Harry Browne advised that  you should invest the money you can’t afford to lose in the Permanent Portfolio strategy. This strategy, as discussed in his books and on this site, provides stable returns with low volatility year after year with enough diversification to protect against large losses of capital. It’s boring, yet profitable. 

But what if you think you can beat the market? What if you want the excitement of stock trading? Suppose you have some money you can afford to lose? What to do? Simple: You want a Variable Portfolio.

The Variable Portfolio is for speculation and is done with money you can afford to lose. This is money that if you were to wake up tomorrow to find it gone it wouldn’t affect your retirement plans, children’s college savings, home down payment, etc. It’s money that you’re willing to gamble on losing or striking it big.

What Investments to Hold in the Variable Portfolio

The Variable Portfolio can hold any investment you feel like. Speculative penny stocks, hot sector bets, art work, your cousin’s Amway franchise, whatever. Use any market timing scheme you think sounds good. Follow the advice you see on the TV or read in a magazine. Go to Vegas with it. It doesn’t matter, but there are a couple basic rules you need to follow.

The Rules of the Variable Portfolio

The Variable Portfolio has two basic rules:

  • It must be with money you can afford to lose.
  • You aren’t allowed to replenish the Variable Portfolio with money from the Permanent Portfolio if you lose it. 

I also adapted a third rule expressed in the 16 Golden Rules of Financial Safety  just to clarify things:

  • You can’t use margin or take other risks that could cause you to lose more money than you put into the Variable Portfolio investment. 

I add this third rule because, to me, this would include some strategies like shorting securities which can cost you more money than your initial position if you’re wrong. In my opinion, you should not have short positions in the Variable Portfolio nor should you include investments that can cost your more money than the initial sum if you’re wrong (which some business investments can do, so tread cautiously). 

The Variable Portfolio can be any percent of your entire investment portfolio you feel comfortable losing. In other words, the Variable Portfolio could be 10% and the Permanent Portfolio could be 90% of your savings. Or it could be 50/50. Or it  could be zero percent because you don’t have money you can afford to lose or just don’t feel like speculating. 

A Variable Portfolio for “Modifying” the Permanent Portfolio

A common question about the Permanent Portfolio is about “modifying” the asset allocation from the 4 x 25% split to something else. While I think the allocation works fine as is, if you feel like modifying the Permanent Portfolio you should count it as part of your Variable Portfolio. Do you think you should hold more than 25% in stocks? Fine. That’s part of your Variable Portfolio. You want to hold more bonds or some REITs? Fine. That too is part of your Variable Portfolio. Same for gold and cash. These changes also fall under the rules listed above.

The Variable Portfolio Helps Keep Your Hands off the Permanent Portfolio

The Variable Portfolio is a critical component to the Permanent Portfolio strategy because it allows you to wager money (if you choose) in a way that can’t compromise your core savings if you are wrong. It’s like having some “Mad Money” in  your budget for spending on whatever you like without blowing your expense account. 

You can use a Variable Portfolio or not. It’s not required, but is there if you feel like doing a little gambling if you can afford to do so.

Can I Beat the Market?

The markets are hard to beat as many investors have found out to their dismay (and loss). Before you get too gung-ho on the Variable Portfolio, I leave you with this quote from Harry Browne in his book Fail-Safe Investing summarizing the odds of beating the market:

Even investment professionals don’t generally beat the markets. The Hulbert Financial Digest tracks the results achieved by the published model portfolios of hundreds of investment newsletters — written by people who spend 8-12 hours a day watching and studying the investment markets. 

Each year only a handful of newsletters outperforms the Dow Jones Industrial Average. And the handful changes from year to year, so there’s no way to know which advisor will have a “hot hand” in the coming year. 

Professionals are consumed with the job of tracking investments, and they have easy access to far more information than you do. If they can’t consistently beat the investment markets, how can you? The answer is: you probably can’t. 

If you want to speculate and try to beat the markets, only do it with money you can afford to lose in the Variable Portfolio. The Permanent Portfolio is for your money that is precious to you, not for speculating. 

 


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