Permanent portfolio 2.0 and 2.x: going beyond Harry Browne

In our previous article, we examined Harry Browne's permanent portfolio, a long-term investment strategy built on diversification and resilience across economic cycles. The approach rests on four pillars: equities for growth, long-term bonds against deflation, gold as an inflation hedge, and cash to cushion recessions.

Our backtests confirmed that the permanent portfolio (PP) excels at risk management, even if it can underperform more aggressive portfolios during strong bull markets. In this article, we look at how to improve its performance while keeping volatility as low as possible — in other words, how to maximise the Sharpe ratio.

Replacing cash with Swiss real estate

Our starting point is the best PP identified in the previous backtests: SPY, GLD, CSBGC0 and FXF. One asset is a particular drag on returns: cash. Let's replace it with an instrument that has stood out in other backtests: Swiss real estate, via the SRFCHA ETF.

From a CAGR standpoint, this is already an improvement, though we remain well behind the S&P 500. The analysis period was particularly favourable for equities. Thanks to this result, the PP with SRFCHA achieves a better Sharpe ratio than the best PP tested so far — and even better than SPY, which was no foregone conclusion given the latter's excellent CAGR.

Volatility is slightly higher than with FXF, but at 6.33% it remains very reasonable. The maximum drawdown (MDD) is also marginally less favourable than the original PP, yet still well below SPY's. Another notable benefit: the number of negative years drops from nearly one in three (with FXF) to barely more than one in five with SRFCHA.

That said, it is still not quite enough: at 6.65% annual CAGR, we remain below the 7% threshold (in real terms) required to achieve financial independence (see my book).

Adding the ETF triad to surpass the classic PP

To clear this hurdle, we still have a powerful weapon in our arsenal: the ETF triad, made up of QQQ, VDC and XLV. It replaces SPY, and the equity allocation rises from 50% to 60%, creating a hybrid strategy between the classic PP and a 60/40 portfolio.

Four portfolios are put head to head, with GLD, TLT, CSBGC0 and SRFCHA as the defensive components:

• PP 2.0 — triad + GLD + TLT: the original PP 2.0 already presented on this blog.
• PP 2.0 Swiss variant — triad + GLD + CSBGC0: Swiss bonds instead of US bonds.
• PP 2.x — triad + GLD + SRFCHA: the PP 2.x, currently my best passive portfolio.
• PP 6 ETFs — triad + GLD + CSBGC0 + SRFCHA: an extended version combining Swiss bonds and Swiss real estate.

Comparing the four improved permanent portfolios

Key findings:

• All four improved PPs remain below SPY in terms of CAGR. The analysis period was exceptionally favourable for equities. Over the longer term, this advantage should fade: SPY's CAGR from 1995 to 2024 stands at 9.49% in CHF, a performance that is difficult to sustain indefinitely. Unfortunately, equally long historical data is not available for CSBGC0 and SRFCHA.
• The CAGR of the improved PPs is roughly twice that of the original PP.
• All Sharpe ratios of the improved PPs exceed both SPY and the original PP.
• Volatility and MDDs of the improved PPs are slightly above the original PP, but remain well below SPY's. The Sharpe ratio confirms that this additional risk is more than offset by the extra return.
• The PP 2.0 and its CSBGC0 variant show remarkable resilience: only 7% of years are negative. The PP 2.x and the 6-ETF portfolio are marginally less consistent, but still well ahead of a pure equity portfolio.

Why the PP 2.x stands out as the best choice

The four improved PPs are closely matched. A few elements help to differentiate them:

• The YLR gap (7% vs 14%) between PP 2.0 and PP 2.x comes down to just one extra negative year for the latter — and at -0.68%, the difference is too slim to justify giving up a higher CAGR.
• Despite a slightly higher MDD than the other three variants, the PP 2.x maintains very reasonable volatility, better even than the PP 2.0.
• The Sharpe ratio, which weighs return against risk, ranks the PP 2.x and the 6-ETF variant at the top.
• The return gap between these two portfolios, combined with a slightly favourable Sharpe ratio, ultimately tilts the balance in favour of the PP 2.x.

The PP 2.x in brief

The PP 2.x meets four core criteria:

• Simple: five ETFs (QQQ, VDC, XLV, GLD, SRFCHA) in equal weights.
• Effective: better Sharpe ratio than SPY and all previous PP versions.
• Accessible: designed for beginners, investors with modest capital, and those who want to spend minimal time managing their portfolio.
• Low-maintenance: rebalancing kept to the strict minimum.

With just 5 ETFs — QQQ, VDC, XLV, GLD and SRFCHA in equal allocations — this portfolio ticks all those boxes. Investors seeking broader diversification through exposure to Swiss bonds can consider the 6-ETF variant. Those wanting to go further still will want to look at the Determinant Portfolio.

It is worth noting that the PP 2.x is an evolving strategy, subject to change as research progresses. Bonds or other asset classes may well be incorporated in future iterations.

Frequently asked questions

What is the permanent portfolio 2.x?

The PP 2.x is an improved, evolving version of Harry Browne's permanent portfolio. It consists of five ETFs in equal weights — QQQ, VDC, XLV, GLD and SRFCHA — combining a sectoral equity triad, gold and listed Swiss real estate. It targets a better risk-adjusted return than the classic PP, while remaining straightforward to manage.

What is the difference between the PP 2.0 and the PP 2.x?

The PP 2.0 uses the ETF triad (QQQ, VDC, XLV) combined with gold (GLD) and long-term bonds (TLT). The PP 2.x replaces the bonds with listed Swiss real estate (SRFCHA), which improves both the CAGR and the Sharpe ratio. According to the backtests, the PP 2.x delivers a better return per unit of risk, at the cost of marginally higher volatility and a slightly higher rate of negative years.

Why replace cash with Swiss real estate in the permanent portfolio?

Cash — represented here by FXF (Swiss franc) — is the asset that weighs most heavily on the classic PP's performance. Listed Swiss real estate (SRFCHA) offers better long-term returns while retaining defensive characteristics: low volatility, moderate correlation to equity markets and solid crisis resistance. The backtests show that it improves the portfolio's overall Sharpe ratio without meaningfully worsening the MDD.

Is the PP 2.x suitable for beginner investors?

Yes — and that is one of its key strengths. With only 5 ETFs held in equal weights, the PP 2.x requires no complex active decisions. Buy the five components and rebalance periodically. It is an ideal strategy for beginners, investors with limited capital, or anyone wanting to spend minimal time managing their portfolio while working towards financial independence.

What return can be expected from the PP 2.x over the long term?

Over the period analysed, the PP 2.x delivered a CAGR above 6.65%, with a Sharpe ratio better than that of the S&P 500. This falls short of a 100% equity portfolio during an exceptionally favourable market cycle, but over a longer and more volatile horizon, that gap should narrow. The primary goal is not to maximise raw return, but to achieve the best possible risk-adjusted return — which is precisely what the PP 2.x delivers according to the available data.

Sources and data

• iShares Swiss Domestic Government Bond ETF (CSBGC0) — iShares by BlackRock
• SPDR Gold Shares (GLD) — State Street Global Advisors
• Invesco QQQ Trust (QQQ) — Invesco
• Vanguard Consumer Staples ETF (VDC) — Vanguard
• Health Care Select Sector SPDR Fund (XLV) — State Street Global Advisors
• Backtest and historical performance data: FactSet