Golden Rules of Financial Safety (1999)
harrybrowne.org
harrybrowne.org
Off-topic (?) from that article, I'd be interested to hear what he would have made of the current cryptocurrency craze, given his views on gold, inflation, and portfolio stability.
"There's nothing wrong with speculating — provided you do it with money you can afford to lose. But the money that's precious to you shouldn't be risked on a bet that you can outperform other investors."
Edit: Rule #12 addresses it more directly: "Speculate only with money you can afford to lose."
`Rule #9: Don't ever do anything you don't understand.`
I feel like this could apply to a lot of cryptocurrency evangelists (not all of course).
Rule #2: Don't assume you can replace your wealth.
The fact that you earned what you have doesn't mean that you could earn it again if you lost it. Markets and opportunities change, technology changes, laws change. Conditions today may be considerably different from what they were when you built the estate you have now. And as time passes, increasing regulation makes it harder and harder to amass a fortune.
How exactly is this possible? I am a german citizen and resident, and after hours of reaearch a few months ago i couldn’t find ONE bank in the world I could open a bank account with. I always have to be at least a resident. Did anybody figure this out?
My partner is from Canada and I would love to park some money there, but I couldn’t figure out a way to do so.
The price you can sell an asset for is whatever someone is willing to pay, on that day. If sentiment turns and everyone is selling bitcoin, the price will most definitely not be going up.
Bitcoin isn't liquid enough for me to trust it for emergencies. If I needed to pay for a hotel or a plane ticket, the process of translating that to cash, then a pre-paid VISA card is way to complicated and probably expensive.
One way is via the Perth Mint in Australia. They need a copy of your passport and take the money by wire to an American account, but as far as moving some money somewhere else you can do it.
I don't know what conditions they place on the residence location of their subscribers.
Most Chinese banks will open an account even on an 24-hour transit stamp (it usually helps to speak some Mandarin). Hong Kong is another possibility and will probably get you better service. Same with Vietnam, Pakistan, and lot of others countries. Some US banks will open an account for non-residents as well.
> The portfolio should assure that your wealth will survive any event — including an event that would be devastating to any individual element within the portfolio. In other words, this portfolio should protect you no matter what the future brings.
> It isn't difficult or complicated to have such a portfolio this safe. You can achieve a great deal of diversification with a surprisingly simple portfolio.
What could such a portfolio be? Cash in a savings account? (Genuine question from an investment novice -- I always thought any investment was risky to some extent).
25% Stocks
25% 30 year treasury bonds
25% Cash
25% Gold
His book on the subject: https://www.amazon.com/Fail-Safe-Investing-Lifelong-Financia...
A more recent book: https://www.amazon.com/Permanent-Portfolio-Long-Term-Investm...
25% stocks (index fund) Stocks – for profit during periods of general prosperity and/or declining inflation.
25% Gold – for profit during periods of bad inflation; during inflationary episodes gold bullion provides protection against a falling currency and other potential problems.
25% Long Term Bonds (30 year) – for profit during periods of declining interest rates; and especially during a deflation. Bonds also do reasonably well during prosperity.
25% Cash – During a recession, no particular asset class is going to do well. The cash in a Treasury Money Market Fund offers stability when portfolio asset classes fall in price. It also protects purchasing power during a deflation.
Also the exact number is not all that critical. Earlier versions of Browne’s portfolio were more complicated and he simplified it to 4x25 later on, still allowing that people could tweak it if they must. But 4x25 is simple and works.
Warren Buffett has some interesting things to say about this: https://20somethingfinance.com/warren-buffett-is-moving-100-... and http://www.barrons.com/articles/buffett-bonds-terrible-in-co... for example.
https://portfoliocharts.com/2017/05/12/understanding-cash-wi...
Harry's 25% cash isn't dollar bills, it's treasury bills, which have held up to inflation.
>Harry's 25% cash isn't dollar bills, it's treasury bills, which have held up to inflation.
Short-term ones haven't for last ~10 years, especially if it's a taxable account.
> I hear some version of this argument all the time: The opportunity cost for holding cash is too high. It earns virtually nothing, and you’re guaranteed to lose money to inflation. Just get over your fear and buy stocks!
It would be much more helpful to say something like "having an investment of stable value can decrease the volatility of the returns as you balance in and out during the market ups and downs, and improving the risk-adjusted returns, which back-testing can demonstrate". (I don't know if that's what it said, but that's an example of contributing the insights back to the discussion.)
And if the article really did provide insight, wouldn't it be easy to produce a paragraph like the above?
> Harry's 25% cash isn't dollar bills, it's treasury bills, which have held up to inflation.
OP seemed to be under the misconception that cash meant dollar bills under the mattress. The article addresses this in the section beginning "To explain, I think it helps to start with the definition of cash..."
OP seemed to be under the misconception that cash responds poorly to inflation, which the article also addresses.
1) What else is the article adding? The fact that it (historically) yields something above inflation was enough to refute the OP's implied claim about negative real returns.
2) That wouldn't address the OP's point that they still have a low RoR for a long-term portfolio.
3) As in my comment it wouldn't refute that T-bills haven't kept up with inflation recently.
If the article's point is about how balancing into/out of a stable investment can improve portfolio return, then that would warrant a summary in your comment.
Sorry if my comments come off as mean. I'm trying to convey why a giant article might not be helpful to resolving the disagreement.
> Sorry if my comments come off as mean.
You're not coming off as mean. I can tell you're genuinely trying to improve the discussion here, and you reminded me that when I'm replying to someone, the audience is wider than just that person. Thanks.
Wealth is what you save, not what you earn or what you spend.
There are many people with very high income but spending as high (or even higher!), so they have little or no wealth.
So to summarize:
Use your career income to accumulate wealth that will provide your income without your career.
