ↑Wed Jul 09, 2025 3:34 pm We know the classic split is 25% each — but based on modern macro data, what percentages do you actually use today?

Do you keep it pure, or do you tweak based on inflation risks, global instability, or regional factors?

Let’s hear your version.

Keeping it pure. How do I know what the future will bring with regard to inflation, global instability, regional factors, etc? How do I know which asset will be the winner this year?

coasting wrote: ↑Mon Aug 18, 2025 3:12 pm

frugal wrote: ↑Wed Jul 09, 2025 3:34 pm Have these economic environments really happened 25% of the time each?

Not exactly. Historical data for the U.S. (since 1900) and Europe (mainly post-1950) tells a different story:

⸻

Historical Occurrence of Each Scenario

United States (NBER, CPI, FRED data):
• Expansion (GDP growth, low inflation): ~65–70% of years
• Recession (GDP contraction): ~15%
• High Inflation (CPI > 5%): ~10–12%
• Deflation (CPI < 0%): ~3–5%
⸻

That's a long time period for the United States data. Often a good thing, but in this case maybe less useful pre-1971 when US dollar was convertible to gold at fixed price. Earliest Portfolio Visualizer data that includes all 4 assets is 1978 (due to Long Term Treasurys). Therefore 1978 through 2024 provides 47 full years of each asset's performance. Instead of looking at NBER/CPI/FRED data to determine the dominant economic theme for each year, we might instead just look at the winning asset for each year. Stocks are still the winner, but at 47% instead of ~65-70%. Gold comes in second at 23%, bonds in third at 19%, and cash in last at 11%.
PP-AssetWinnerCounts.PNG
Here are the nominal returns for each asset by year (plus inflation column for reference):
PP-AssetReturnsByYear.PNG

frugal wrote: ↑Wed Jul 09, 2025 3:34 pm So… Is the 25/25/25/25 allocation realistic?

From a hedging strategy, it works — because you’re always protected.
But from a probability-weighted perspective, expansion dominates, and deflation is a rare outlier.

"Deflation is a rare outlier", yet in the US long bonds were the winner almost 1 year out of 5.

frugal wrote: ↑Wed Jul 09, 2025 3:34 pm We know the classic split is 25% each — but based on modern macro data, what percentages do you actually use today?

Do you keep it pure, or do you tweak based on inflation risks, global instability, or regional factors?

Let’s hear your version.

Keeping it pure. How do I know what the future will bring with regard to inflation, global instability, regional factors, etc? How do I know which asset will be the winner this year?

Coasting

Thank you for the fantastic study

You are right !

Maybe we can reduce a little bit the cash portion?

15% ? How can we calculate it better ?

All the best