Given the current economic environment, I thought I would provide a summary of my investment recommendations for 2013.
I am a big advocate of the permanent portfolio, as described in Harry Browne’s book “Fail-Safe Investing“. The quick summary is that you put 25% in stocks, 25% in long-term government bonds, 25% in gold (or equivalents), and 25% in cash (or equivalents). You can also use the mutual fund PRPFX as a substitute. While it is not a perfect substitute, it can be useful.
My recommendation is that you take 50% of your investment money and put it towards the permanent portfolio. This can be done in a variety of ways and I recommend diversifying even here. You can use PRPFX, you can use ETFs, and you can buy these investments directly. The more money you have to invest, the more you should diversify, even in the types of instruments you buy.
For the other 50%, I think it will depend on your situation. If you are in a good position to buy investment real estate, and you can get positive cash flow, then I recommend it. You should be in a situation where you can afford some extra money for repairs or for a couple of months of vacancy. You need a cushion. I think most people will find that they can get a better return on their money in investment real estate than almost anywhere else.
Aside from this, I would put your additional money in gold, gold stocks, and cash. I think shorting the stock market is risky at this point, especially with all of the Fed’s quantitative easing programs. If you want to take a small risk and short the market, I would have at least 3 times the gold exposure as compared to exposure in shorting the market. And this is outside of the permanent portfolio.
I really like the permanent portfolio, but I have to admit that the bond portion makes me really nervous at this point. It is an important part of the portfolio as a hedge against deflation and depression, but it is tough to buy bonds at this point because of the historically low interest rates and the possible threat of higher price inflation.
One option is to replace your deflation hedge by buying less bonds and getting another deflation hedge. If you have a mortgage for your house (or for an investment property), you could pay down some of the principal balance on your loan. This locks in a guaranteed rate of return (the interest rate on your mortgage). And with this return, you don’t pay taxes on it (other than perhaps a lower deduction).
So to sum it all up, let me take an example of a person with $100,000, who owns a house with a mortgage.
My suggestion is to take $50,000 and put it in the permanent portfolio. Take $25,000 and buy investment real estate (assuming you can get positive cash flow and are in a good position and good location). You could use $20,000 for the down payment and closing costs and use the other $5,000 as reserve money. For the remaining $25,000, I would keep another $10,000 in cash (in a bank) and put another $10,000 towards gold and silver (or equivalents like GLD). I would take the remaining $5,000 and gamble it on gold stocks (such as GDX or GDXJ). For the $50,000 in the permanent portfolio, $12,500 of that would be going into government bonds. If this makes you nervous, take about half (say $6,000), and redirect into paying down the principal balance on your home mortgage.
These are just my suggestions. They are rough estimates and each individual has different needs, different risk tolerances, and different overall situations. But I hope people find this helpful as at least a guide.
This economy is really tough right now. Safety should be your number one goal in investing, especially now. Any profits you can make in real terms should be considered icing on the cake.