Harry Browne came out this Permanent Portfolio which makes up of 25% stocks, 25% bonds, 25% gold and 25% cash. He claims that this protfolio will be able to tide you through any bull or bear run as the components are negatively correlated. From his website (harrybrowne.org), it was mentioned that from 1970 – 2003, the average yearly gain is 9.5% and the worst year (1981) only suffered 6% loss. You can also take a look at the portfolio performance in chart and tables. If you are interested, you can invest in this Permanent Portfolio Fund. I only gave a rating of 6.5 is because I was expecting more elaboration about permanent portfolio but sadly, it only covered a small topic out of an already thin book. Nonetheless, I think the book was meant to be thin and concise containing only the essence and important points about investment.
The 17 Simple Rules of Financial Safety
1) Build your wealth upon your career – Work and save money to invest. Be patient and do not think investment as a get rich quick method.
2) Don’t assume you can replace your wealth – Do not risk your savings/money. Protect your capital.
3) Recognize the difference between investing and speculating – Go long term on a balanced portfolio with a variety of investments and not risky short term speculating of specific stock selection.
4) Beware of fortune tellers – Do not be taken in when someone ‘predicts’ a particular investment will bring in lucrative profits. No one is certain about the future.
5) Don’t expect anyone to make you rich – There are 2 kinds of investment advisors: Helpers and Market Beaters. Helpers – Assist you to develop an investment portfolio based on your needs. Market beaters – Recommends speculations to help you gain a greater return. Listen to the Helpers. Phrase to remember, “The investment expert with the perfect record up to now will lose his touch as soon as you start acting on his advice.”
6) Don’t expect a Trading System to make you rich – Trading system that seems to work may not always be successful as things change. Phrase to remember, “The system that has worked perfectly up to now will go sour when you stake your money in it.
7) Invest only on a cash basis – Do not borrow money to invest. If you lose, you will be much worse off and end up in debt.
8 ) Make your own decision – Do not give full authority to anyone to make decisions on managing your money. No one will treat the money with the same care as you do.
9) Do only what you understand – Do no go into investment that you do not understand as there may be risks that you are unaware of.
10) Spread the risk – There is no one instrument that can perform all the time. Diversify across investments so that no one event can do you in
11) Build a bulletproof portfolio for protection - Main part of the book that deals with permanent portfolio. 3 requirements for a portfolio:
- Safety – Protect you in bad times and prosper in good times.
- Stability – The portfolio’s performance should be steady such that you do not worry about it even in the worst economic stituation.
- Simplicity – Easy to maintain.
Permanent Portfolio has these 3 requirements. Once set up, it is permanent likewise are the proportions of investment. There are 4 kinds of economic scenarios that investors may go through:
- Prosperity – economy growing, favors stocks
- Inflation – consumer prices rising, favors gold
- Tight money or recession – money supply insufficient, people have less cash and leads to recession. Favors cash.
- Deflation – Opposite of inflation and according to history, sometimes triggered a depression. Interest rates fall, favors bonds.
Thus the composition of the portfolio is made up of stocks, bonds, gold and cash, 25% each. After it has been setup, only an annual review to rebalance the percentage equally is needed. No matter what happened, you do not need to react to any news.
12) Speculate only with money you can lose – If you have the urge to speculate, do it with the excess money that you have after investing in your Permanent Portfolio. So that even if you lose the money, it will not destroy you and your future.
13) Keep some assets outside your own country – Geographical diversification is necessary in case anything happened to your country (e.g. war, trade sanctions etc). keep them out of reach of your government.
14) Take adavantage of Tax-Reduction Plan – Tax deferral: defer paying tax on dividends, allow the dividends to be reinvested and further acrue more value. It is proven that by deferring tax payment, you get a better return overall. Pension plans: Individual Retirement Account (IRA, in US) or Supplement Retirement Scheme (SRS, in Singapore). When you divert your income to these account, you are not subject to tax for this amount. Likewise the dividends that you receive through this account. You are taxed only when you withdraw the money in the future. As you will be in your retirement age, your income bracket is lower and hence, a lower tax on your money.
15) Ask the right questions – Do not ask these questions: Is there any risk? Is this investment safe? How much does the investment yield? Is this company a potential takeover candidate? Do technical analysis factors favor the investment now?
16) Enjoy yourself with a budget for pleasure – Spare a budget for enjoyment besides earning and saving. Wealth is of no value if you don’t enjoy it, just keep within the limit.
17) Whenever you’re in doubt, err on the side of safety – If you are unsure of an investment, give it up. An opportunity missed is better than capital loss.