More than three decades ago, best-selling author Harry Browne, argued that the odds are stacked against the typical investor who's overwhelmed by technical jargon, market volatility and the business of money management.
That's why in his book, Why the Best Laid Investment Plans Usually Go Wrong, Browne explained that it's impossible to rely on advisors, brokers or systems to make money in the investment world.
There are exceptions, of course, but generally, brokerage firms are full of well-dressed, smart-sounding individuals spouting a lot of self-serving nonsense.
And the truth is…
The majority of their market forecasts, trading strategies, hot tips and sure-fire speculations never pan out.
So why do the “best laid investment plans usually go wrong?”
Let me explain…
Almost nothing ever turns out as expected, forecasts rarely come true
According to Browne, “The best-laid investment plans usually go wrong because they’re based on an empty hope. The hope that some system, advisor, technique, indicator, or mysterious art will take the uncertainty out of investing.”
In the last two decades, there’s been two of the biggest financial crashes the world has ever seen.
The first, the Dot.com bubble which saw the NASDAQ plunge nearly 80% triggering a US recession.
Then in 2008, the US housing bust caused the biggest crash since the 1930s Depression.
Unsustainable prices resulted in the average US household lose one-third of its value by 2009.
Consequently, a stock market crash occurred.
So ordinary investors who relied and hoped on their financial advisors, brokers or portfolio manager’s investment strategies to protect their portfolios during these crashes, actually lost money.
Browne continued, “Almost nothing turns out as expected. Forecasts rarely come true, trading systems never produce the results advertised for them, investment advisors with records of phenomenal success fail to deliver when your money is on the line, the best investment analysis is contradicted by reality.”
So how do investors really make money?
Browne says, “the investors and speculators who make money consistently are those who have ignored the fantasies and accepted the world as it is.”
And more importantly, ones who have developed investment plans that consistently makes money no matter which direction the market goes.
Just like this one…
An investment plan that consistently makes money
Harry Browne’s idea was to invest in a basket of asset classes, each one of which has a low correlation with the others.
As a result, when any one of the asset classes is performing poorly, there is a good chance that the others will at least be holding their own — if not actually appreciating in value.
He called it the “Permanent Portfolio”, because you don’t need to make any changes other than periodic rebalancing.
The difference is, the permanent portfolio provides “true” diversification based on economic cycles rather than asset classes.
Below is an example of the permanent portfolio…
Stocks - For periods of prosperity and inflation
Long Term Bonds - For periods of deflation and recession
Gold Bullion - For periods of inflation
Cash - For periods of recession and inflation
It doesn’t rely on market timing, predictions, research opinions, fortune tellers or chart analysis.
The only thing you need to do is rebalance your portfolio every year to its original allocation.
Out of 41 years, the permanent portfolio has achieved 36 winning years.
What’s more, this type of portfolio could have turned R10,000 into R328,479.
Until next time,
Always remember, knowledge brings you wealth,
P.S. The South African Investor Gone Fishin’ Portfolio
uses a strategy similar to Harry Browne’s Permanent Portfolio. This strategy outperformed the JSE All Share by 13% in 2015 and 7% in 2016. To discover how it works, click here.