Permanent Portfolio (US ETF) Backtest: The Surprising Effect of Diversification

[Quant Investing] Permanent Portfolio Backtest with US ETFs

The common proverb, "Don't put all your eggs in one basket," emphasizes the importance of **asset allocation**. In this post, we'll directly implement the **Permanent Portfolio** strategy, devised by investment sage Harry Browne, using major US market ETFs and analyze its performance in depth. We'll examine whether this strategy, which aims for stable returns regardless of market conditions, can produce better results than 'all-in' strategies on individual assets, focusing on key metrics like return (CAGR) and maximum drawdown (MDD).

Permanent Portfolio (US ETFs) Backtest: The Surprising Effect of Diversification

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1. Permanent Portfolio Strategy Overview

The Permanent Portfolio strategy divides the market into four situations: prosperity, recession, inflation, and deflation. Its core principle is to invest assets equally to ensure the entire portfolio maintains stable performance, no matter the situation. The key is to not try to predict a specific market condition, but to invest 25% in each asset designed to perform well in one of the four scenarios.

• Prosperity: Stocks (25%) - Can expect high returns during economic growth.
• Recession: Long-term Bonds (25%) - Defends against recession with price appreciation during interest rate declines.
• Inflation: Gold (25%) - Acts as a hedge against currency devaluation.
• Deflation: Cash-like Assets (25%) - Protects against losses as the value of cash increases.

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2. US ETF Backtest Conditions and Data

This backtest was conducted using **10 years of data from August 1, 2015, to August 1, 2025**. The initial investment was set at 10 million KRW, and the performance of each portfolio was compared and analyzed.

ETFs Used in the Backtest

• Stocks (25%): S&P 500 Index-tracking ETF (SPY)
• Long-term Bonds (25%): US 20+ Year Treasury Bond ETF (TLT)
• Gold (25%): Gold Price-tracking ETF (GLD)
• Cash-like Assets (25%): Short-term Treasury Bond ETF (SHY)

The data was sourced from Yahoo Finance's historical data, and for ease of calculation, taxes and transaction costs were assumed to be '0'.

▶ Reference: How to Find Yahoo Finance Historical Data
▶ Reference: How to Download Yahoo Finance Data

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3. Backtest Results and Analysis

The table below summarizes the 10-year backtest results. It provides a clear comparison of the performance of the Permanent Portfolio and each single-asset 'all-in' strategy, using metrics such as total return, compound annual growth rate (CAGR), and maximum drawdown (MDD).

▲ 10-Year Return Comparison Graph by Asset

▲ 10-Year Return Graph of the Permanent Portfolio

Category	Permanent Portfolio	SPY (100% Stocks)	TLT (100% Long-term Bonds)	GLD (100% Gold)	SHY (100% Cash)
Final Amount (KRW)	21,374,219	35,741,597	9,111,154	29,102,640	11,542,965
Total Return	113.74%	257.42%	-8.89%	191.03%	15.43%
CAGR	7.89%	13.58%	-0.93%	11.27%	1.45%
MDD	-19.41%	-33.72%	-48.35%	-22.00%	-5.71%

The first thing that stands out from the backtest results is the overwhelming final amount and return of the portfolio that went **all-in on SPY**. It recorded a high total return of 257.42% (CAGR 13.58%) over 10 years. However, this came at the cost of having to endure a significant risk (MDD), with the asset value dropping by as much as **-33.72%** from its peak during the investment period.

On the other hand, **TLT** showed poor performance, recording a negative return, while **GLD** recorded the second-highest return after SPY, effectively fulfilling its role as an inflation hedge asset.

What's noteworthy here is the result of the **Permanent Portfolio**. While it recorded a lower return than SPY, its MDD was a very stable **-19.41%**. This signifies a much lower risk than single assets like SPY, TLT, and GLD. By combining assets that move differently, this asset allocation strategy offsets the risk (volatility) of individual assets and dramatically increases the overall stability of the portfolio—this is the power of asset allocation.

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4. Conclusion and Insights

This backtest clearly demonstrates that the Permanent Portfolio strategy effectively mitigates market volatility and drawdown shocks, instead of chasing high returns. In particular, the significantly lower **maximum drawdown (MDD)** compared to single-asset investing is a crucial factor that allows investors to feel psychologically secure and sustain long-term investments.

In conclusion, for investors who want steady and stable asset growth rather than the stress of predicting market conditions or timing trades every year, the Permanent Portfolio can be a very wise choice.

Key Summary:
The **Permanent Portfolio**, which overcomes market unpredictability and delivers stable performance, is a powerful risk management tool that maximizes psychological security by slightly compromising on returns.

The content of this blog is for reference in investment decisions only, and investment decisions should be made based on individual judgment and responsibility. Under no circumstances can the information in this blog be used as evidence of legal liability for investment outcomes.