This ‘Permanent Portfolio’ will change the way you invest.
Fail-Safe Investing: Lifelong Financial Security in 30 Minutes
There are many books that will claim to teach you how to ‘beat the market.’ Fail-Self Investing is not that book. If you’re familiar with Harry Browne’s work, you’ll know that his overall philosophy for life and money tends towards the safe side.
That’s not to say that you can’t still build wealth while being somewhat conservative with your choices. With so much uncertainty in the market in recent years, it pays to adopt Browne’s low-maintenance approach to long-term investing. If you’re looking for realistic, sensible advice, then the ideas in this book are for you.
Here are 7 takeaways from Fail-Safe Investing: Lifelong Financial Security in 30 Minutes.
Takeaway 1 – No one can predict the future.
To state the obvious, no one can predict the future. We can make educated guesses based on the best available information, but the basic truth is that the future is uncertain and anything can change in a moment.
Whatever confidence or knowledge we have in the present may not apply tomorrow or next year. By embracing this uncertainty, we can recognize that people who claim to have insights others don’t are either deluding themselves or trying to delude us. Beware of financial advisors or fund managers who claim to eliminate risk and uncertainty. That’s impossible.
Safety comes from preparation for the future, not from trying to get rid of the risks altogether. It’s the right preparation that gets you better results and prevents you from making costly mistakes.
Takeaway 2 – You are your #1 asset
Don’t underestimate yourself and your career as a source of wealth. For one, it’s likely that the money you make from your career will be your investing capital. That means that for a start, it’s wise to develop your skills and career, and not just spend all your efforts in investing in the market.
Investing in yourself will always provide the highest returns. Use books or training courses to improve your skills, knowledge, and capabilities — this will pay off down the line and for the rest of your life, whether in your career or in the businesses you build.
Takeaway 3 – Speculation is not the same as investment
Speculation is acting on a predicted outcome at some point in the future. When investors buy stock hoping they will beat the market, they're speculating. When you play roulette at a casino, you’re speculating.
Investment involves purchasing assets you believe will appreciate in value. Again, no one can predict the future. Ideally you’d have done your research before purchasing, but even then, there is always the risk that that it won’t work out. Good investments would always have factored in that risk.
Markets adjust constantly to external events to establish prices for goods and services. So in general, it’s safe to expect a similar return that the market gets.
‘Foolproof’ speculative systems are a scam
Avoid buying into schemes claiming to grow your money through speculation. If a ‘foolproof’ system existed, the seller would have no need to sell it to you because they would already be able to make as much money as they want!
Your long-term investment portfolio should, first and foremost, be structured in a way to minimize your risk of loss. Never speculate with funds you need to pay your day-to-day expenses or handle emergencies.
Speculate only with money you can afford to lose.
Speculating can be fun. But if you do choose to speculate, do so with the knowledge that you’re playing with luck. You can gain massively, and also lose massively. So never speculate with money you can’t afford to lose (for your bills and expenses, etc.).
Takeaway 4 – Make your own financial choices
At some point, you might have chosen to buy the services of brokers, fund managers, advisors, and so on – but at the end of the day, whether or not they make any money for you, they are making money themselves. Remember, no one cares as much about your money as you do. Many have lost their fortunes just because they handed someone else the authority to handle their money.
Brokers, fund managers, and advisors will speculate with your money while you give them a percentage of your savings and pay unnecessary transaction fees every year. Ultimately, Browne’s advice is to ditch them. If you want to make good investment returns, you have to make every dollar work for you — and you won’t be able to do that if you are paying someone else to manage your money.
Takeaway 5 – Put your money into a “Permanent Portfolio"
We know that no one can predict the future, and that it’s best if we make our own decisions about money – but how? Browne suggests building up an investment portfolio that is resilient. Your “Permanent Portfolio” doesn’t assume that the stock market will always be going up. But it’s meant to ride out the worst economic conditions over the long term.
There are three requirements for a Permanent Portfolio:
- Safety: You should feel that your wealth is protected. Whether in times of prosperity, inflation, recession, or even deflation, you would be confident in your portfolio. Again, safety comes from making sure that you are ready for uncertainty.
- Stability: Your portfolio performance should not fluctuate wildly when something happens in the economy, so that you won’t have to pay constant attention to it.
- Simplicity: Invest in what you understand and keep it simple to manage so that you’ll be able to leave it alone for a long time and won’t be tempted to change it.
Takeaway 6 – Structure your Permanent Portfolio according to the four major economic conditions
At any given time, the economy goes through different phases, and they can be broken down into four types:
Prosperity is a period in which the economy is growing, interest rates are declining, businesses are doing well, and unemployment is falling.
Recession is a period in which money is tighter, businesses are slumping, customers have less cash to spend, and unemployment is rising.
Inflation is a period in which the purchasing power of a currency decreases due to increased supply. In general, consumer prices are rising.
