WilliamJones's Full Review: Harry Browne - Fail-Safe Investing: Lifelong Finan...
I'm always on the lookout for a new investing book. Harry Browne's Fail-Safe Investing: Lifelong Financial Security in 30 Minutes, published in 2001, is one I wish I had come across years ago. It's one that could have saved me a lot of grief.
The late Mr. Browne (the author passed away in 2006) was an interesting figure. A two-time Libertarian Party nominee for President of the United States, free-market advocate, and author of several books (including the bluntly-titled Why Government Doesn't Work), I found myself drawn to his investment advice.
I don't know that I'd wholeheartedly embrace his politics, but his conservative nature toward money has a lot of appeal.
My money is precious to me. I worked for it, and I'm not looking to lose it. Rule #1, as Warren Buffett once famously quipped, is "Don't lose money." Rule #2? You got it, see Rule #1.
And that's all well and good, but, practically speaking, how does one accomplish that?
The central theme of Browne's book is this: for the money that's precious to you, that you can't afford to lose, you should build what he calls a Permanent Portfolio.
The composition of the Permanent Portfolio is simple and elegant. It looks to protect you in all types of economic environments. According to the author, there are four: prosperity, inflation, recession and deflation. These are all-inclusive (i.e., there are no more).
Likewise, the portfolio has four broad categories: stocks, bonds, gold and cash.
These should be divided equally, in four parts. So 25% of the portfolio should be broadly diversified in stocks (think an S&P 500 index fund), 25% in long-term U.S. Treasury bonds, 25% in physical gold, and 25% in a portfolio of short-term U.S. Treasury bills.
It's very important that the gold component be in physical gold, not gold mining stocks. For most folks this will be non-numismatic gold bullion coins stored in a safe deposit box. Because he doesn't want to worry about credit risk, the bond portion should include only long Treasury bonds.
Why long bonds? The longer the time to maturity, the greater the effect a change in interest rates will have. Thus, during a deflation, bonds may be the only thing that will protect you. The longer the bond, the greater the protection. Likewise, the cash component should only be in short-term Treasury instruments.
Should you feel that a money market fund is safe enough for your cash, think again. It is possible to lose money in a non FDIC-insured money market fund, as folks who owned the Reserve Primary Fund found out when their fund "broke the buck" on the heels of the Lehman Brothers bankruptcy in September 2008.
Mr. Browne claims an investor can build such a portfolio with as little as $4,000. For investors with less money, or those who want a simpler alternative, there is a Permanent Portfolio mutual fund (ticker PRPFX).
This fund is more complicated in its allocations, but importantly it strives for the same type of balance and stability. I came across this book, in fact, after researching that fund, which is currently managed by Michael Cuggino.
Harry Browne does give performance figures that go back to 1970 (the mutual fund dates back to the early Eighties) and they're impressive. Prior to 2001, the worst-performing year was 1981, when the Permanent Portfolio lost 6.2%. However, in 1982, the fund returned 23.3%, making up for that loss.
Why does it work as well as it does?
Well, we all know stocks do well in times of prosperity. It's a given that gold goes up in times of inflation. And long-term Treasury bonds are a safe haven, as they were during the Great Depression, when there's deflation. Unfortunately, the author has found no investment that reliably goes up in times of recession or what he calls "tight money." But here, at least, the cash component will not fluctuate much and will cushion you somewhat.
Recessions, the author notes, generally last no longer than 18 months, at which point the ecomony will move toward prosperity or outright deflation.
This is a timely book. The author, too, understands very well investor temperment. By this I mean the tendency to want to change course when an investment is doing poorly. We're more likely to stick with an investment strategy if that strategy provides us with a smooth ride—if we can avoid the major ups and downs of the market.
For money you can afford to lose, the author suggests a separate "variable portfolio," which can be anything you want. If you want to buy individual stocks, or high-yield junk bonds, or whatever, the advice is to do it with money you can lose, not money you will need for retirement or for your kid's college education.
My only complaint, if you can call it that, is the notion that an entire book may not have been necessary to explain the concept. Early on Browne lays out 17 rules, many of which I found to be common sense (e.g., "Beware of Fortune-Tellers," "Don't ever do anything you don't understand," "Speculate only with money you can afford to lose").
Still, when it comes to money, people do amazingly stupid things, so maybe a good dose of common sense is warranted.
From a bestselling financial advisor comes this essential, easy-to-understand guide on getting the most out of your investments. There are no secret t...More at Buy.com Marketplaces
Epinions.com periodically updates pricing and product information from third-party sources, so some information may be slightly out-of-date. You should confirm all information before relying on it.
- Add to My Yahoo!: 
- Add to Google Homepage: 
© 1999-2009 Shopping.com, Inc.