Posts tagged simplicity

Safe. Stable. Simple. These are the words Harry Browne used to describe his investment philosophy in his October 10, 2004 radio show. He pretty much nails it.

October 10, 2004 Investing Radio Show

Safe

A portfolio that is safe is one that is invested conservatively but also with strong diversification in case things don’t go according to plan. People work hard for their life savings. Why gamble those savings on some get-rich-quick investing scheme that can cost a big chunk of it if things go wrong? A portfolio that is safe does not mean tucking the money under the mattress. What it means is that investors buy things only that they fully understand for a very specific reason. Risks are taken where they should be and avoided where they add nothing to the bottom line. A portfolio invested this way can hold assets that are “risky” but own them in a way where the risks wash out over the long run and produce actually safer and more consistent returns through diversification. Safety also means following some basic rules of investing that will make it much harder to fall into many common investment traps.

Stable

A portfolio that is stable allows an investor to not panic when the markets are in serious turmoil. Stability doesn’t mean investors won’t ever take a loss. What it means is that the losses will be dampened so that the pain is tolerable and not driving the investor to waking up in a cold sweat. These situations, if they occur, can cause investors to make bad decisions about their money usually at the worst possible time. Stability in a portfolio means that investors can focus on their work and savings which is really driving most portfolio returns (especially early on).

A portfolio that is stable also means it is giving out reasonable market returns. A consistent return over the years can grow a portfolio greatly due to compounding. There is no need to reach for the brass ring for double-digit growth because that always means higher risks. Higher risks means less stability and a potential for doing much worse in the markets than what an investor is expecting. On the other hand, a more consistent growth can prove incredibly powerful if just left alone and a stable portfolio means investors will leave it alone. Since long term investment success is related to the ability to stay the course and not try to time the markets, stability in the portfolio is an important ingredient because it helps keep emotions in check no matter what the markets are doing.

Simple

I love simplicity, especially for investing. Complicated investing strategies and products can conceal many risky moving parts underneath. Many times these risks will not be discovered until it’s too late. Not just this, but often financial advisors will sell complicated strategies because it makes sure you keep them around to manage it all for a hefty fee. Investing does not need to be, nor should it be, complicated. There is a strong relationship between complicated investment approaches, lower performance and higher risks – All things you don’t want. Portfolios that are simple have lower management fees, lower taxes, lower chances of hidden risks, and can be managed without the use of a financial advisor with very little time commitment on the part of the investor. All of these attributes ensure a greater chance of long-term investment success.

There you have it. Safe. Stable. Simple. The three words that define the Permanent Portfolio. If you’ve never heard this radio show, you’ll enjoy it. Harry Browne discusses these and other important topics that are the foundation for growing and protecting wealth.