A Permanent Portfolio?

The investing world is full of advice. Some good. Most bad. Stocks, bonds, cash, 401(k), IRA, etc. Up is down. Left is right. And if you only follow the right sage advice you can become an instant millionaire. It’s all too complicated isn’t it? Well, the fact is that investing can be easy and profitable if you avoid the major pitfalls that stalk every investor.

When I first started investing I was drawn into the circus of the stock markets. Educated analysts, sophisticated computer models and wise money managers were advertised as the keys to success. The brochures showed retired couples walking on a sunny beach into the sunset (presumably after they just got off their yacht). Marketers trumped up the past returns of their funds and how much money you would have made if you were smart enough to have invested back then. Yet, the results just weren’t there. Sure, there were some mutual funds that did fine from time to time but it was never consistent. Money would be made, and then unmade, just as fast. 

Like many, I invested through the tech boom of the late 90′s only to see much of what I earned evaporate. Remember those days of analysts hocking the IPO of companies like furniture.com? How could that fail! When you want a sofa everyone knows the best way to get it is to order it off the web and have UPS drop it off on your doorstep, right? 

Well we all know how that turned out. In fact, for completely unrelated reasons, I was lucky in that I managed to sell out of the markets while the damage was simply horrible, but not yet terminal. Others I knew weren’t as lucky. 

When I started saving and investing again I had to find a better way. During this time I came across index fund investing and began to travel down the road of enlightenment. Index funds always gave you market returns guaranteed (good or bad). They avoided the bad decisions that fund managers made trying to get big returns. They had low costs. They were simple. They worked, and served me well for many years. 

Yet, by 2006 I had some concerns. My study of economics and history showed that there are times, many times, when things don’t go according to plan. This is the normal state of the world. It was these uncertain times that presented problems for standard stock and bond allocations – problems that could lead to serious consequences. While stocks have long stretches when they do very well, there were also long stretches where they did poorly. Bonds had similar issues. Even worse, sometimes stocks and bonds would do poorly together. So, I went out to look for something that would distribute my risks better than what stocks and bonds could alone.  

Enter Harry Browne (who passed away in 2006). I won’t go into Mr. Browne’s background now except to say he was a two time Libertarian presidential candidate and best-selling financial writer. I found his book Fail-Safe Investing by accident (I don’t even remember how I came across it actually) and he introduced me to his idea of a Permanent Portfolio (co-created with Terry Coxon in the late 1970s). His portfolio held stocks, bonds, gold and cash at all times in fixed allocations. It was unconventional, but he had a strong case for why it worked. 

I eventually came around to his way of thinking as I did more research. The basic ideas behind the Permanent Portfolio are:

1) The portfolio should provide wide and true diversification.

2) The portfolio should be simple and not require a lot of maintenance or monitoring. 

3) The portfolio should allow you to grow and protect your money no matter what happens. 

The portfolio follows what Harry Browne called his “16 Golden Rules of Financial Safety” which are the core principles of his investing philosophy that have proven to be very wise advice over the years. 

After much research and reading I came to use the Permanent Portfolio concept for my own investment needs. In future posts, I’m going to explain how you can use it too. In the meantime, I recommend purchasing his e-book Fail-Safe Investing (I have no financial affiliation with the estate of Harry Browne). It will be a quick read and could be the best money you spent in a long time if you are ready to get a handle on your investments. 

Fail-Safe Investing