Harry Browne passed away in 2006. It is 14 years later that we are dealing with the coronavirus, along with the economic and financial impacts.
Obviously, Harry Browne had nothing to say on the coronavirus, as it is a relatively new thing today. But when you are making financial decisions, it is best to have a firm base of principles in place that do not change with the current events.
Personally, I think the reactions to the virus are way over-blown. But it doesn’t matter whether you think the virus is a great threat or not. What matters is everyone else’s reaction.
I keep saying that I am not paranoid about the virus itself. I am paranoid about the reactions to the virus.
I already thought the stock market in the U.S. was one giant bubble. I have been strongly warning about that. But even I am surprised at just how fast and furious the drop in stock prices has been. It would have been hard for anyone to predict this virus and the major changes that have taken place in such a short period of time.
But let’s look at this situation (from a financial aspect) with a firm set of principles. The main principle is that this planet is made up of billions of people, and people act. We cannot predict how each individual human will act, and we can’t predict the cumulative effects of these actions.
This is why Harry Browne devised his permanent portfolio concept. It is designed to weather any storm. Of course, if the planet gets struck with a giant asteroid and blows up the planet, your portfolio won’t survive, but neither will anything else.
The permanent portfolio takes into account something like the coronavirus. It doesn’t make toilet paper appear at the store, but it serves to protect your financial investments.
Even the permanent portfolio has been down the last few weeks. The 25% stock portion has done really poorly. The 25% bond portion has done well. The 25% gold portion has been extremely volatile. The 25% cash portion has added some stability, which is what it is designed to do.
You might be down 5 or 6 percent over the last few weeks if you are following something similar to the permanent portfolio. But it is better than being down 25% like those who were “all-in” on stocks.
Building a Bulletproof Portfolio for Protection
In his book, Fail-Safe Investing, Browne lays out several rules for financial safety. For Rule #11, he explains the permanent portfolio and its importance for protecting your investments.
He states, “The portfolio should assure that your wealth will survive any event – including events that would be devastating to any one investment. In other words, this portfolio should protect you no matter what the future brings.”
He lists three requirements for building a bulletproof portfolio. They are safety, stability, and simplicity.
He goes on to cover the four investments that cover all the possibilities. You should invest to protect your investments from four economic categories: prosperity, inflation, tight money or recession, and deflation.
As I’ve explained before, his phrase of “tight money or recession” should really just be looked at as recession in today’s world. The Fed can be loose with its money while we have a recession. The tight money is really more with consumer spending. As we have learned from the last decade, you can have minimal consumer price inflation while the Fed is expanding its balance sheet.
In order to protect against any of the economic categories, he recommended four investments split up equally (25% each). They are stocks, long-term government bonds, gold, and cash (or cash equivalents).
At the conclusion of this rule, he states, “The test of a Permanent Portfolio is whether it provides peace of mind. A Permanent Portfolio should let you watch the evening news or read investment publications in total serenity. No actual or threatened event should trouble you, because you’ll know that your portfolio is protected against it.”
Are you watching news of the coronavirus and wondering what you should do with your financial investments? Should you buy on the dips? Should you sell on the up days because the market will fall much farther? Should you be buying gold because the Fed will start creating money out of thin air like crazy? Is it too late to rush into government bonds?
This is what the permanent portfolio is for. If you want to speculate, then take the money you want to use for speculation and set it aside for this purpose. Speculation money should be done with money that you can afford to lose.
Your home base should be the permanent portfolio. This should be called the sleep-at-night portfolio. It can’t guarantee you happiness in life. It can’t even guarantee you financial success. But it can give you a high degree of assurance that your investment portfolio can survive no matter what the current economic environment brings. That includes the coronavirus.