One common finance/ investment question arises when somebody comes into some new-found money.  The question(s) goes something like this:

I just inherited $20,000.  Should I invest all of it right away or wait until a market correction?  Or should I use dollar-cost averaging?

Of course, in most cases, the person asking the question is referring to investing the money in stocks.  If someone had invested a lump sum of money in U.S. stocks in March 2009, they would have done very well up until now.  But past performance is not an indicator of future returns.

I do not advocate investing in stocks except for speculation or as part of a permanent portfolio.  I do not buy the common theme that stocks always go up in the long run.  Tell that to the Japanese person who bought into the Nikkei at its peak in 1989.  They are down 50% nearly 3 decades later.  Just how long are they supposed to hold?  Just how long is the “long run”?

And while people will say that won’t happen in the United States, I am not sure how they can say that, especially given the massive levels of debt and regulation.  The only reason you might be able to make this claim is because the Fed would be more likely to engage in massive monetary inflation.

Still, Japan is not a third-world  country.  We are not talking about Ethiopia or Bangladesh here.  In the 1980s, there were many pundits in the U.S. worrying about Japan taking over the United States, economically speaking.

Stocks have paid well in the U.S. since the 1980s with a buy and hold strategy.  Still, this does not guarantee anything in the future.  And also consider that there have been major booms and busts within the last 3 decades, so it hasn’t been a smooth ride.

I recommend a permanent portfolio for more stability and safety.  The returns have been relatively lousy in the 2010s as compared to U.S. stocks.  But this is a reflection of low interest rates and relatively low consumer price inflation.  You give up some of the big returns in exchange for stability.  When stocks take a hit, as they did in the fall of 2008, the permanent portfolio is a good place to be, even if it declines.  The losses will typically be far less.

To get back to the original question, anyone that comes into $20,000, or any amount of money right now, should stay away from stocks, unless it is in terms of the permanent portfolio.  But that leads to another question.  Should you use dollar-cost averaging for the permanent portfolio?

If there were ever a time to use this strategy, it would be now.  Stocks are hitting new all-time nominal highs on an almost regular basis.  Interest rates are still extremely low by historical standards, which means almost no returns from the cash portion and not that much potential for the bonds.  Gold could still go up, but it is not likely to be significant until we see a return of higher consumer price inflation.

With that said, I wouldn’t hesitate too much to dump a lump sum of money into the permanent portfolio.  By its nature, you are not likely to take a big loss, even if the financial markets change quickly.  The permanent portfolio is designed to withstand virtually any economic environment short of an end-of-the-world scenario.  The permanent portfolio is far from perfect, but I haven’t really found anything that works better at this point.

The one environment that hurts the portfolio is a recession.  Even in this scenario, the long-term bonds are likely to go up in value as interest rates fall further.  This probably won’t offset the losses from stocks (and perhaps gold), but it is still far better than being heavy in stocks.

As Harry Browne wrote in his book, recessions don’t last that long.  It will either turn into a depression (good for cash and bonds), or it will turn into inflation (good for gold), or it will turn back into some form of prosperity (good for stocks).

If you have a good chunk of money ready to invest right now, a good strategy might be to invest the majority of it in the permanent portfolio, and to keep a small percentage (in addition to what is in the portfolio) in cash or a cash equivalent.

For example, if you have $20,000, you could put $16,000 into a permanent portfolio setup and leave $4,000 in a savings account.  You would actually have $8,000 in cash when you include the $4,000 (25%) that is in the permanent portfolio.

This way, if there is a downturn, you can put the additional $4,000 into the permanent portfolio.  I am not predicting an imminent major pullback, but it wouldn’t surprise me.  So if you are concerned about an upcoming recession, this is a strategy that you can use if you are hesitant to dump everything into the permanent portfolio.

It is true what they say: In a recession, cash is king.  Perhaps U.S. government bonds will be king too, but you get the point.

It is tempting to invest in stocks right now as you see your friends looking at their 401k balances grow.  It can be frustrating in a boom time when you are not fully participating in the boom.  But when the bust comes, you will be thankful, and this is the important thing to remember.

The boom may last a while longer.  Nobody really knows.  But when the fall in stocks finally happens, you will be able to sleep at night with your permanent portfolio.

Of course, this is just the investment perspective.  The most important thing is to keep your job or whatever form of income you have.  Your income is your number one priority in terms of finances.  Protecting the assets you already have is secondary.