Back in 2009, I wrote a blog post entitled Financial Thinking, in which I summarized the results of six months' research on investment strategies after the 2008-2009 market crash (informed both by practical experience and by my grounding in economics, history, psychology, and philosophy). Since then I've done a lot more thinking and research; more pointedly, of late a few friends have asked for my thoughts on the topic. Thus I figure it's time to provide a more complete report on my thinking about finance and investing.
First, I still agree with much of what I wrote in that earlier post: focus primarily on your career, pay yourself through aggressive savings, strictly limit your spending, don't get in debt, have a big rainy-day fund, don't trust professional financial advisors to have your best interests at heart, etc.
Second, it's unrealistic to believe that you as an individual investor can beat the combined brain power and market power of Wall Street. Think of it this way: let's say you're a doctor or a small business owner or whatever; would you expect on your own and in your spare time to write a computer program that would outsmart the combined brain power of the engineers at Google, Apple, Microsoft, and every other software company on the planet? No way. Yet why do you think that you can beat Wall Street? Don't even try!
Third, most individuals are constitutionally incapable of investing intelligently. Read up on behavioral finance. Its conclusions are sobering: most people buy high and sell low because they let their emotions get the best of them, especially when the investing environment becomes stressful. You might think you're immune, but there's a high probability that you're not.
Put all this together, and what you need is a low-stress investing method that doesn't require a lot of your time, is very safe, and yet still has a track record of handily outpacing inflation over the long term.
It sounds too good to be true, doesn't it?
Maybe it is. But I think I've found something that comes close.
It's called the Permanent Portfolio, and the strategy is to invest as follows:
If one of the components goes above 35% or below 15%, rebalance back to 4×25%.
That's it.
There are no newsletters to buy, no 10-K statements to read, no advisors to pay. You can do it all yourself without day trading or even actively playing the markets.
Yet since 1972 (when the price of gold was deregulated), the Permanent Portfolio method has returned a compound annual growth rate in excess of 9%, with very little stress and worry.
The Permanent Portfolio method (not to be confused with the Permanent Portfolio fund) was created by the late financial writer Harry Browne. Although his book Fail-Safe Investing provides a fine introduction, a more recent book by Craig Rowland and J.M. Lawson (entitled simply The Permanent Portfolio) goes into much more depth. There's also an active discussion forum at gyroscopicinvesting.com, which is a great way to share insights with fellow "PP" enthusiasts (even I, busy though I am, post there from time to time).
Finally, I'll remind you of Warren Buffett's first two rules of investing. Rule number one is: don't lose money. Rule number two is: don't forget rule number one. The beauty of the Permanent Portfolio is that each of the four buckets does well in some environments and offsets losses in other buckets. Of course, past performance is no guarantee of future returns and you need to always be on your toes regarding potential game-changing events. Yet together, stocks, bonds, cash, and gold have weathered many a storm and give every indication that they will continue to do so. Read the aforementioned books (along with all the other approaches you think might work, such as dividend investing) and realistically consider all your options; I've done so and concluded that the Permanent Portfolio is the most reasonable investing approach for folks who don't make their living in the financial industry.
UPDATE 2020-05-28: See also my post Crisis Investing.