I am a strong advocate for using a permanent portfolio for financial investments. I wrote a short e-book on the topic.

The permanent portfolio is an idea developed by the late Harry Browne.  It is explained in his book Fail-Safe Investing.  In the book, he distinguishes the difference between investing and speculating.  He advocated investing in a permanent portfolio.  Speculation should be done with money that you can afford to lose.

In my book, I discuss tweaks you can make to the permanent portfolio to fit your personal situation. I don’t know if Harry Browne would have approved of this or not, but I still don’t deviate too much from the portfolio.  It is there as a home base.

With that said, I think it is important that I disclose what I am currently doing.  I certainly have some money invested in PRPFX, which is the mutual fund that is loosely modeled after the permanent portfolio.

However, beyond PRPFX, I am quite light on stocks.  Stocks make up less than 25% of my total financial assets.  If you exclude some specialty stocks in precious metals and energy, then I am way below 25%.

Is this speculation? Yes.  But it is very calculated.  After all, what is the worst that can happen in terms of my investment portfolio?  The worst-case scenario that could result from this deviation is that stocks continue to go higher for a long period of time.  I will miss out on the gains.

I am betting on a major correction (or worse) in U.S. stocks in the somewhat near term.  I am making this bet by not owning as much as what is recommended in the permanent portfolio.  I have not yet proactively bet in any significant way by shorting the market.  I may decide to buy a bear fund at some point, but I will limit my exposure in case I am completely wrong and stocks go up.

The permanent portfolio offers simplicity.  You don’t even really need to follow the financial markets in order to follow it.  You just have to rebalance your portfolio once in a while.  Even simpler, you can buy PRPFX and let it sit there.  (I have warned in other writings that PRPFX is a bit more speculative than the actual permanent portfolio.)

I am light on stocks knowing that this is a deviation.  I just want to disclose this because I am such a strong advocate of the permanent portfolio.  I am still using it as my guide, but I am deviating in accordance with what I think is currently happening in the economy.

Stocks are near all-time highs.  They went down quite a bit today because the U.S. government has essentially started a proxy war with Iran.  This has added uncertainty.  But even if things cool down with Iran, I think stocks are in trouble.

The yield curve mostly inverted for several months in 2019.  The 3-month yield was higher than the 10-year yield.  This is a recession warning.  Meanwhile, starting in September, the Fed has intervened in the “repo” market in order to prevent a spiking of short-term interest rates.

In 2019, the S&P 500 was up about 29%. The Nasdaq was up 35%.  This is not normal.  Does anyone honestly think that the economy is booming so much, and profits are going to be so high, that these valuations are justified?

I think the downturn will begin in 2020.  Maybe it can be delayed until 2021, but I doubt it.  No one can know for sure.  But I am willing to forego possible gains in the stock market in order to protect against possible losses.  I think the downside is much greater than the upside at this point.  And when the implosion begins, it is going to get ugly.  I can’t discount the possibility of something very severe, where stocks go down in the neighborhood of 70 or 80 percent.  I am not saying this is going to happen, but it is a realistic possibility.

If and when the stock crash happens and the Fed ramps up its monetary inflation – as it surely will do – then I will go back to 25% in stocks as part of the permanent portfolio.  If stocks get beaten down bad enough and I have the courage to do so, maybe I will go a little heavy in stocks at that time.

I believe the stock bubble is the biggest bubble at this point that could implode at any time. There is a giant government bubble, but unfortunately we may have to wait a while longer before that implodes.