Word
Gems
What is a
man but the sum of his thoughts?
Wealth
& Economics:
- Harry Browne:
- 16 Golden
Rules of Financial Safety
(Adapted from Fail-Safe Investing
by Harry Browne)
When you read that one of the richest
people in the world — someone like Bunker Hunt, John Connally, or Donald Trump —
has declared bankruptcy or is in financial trouble, it's easy to feel a sense of futility
about managing your own money.
If such a person—able to afford
the best financial advice in the world—can be brought low by a bad investment or
decision, what chance do you have?
But the wealthy individual didn't fail
because he received bad advice or picked a poor investment. His undoing was that he
violated some basic rule of life. If he had managed his investments the same way he
manages his business and personal life, he probably wouldn't have lost his money.
To assure that you never share his
fate, I've developed what I call "The 16 Golden Rules of Financial Safety."
There's nothing mysterious or shocking about these rules; they simply apply to investments
the kind of advice your mother gave you when you were little — the kind of advice
you've most likely lived your life by.
If you abide by them, there's less
than one chance in a million that you could lose all you have.
Here they are . . .
Your Career
Rule #1: Your career provides your
wealth.
You most likely will make far more
money from your business or profession than from your investments. Only very rarely does
someone make a large fortune from investments.
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. Your investment plan should be aimed, first and foremost, at preserving
what you have—preserving it from investment loss, government intervention, or
mismanagement.
Your Wealth May Be Non-Replaceable
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.
So treat what you have as though you
could never earn it again. Don't take chances with your wealth on the assumption that you
could always get it back.
Investing vs. Speculating
Rule #3: Recognize the difference
between investing and speculating.
When you invest, you accept the return
the markets are paying investors in general. When you speculate, you attempt to beat that
return — to do better than other investors are doing — through astute timing,
forecasting, or stock selection, and with the implied belief that you're smarter than most
other investors.
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.
Forecasting the Future
Rule #4: No one can predict the
future.
Events in the investment markets
result from the decisions of millions of different people. Investor advisors have no more
ability to predict the future actions of human beings than psychics and fortune-tellers
do. And so events never unfold as we were so sure they would.
Yes, there have been forecasts that
came true. But the only reason we notice them is because it's so exceptional for even one
to come true. We forget about all the failed predictions because they're so commonplace.
No one can reliably tell you what
stocks will do next year, whether we'll have more inflation, or how the economy will
perform.
Investment Advice
Rule #5: No one can move you in and
out of investments consistently with precise and profitable timing.
You'll hear about many Wall Street
wizards, but the investment advisor with the perfect record up to now most likely will
lose his touch the moment you start acting on his advice.
Investment advisors can be very
valuable. A good advisor can help you understand how to do the things you know you need to
do. He can help call your attention to risks you may have overlooked. And he can make you
aware of new alternatives.
But no one can guarantee to have you
always in the right place at the right time. And worse, attempts to do so can sometimes be
fatal to your portfolio.
Trading Systems
Rule #6: No trading system will
work as well in the future as it did in the past.
You'll come across many trading
systems or indicators that seem always to have signaled correctly where your money should
have been, but somehow the systems never come through when your money is on the
line.
Operate on a Cash Basis
Rule #7: Don't use leverage.
When someone goes completely broke,
it's almost always because he used borrowed money. In many cases, the individual was
already quite rich, but he wanted to pyramid his fortune with borrowed money.
Using margin accounts or mortgages
(for other than your home) puts you at risk to lose more than your original investment. If
you handle all your investments on a cash basis, it's virtually impossible to lose
everything—no matter what might happen in the world—especially if you follow the
other rules given here.
Make Your Own Decisions
Rule #8: Don't let anyone make your
decisions.
Many people lost their fortunes
because they gave someone (a financial advisor or attorney) the authority to make their
decisions and handle their money. The advisor may have taken too many chances, been
dishonest, or simply incompetent. But, most of all, no advisor can be expected to treat
your money with the same respect you do.
You don't need a money manager.
Investing is complicated and difficult to understand only if you're trying to beat the
market. You can preserve what you have with only a minimum understanding of investing. You
can set up a worry-proof portfolio for yourself in one day — and then you need only
one day a year to monitor it. Allowing the smartest person in the world to make your
decisions for you isn't nearly as safe as setting up a safe portfolio for yourself.