The other 75% has no relationship to them at all.
Tenses are important in investing.
Where do I start to know more about this? I dont want it to stress me out though, Im not so risk adverse when it comes to my finance. I spend very little, but I want to learn more about investing.
Any advice? More specifically for people living in EU?
Investing doesn't have to be a scary beast, just go one step at a time. I'd suggest starting your studies by reading about asset allocation and expense ratios on mutual funds. Asset allocation will cover how bonds, stocks, and cash behave in various economic situations. Expense ratios are good to understand because they can have a huge effect on how much money you have down the line.
Them look into active versus passively managed funds.
Notice I haven't mentioned picking an individual stock yet. If you're risk adverse and getting into things, I'd highly recommend sticking with low cost index mutual funds. E.g. An S&P500 fund will give you almost exactly what the "overall stock market" would get without the guilty feelings of "I probably picked wrong and I'm screwed now".
Bogleheads is also really good (as mentioned below).
https://web.archive.org/web/20160402162234/http://crawlingro...
The advice is decent and normal, but I really love how regular advice is "colored" with libertarian perspectives.
See hyper-inflation (e.g. Germany in early 20th century and others now) or government takings like Zimbabwe confiscating farms.
If you think it can't happen in a modern democracy, see https://en.m.wikipedia.org/wiki/Executive_Order_6102 where the US outlawed private ownership of gold in 1933 to enable debt reduction by devaluing the currency.
Or, to ask another way, is there any reason to prefer anything other than Vanguard's Index500 vs anything else attempting to replicate the SP 500? (I call out the Vanguard fund because the fees are very low, .14% iirc.)
Vanguard's prices are great, especially if you get into their top-tier $10,000+ accounts. But ETFs are competitive against Vanguard in my experience.
Of course, Vanguard also offers low-cost ETFs. As long as you go with a mainstream option, I don't think you can go wrong.
Mutual funds: recurring investment of any dollar amount (fractional shares). Minimum initial investment required. Trade once per day, beware loads, fees, and expense ratios
ETFs: buy or sell one or more whole shares, trade throughout the day, beware trading commissions and expense ratios.
This guy's a mug. And anyone who thinks financial security for one is something that can be done independent of a community is full of it, or a hustler protecting previously accrued assets.
???
So you are saying the people who make money, and are frugal, would not be able to get to "financial security"? I'm a sample size of 1, but I seem to be doing just that "on my own".
You seem extra jaded here. What am I missing?
I don't know how much money you have, but if you or your family had a life-long expensive disease, can you say that given the current medical coverage offered at the current prices, you would be financially secure?
It's not a criticism to your ability to save or manage your money. Please dont' take it that way :)
Having a "life-long expensive disease" is like the inverse of Rule #12, where you've already lost the lottery. Now, this wouldn't even be a problem in Canada, but it'd be pretty moot to put in a rule about that.
The point is, this article isn't "these are the ingredients for being rich", it's "What reasonable guidelines can you follow to maintain any wealth that you manage to accrue?"
The context was "rich people went bankrupt, whaaaaat?" and the article is "well, they must have violated one or more of the following rules in a big way!"
He specifically went out of his way to say NOT to try elaborate overseas schemes to avoid paying taxes.
I mainly disagree with the first rule. Your career should not provide your wealth. Your career should keep your bills paid, provide security for the future, and allow you to live a comfortable life. Investments in financial endeavors like real estate, businesses, stocks, etc, education, and family is what provides wealth.
Update: Not sure why this post is getting downvoted? A career provides MONEY not WEALTH. There is a big difference. It is up to you to convert that money into wealth
The money to fund wealth building ventures comes from having a stable career. However, the act of having a career does not build wealth as the rule implies.
He was saying that the initial source of the funds that you use to build your wealth will come from your career.
Unless of course you're lucky enough to inherit those funds, but if that's the case, you already know it.
Pointless. You're arguing semantics, and pretty meaningless semantics at that.
For almost every single person, the main source of their wealth will be their career.
Unless you are planning on inheriting more money than you expect to make from your career from your extremely wealthy parents, you're going to have to accept Rule #1.
And if you borrow money to accomplish these things, you are in violation of Rule #7, don't use leverage.
By using the money earned from your career to fund ventures. A stable career should provide you with money to build wealth. However, simply working a 9-5 everyday will not provide wealth as the rules implies. It provides money, not wealth. There is a difference
For example, if you can save ~96% of your gross income and safely draw 4% from your investments, you can cover your expenses after only a single year. (Of course, you will never save 96% of your gross income, due to taxes.)
1) There is no inflation.
2) Your capital investments always return 5%.
3) Your salary is $100,000 and does not change.
4) You are able to save 50% of your income and invest it.
At year 0, you are worth the equivalent of $2,000,000 invested. It won't be until year 40 that your investments are returning the same amount as your starting salary. Presumably, you plan to retire sometime around year 45 (~65-ish).
Thing is, there is inflation, a 5% return isn't guaranteed, your salary will probably increase, and saving 50% is pretty ambitious. All of these things actually make it harder to get a better return than your salary.
It is incomplete because: presumably you do not die immediately upon retirement. A 30 year retirement would see your investments compound for an additional 30 years after your career income stream ceases. This can dwarf the $2M total you save over a 40 year career at $50k/yr.
It is incorrect because even after the 40 years your net worth is $6.5M on gross lifetime earnings of $4M.
> Your investments can make your future more secure and your retirement more prosperous. But they can't take you from rags to riches. So don't take risks with complicated schemes in the hope of multiplying your capital quickly.
He wasn't making a statement about how to become wealthy, instead, he was trying to warn you against get rich quick schemes.
He would probably consider endeavors like real estate investing a part of your career.