Keynes is quoted as saying that markets can stay irrational longer than you can stay solvent.  This is probably one of the better things that Keynes said.  Austrian economics can teach us a lot, but it can’t really teach us how to time our investments very well.

That is one of the reasons that I am an advocate of the permanent portfolio (as described by Harry Browne in his book Fail Safe Investing) even for advanced investors and investors that understand Austrian economics.

Many libertarians will criticize the permanent portfolio for investing 25% in bonds.  They say interest rates will go up and bonds will be a loser.  These people will be right one day.  The problem is, when?  There were libertarians predicting higher interest rates 5 or more years ago.  Bonds have been a great investment over the last 5 years, especially compared to stocks.

I don’t disagree that interest rates will eventually rise and that bonds will fall.  The problem is that I have no idea when this will happen.  Most people are not rich enough to continue to bet against bonds.  And even if you just avoid them, then where will you put all of your money?  Stocks have been horrible.  Gold has done very well, but even gold could take a major hit if the economy goes into free fall again.

The most difficult thing about investing (for those that aren’t Keynesians and understand some free market economics) is the timing.  That is why I think everyone should put at least half of their money into a setup like the permanent portfolio.  Use the rest of your money for speculation if that is what you want to do.  And just remember that markets often seem irrational and the market doesn’t care about your reasoning or about your solvency.