Deflation is a period in which prices are falling as the purchasing power of a currency increase. (Good news for those with cash; bad news for those with debt.) In the 1930s, deflation triggered the Great Depression due to a collapse in investment purchases.
That said, your Permanent Portfolio will have a 25% allocation across four different assets:
- The Total Stock Market Index does well in times of prosperity. It tends to perform poorly in recession, inflation, and deflation, but this won’t matter as much if it’s kept over a long term.
- Cash performs the best in periods of deflation as it would give you purchasing power, while the rise in interest rates increases the return on your dollars. It keeps its value during a recession, but it does not do well during prosperity and inflation.
- Gold does very well during inflation; in the 1970s, gold rose twenty times over when inflation rose to 15%. However, it does poorly during deflation.
- Long-Term Government Bonds do well during prosperity as well as during deflation, profiting when interest rates fall. However, tªhey perform poorly during times of inflation and recession.
Once your permanent portfolio set up, the maintenance is simple: once a year, check if the value of your four investments have stayed within 15-35%. If it has gone outside the 15-35% range, simply rebalance the portfolio back towards 25%. Another time you may want to check your portfolio is when you notice a big change in investment prices.
This asset allocation acts as a system of counterbalancing. For example, when the stock market goes down, gold and bonds tend to go up. When gold or bonds go down, the total stock market tends to go up.
This means that your Permanent Portfolio is resilient to uncertainty and change. By owning all four asset classes, you’ve covered your bases, regardless of market fluctuations.
A side-benefit of this set-up is the peace of mind and confidence you can get — You won’t be up late at night worrying about your stocks.
Takeaway 7 – When in doubt, be cautious to avoid costly mistakes.
Do what you understand. Otherwise, you could make an expensive investment mistake. When in doubt, listen to your gut, do more research, or talk to a trusted advisor. It’s better to be cautious than regret a decision you made later.
This is one of the best ways to ensure your lifelong financial security.
Be wary of personal debt and leverage
Leverage is essentially borrowing money so that you can multiply your returns. However, while the potential gains are high, so are the potential losses. Leverage can work like rocket fuel – allowing you to soar to crazy heights, or explode in mid-air.
So as much as possible, avoid getting yourself into big debt. Borrowing money for a new house or car might seem attractive, but it can cause you unnecessary stress down the line. A quick and common way people have gone into bankruptcy is by letting their debts pile up.
It’s unlikely that you’ll go broke by playing it safe.
Fail-Self Investing Recap
- Takeaway 1 No one can predict the future.
Anyone who claims they can is most likely lying and will actually end up making their money from people who believe them.
- Takeaway 2 You are your #1 asset.
Investing in yourself will always provide the highest returns. So take the time to grow yourself, especially when you're under 35.
- Takeaway 3 Speculation is not the same as investment.
Real investors do not buy on rumours that they cannot verify.
- Takeaway 4 – Make your own financial choices.
Remember, no one cares as much about your money as you do.
- Takeaway 5 – Put your money into a “Permanent Portfolio".
There are three requirements for a Permanent Portfolio: Safety, stability and simplicity.
- Takeaway 6 – Structure your Permanent Portfolio according to the four major economic conditions.
The four conditions are prosperity, recession, inflation and deflation.
- Takeaway 7 – When in doubt, be cautious to avoid costly mistakes.
Avoid debt especially if you are using that debt to invest in the stock market.
Our Thoughts from More Money Malaysia.
Fail-Safe Investing is for those who are more comfortable with a conservative amount of risk.
Much of Browne’s advice sounds like commonsense, but you’ll be surprised at how many people get themselves into financial trouble because they don’t really understand what they’re doing, or they listened to the wrong advice.
We do agree that one of the best investments you can spend on is yourself.
And the best way to invest in yourself is by reading (or by watching book summaries like this), and taking programs to improve your skills.
Also, the four different assets is an easy thing to do as well.
For the total market index, you can buy any ETF that states that it tracks the total market index.
For gold, the fastest way to get gold exposure is to buy an ETF that tracks gold, or to use something like Hello Gold to buy yourself gold.
For long term government bonds, once again, you can get exposure through an ETF.
You can go to your bank and ask to buy some long term government debt.
And finally, with cash, you can just leave it in your bank account.
Although we would suggest you put it in a bank like OCBC as they give you a much higher interest rate.
Another idea is to see if a robo advisor can help you structure this.
Now that you know what the main lessons are in Fail-Safe Investing, here are the next steps.
Step 1 – take some time to determine how you can grow yourself.
What professional skills can you take programs on to improve?
Step 2 – determine if you would like to follow the advice of Harry Browne and create 4 different types of investment buckets.
If so, take the time to find the options you have.
If not, we suggest you simply buy the total market index or use a robo advisor who will do everything for you at a super low fee.