Today, I’m going to address the most asked question in the Money & Crisis mailbag.
Brian M. emailed me late last night and told me the search for the answer is driving him crazy. And he’s not alone.
I get this specific question at least a few times a week. And, although we’ve touched on it in the past, I’m going to lay it all out on the table today.
In fact, I consider the answer to this question such a vital part of financial planning, I’m making it step 4 in our Financial Crisis Action Plan.
Without further ado, the most asked question in the Money & Crisis mailbag is:
“How do I invest my money if I know a financial crisis is coming?”
There’s a good reason I get this question a lot.
It’s a powerful question that digs down to the core of what this e-letter is all about.
We know from experience that investing is one of the best ways to build wealth. But how can you, in good conscience, trust the markets with your cash… when you know it could come crashing down around your ears at any time?
I’m going to answer that question today.
But before we move on, I want to give you a heads-up.
I won’t be talking about any specifics stocks or my personal investments here today. Recommending stocks just isn’t my game. (I leave that sort of thing to folks like James Altucher, who have the time and resources to root out the best stocks.)
What I will be doing, however, is revealing a powerful investment strategy I use, which you can easily apply to your own finances.
Harry Browne’s Permanent Portfolio
The legendary Harry Browne was at different times a writer, investment adviser, and even a Presidential nominee. But to my mind, his greatest contribution to the American people is the Permanent Portfolio.
The Permanent Portfolio is an investment strategy custom built to accommodate financial crises of all kinds.
Browne knew that a financial crisis wasn’t just “likely” or “a possibility.” It was inevitable.
In fact, as Browne correctly pointed out, your average investor will go through multiple financial crises in their investing career. And each of those crises can have a devastating effect on your portfolio.
So instead of trying to predict what or when the next crisis would be, Browne developed an investment strategy that would adapt and grow during any crisis.
Browne called this the Permanent Portfolio. Because once you set it up, you never need to rearrange the investment mix — even if your outlook for the future changes.
The strategy involves putting your assets and money into four types of investments that mimic the business cycle (prosperity, recession, inflation, and deflation).
- 25% of your portfolio in stocks, for strong returns during a prosperous economy
- 25% in cash to hedge against recession
- 25% in long-term Treasury bonds which perform well during periods of prosperity and deflation
- 25% in gold to hedge against periods of inflation
By dividing your investments across these four classes, your wealth can survive an event that would otherwise be devastating to any individual element within the portfolio…
And the results speak for themselves.
In the past 41 years, this simple strategy has suffered only two down years.
Throughout the other 38 years — throughout booms and busts — it continued to churn out gains.
Had you invested $10,000 in a Permanent Portfolio in 1972, you’d be sitting on over $315,000 today. Without ever having to worry about timing an option move or analyzing a balance sheet.
And what about 2008? During one of the worst crises we’ve been through since the Great Depression?
The Permanent Portfolio held its ground, and then some — gaining 1.9%.
A word of warning though: For this strategy to work, you need to sit down once a year and assess the performance of your Permanent Portfolio and rebalance your assets.
After all, in the space of 12 months, one of the four categories might grow big-time, while another might shrink.
If any one sector has grown bigger than 35% of the overall portfolio, or smaller than 15%, it’s time to rebalance the four categories back to roughly equal proportions of 25%.
For instance, if gold explodes and becomes 40% of your total holdings, you might be tempted to “let it ride” in hopes of it growing even bigger.
Don’t give in to the temptation. The moment you do is the moment the market could deliver you a nasty surprise. And the Permanent Portfolio is all about insulating yourself from surprises.
But for Browne, the Permanent Portfolio was more than an investment plan. The core philosophy at the heart of the strategy was a powerful worldview… and the key to Browne’s success and happiness in life.
When Browne discovered he was dying of Lou Gehrig’s disease, he wrote:
To have made so many mistakes, and yet to have had so much. It proves that you don’t have to be perfect to succeed (. . .)
I don’t advise being careless or sloppy. I do advise that you hold fast to your beliefs and act in the best way you know how — but then forgive yourself whenever you fail to measure up to your standards.
You will never be perfect. But you can be free and happy.
I hope you make it.
And that’s what the Permanent Portfolio is all about.
Instead of putting all your eggs in one basket, you expect that things will go wrong… and you prepare accordingly.
All the best,
Editor, Money & Crisis
P.S. If you’re looking for specific investment advice on 2019’s biggest trends, I highly recommend checking out this message from my colleague James Altucher. In it, he shows you a step-by-step strategy for pulling $36,000 out of the stock market every year. Find out more.