Above all, never give anyone
signature authority over money that's precious to you. If you should put money into an
account for someone else to manage, it must be money you can afford to lose.
Understand What You Do
Rule #9: Don't ever do anything you
don't understand.
Don't undertake any investment,
speculation, or investment program that you don't understand. If you do, you may later
discover risks you weren't aware of. Or your losses might turn out to be greater than the
amount you invested.
It's better to leave your money in
Treasury bills than to take chances with investments you don't fully comprehend. It
doesn't matter that your brother-in-law, your best friend, or your favorite investment
advisor understands some money-making scheme. It isn't his money at risk. If you
don't understand it, don't do it.
Diversification
Rule #10: Don't depend on any one
investment, institution, or person for your safety.
Every investment has its time in the
sun — and its moment of shame. Precious metals ruled the roost in the 1970s while
stocks and bonds were in disgrace. But then gold and silver became the losers of the 1980s
and 1990s, while stocks and bonds multiplied their value. No one investment is good for
all times. Even Treasury bills can lose real value during times of inflation.
And you can't rely on any single
institution to protect your wealth for you. Old-line banks have failed and pension funds
have folded. The company you think will keep your wealth safe might not be there when
you're ready to withdraw your life savings.
We live in an uncertain world, and
surprises are the norm. You shouldn't risk the chance that a single surprise will wipe
out a large part of your holdings.
Balanced Portfolio
Rule #11: Create a bulletproof
portfolio for protection.
For the money you need to take care of
you for the rest of your life, set up a simple, balanced, diversified portfolio. I call
this a "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 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.
Speculation
Rule #12: Speculate only with money
you can afford to lose.
If you want to try to beat the market,
set up a second — separate — portfolio with which you can speculate to your
heart's content. But make sure this portfolio contains no more of your wealth than you can
afford to lose.
I call this second pool of money a
"Variable Portfolio" because its investments will vary as your outlook for the
future changes. It might be all or part in stocks or gold or something else —
whatever looks good at any time — or just in cash. You can take chances with the
Variable Portfolio because you know that, whatever happens, no loss can be devastating.
You can lose only the money you've already decided isn't precious to you.
International Diversification
Rule #13: Keep some assets outside
the country in which you live.
Don't allow everything you own to be
where your government can touch it. By having something outside the reach of your
government, you'll be less vulnerable — and you'll feel less vulnerable.
You'll no longer have to worry so much about what the government will do next.
For example, maintaining a foreign
bank account is quite simple; it's little different from having a mail or Internet account
with an American bank or broker.
Tax Shelters
Rule #14: Beware of tax-avoidance
schemes.
Tax rates are still low enough in the U.S. that you might
gain very little from the risk and effort of constructing elaborate tax shelters. And a
great deal of money has been lost by people who hoped to beat the tax system. The losses
came from investments that provided special tax advantages but didn't make economic sense,
and from tax shelters that were disallowed by the IRS — incurring penalties and interest on top of the
liabilities.
There are a number of simple ways
available to minimize taxes — through such things as IRAs and 401(k) plans. These
plans are effective but non-controversial. They won't come back to haunt you.
Enjoyment
Rule #15: Enjoy yourself with a
budget for pleasure.
Your wealth is of no value if you
can't enjoy it. But it's easy to spend too much while the money's flowing in. To enjoy
your wealth, establish a budget of money that you can spend yearly without concern. If you
stay within that amount, you can feel free to blow the money on cars, trips, anything you
want — knowing that you aren't blowing your future.
When in Doubt . . .
Rule #16: Whenever you're in doubt
about a course of action, it is always better to err on the side of safety.
If you pass up an opportunity to
increase your fortune, another one will be along soon enough. But if you lose your life
savings just once, you might never get a chance to replace it.
The Rules of Life
The rules of safe investing are little
different from the rules of life: recognize that you live in an uncertain world, don't
expect the impossible, and don't trust strangers. If you apply to your investments the
same realistic attitude that produced your present wealth, you needn't fear that you'll
ever go broke.
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This article was excerpted from Fail-Safe Investing,
which explains the 16 rules in detail. For information regarding a telephone consultation
to set up your bulletproof portfolio (rule #11), email HarryBrowne@HarryBrowne.org.
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