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Harry Browne’s Rules of Financial Safety (1999)

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Re: Harry Browne’s Rules of Financial Safety (1999)

#211

Post by Rebelgecko »

thunky wrote: post #73
roenxi wrote: post #14

Rule 11 deserves a rethink. There is an official policy that cash will lose some % of its value each year! Holding 25% of your wealth in cash is planning to throwing away years of life. For this sort of dead-basic investment advice, there is no point being ready for situations where a cash position is advantageous. People are much more likely to panic, do something stupid or get ground down by inflation. It is better…

> Holding 25% of your wealth in cash is planning to throwing away years of life. You have to look at the portfolio as a whole. When stocks fall 50% you'll be glad to have some cash because: 1. You'll be down less than 50% 2. You'll be able to buy more stocks at a discount (via rebalancing)

I wonder if this has been back tested? The advantages of 1 and 2 don't seem to be a good trade for 25% fewer gains in the majority of years.

Re: Harry Browne’s Rules of Financial Safety (1999)

#212

Post by thunky »

Rebelgecko wrote: post #211
thunky wrote: post #73

Earlier quoted context omitted.

> Holding 25% of your wealth in cash is planning to throwing away years of life. You have to look at the portfolio as a whole. When stocks fall 50% you'll be glad to have some cash because: 1. You'll be down less than 50% 2. You'll be able to buy more stocks at a discount (via rebalancing)

I wonder if this has been back tested? The advantages of 1 and 2 don't seem to be a good trade for 25% fewer gains in the majority of years.

It's a well known portfolio so it has been analyzed quite a bit.

You can backtest it yourself:

https://www.portfoliovisualizer.com/backtest-asset-class-all...

- portfolio 1 is all stocks

- portfolio 2 is 75% stocks, 25% cash

- portfolio 3 is the "Harry Browne Permanent Porfolio" (selected from the "lazy portolios" option)

Take a look at the "drawdowns" tab.

Re: Harry Browne’s Rules of Financial Safety (1999)

#213

Post by OrvalWintermute »

throw0101a wrote: post #133
OrvalWintermute wrote: post #123

Earlier quoted context omitted.

Gold is the least bad currency option when compared to all the fiat currencies.

Gold is an unproductive asset, that does not do anything useful against inflation, and when used to back currency (e.g., Gold Standard) does not help with stability (and may actually cause instability): * https://www.theatlantic.com/business/archive/2012/08/why-the... * https://archive.ph/FWKcL

Gold is great as a hedge for many things, and that is exactly how I use it. However, I am not suggesting all people have to have a physical supply. There are 3 ways at least that it is regularly used as an investment

Physical Gold

Gold via a fund e.g. SPDR (GLD) https://www.spdrgoldshares.com/

Gold mining stocks e.g. SPDR (GLDM) https://www.spdrgoldshares.com/

Gold does work as a hedge against sustained inflation, but not momentary blips in inflation https://www.investmentnews.com/gold-standard-fight-inflation...

Gold also works as a hedge against currency hyperinflation

First of all, most fiat currencies don't last very long. https://medium.com/@bewdliberty/on-a-long-enough-timeline-th...

2nd, diversification across asset classes still makes sense https://www.morningstar.com/portfolios/why-portfolio-diversi...

In the case of a weakening dollar, sanctions as weapons, and the potential rise of a new basket, or reserve currency, there are many reasons why gold may make sense to add to a portfolio.

>Gold is an unproductive asset

Anecdotally, my gold hedge via GLD is up >20% per annum in capital gains.

If the US dollar is debased more through excessive printing, it will go much, much higher.

Re: Harry Browne’s Rules of Financial Safety (1999)

#214

Post by jandrewrogers »

anonporridge wrote: post #204
jandrewrogers wrote: post #153

Earlier quoted context omitted.

The issue with rebalancing is that it often has tax implications if you aren't careful. You have to weigh the benefits of rebalancing with the tax loss. It works in tax deferred accounts but, at least in the US, a significant percentage of people do not have material access to such accounts.

This is why the first order move when "rebalancing" is to just adjust your allocations of new investment money from your post tax income. e.g. if your stocks and bonds are doing very well and have inflated beyond their allocation, stop buying them and divert all of your savings to cash and gold/bitcoin.

Yes, and also you can sometimes select tax lots that minimize or completely eliminate the net tax exposure. This does have practical limits though e.g. if the portfolio greatly exceeds income or all of your tax lots of consequence are deep into positive territory.

Re: Harry Browne’s Rules of Financial Safety (1999)

#215

Post by lmm »

liquidpele wrote: post #130
DennisP wrote: post #93

Earlier quoted context omitted.

Timing the market is hard but periodically rebalancing your portfolio is easy, and generally recommended.

Rebalancing according to risk is recommended, not doing it because you think you know what the market is going to do. For instance, let's say right now, the market is headed up. When is the right time to "re-balance" to more cash? This is just assuming that the market is going to go lower than it currently is, which is just as much a gamble as thinking it'll go up for the next year. In short, don't try to guess the m…

> For instance, let's say right now, the market is headed up. When is the right time to "re-balance" to more cash? This is just assuming that the market is going to go lower than it currently is, which is just as much a gamble as thinking it'll go up for the next year.

It's the other way round, if the market has gone up then you rebalance to hold more cash. You're betting on mean reversion, not just making a random directional bet; in the long term that works, and since you're not leveraging there's no "remain irrational longer than you remain solvent" problem.

> When is the right time to "re-balance" to more cash?

In theory if you wanted to invest "perfectly" you'd do it continuously. In practice trading costs, tax concerns, and the cost of your own time mean you want to set a schedule that's not too inconvenient.

> Talk to a financial advisor and choose a risk-based investment strategy that makes sense for your point in life.

I know this is the standard advice, but these days it's pretty outdated IMO. A financial advisor will rarely tell you anything more than the basic middle-of-the-road advice you find on the internet or elsewhere, and they'll charge you a substantial amount for the privilege.

Re: Harry Browne’s Rules of Financial Safety (1999)

#216

Post by lmm »

nly wrote: post #163
tornato7 wrote: post #102

Earlier quoted context omitted.

This is interesting. The antithesis is probably the book Lifecycle Investing [0] which essentially concludes that you should be 2X leveraged stocks in your youth and slowly reduce leverage over time. 0. https://www.lifecycleinvesting.net/

So a 50% market drop wipes you out completely? Hrrm, nah

For a few years in your '20s, when your investment is going to be small either way, you presumably haven't got a lot of commitments, and you'll have your whole life to adjust for it if a literal once-in-a-century slump happens to hit at exactly the worst time? I can see the logic.

Re: Harry Browne’s Rules of Financial Safety (1999)

#217

Post by prepend »

sacado2 wrote: post #194
prepend wrote: post #187

Earlier quoted context omitted.

Worse than a more typical 80% stock/15% bonds/5% cash. Having half your assets in cash and gold is very not smart.

I myself tend to lean toward stock-heavy allocations, but this is not something I'd recommend to everyone. I don't know if you remember the 2008-2009 period, or if you even were an investor back then, but those were... interesting times, to say the least. Almost-retired and newly retired didn't sleep well back then. Your portfolio lost 26% of its value that year, and losing 1/4 of your life's saving isn't something m…

No one should have 25% in cash and 25% in gold.

There’s different stock ratios for different situations. But half cash is bad advice. Even if you are 85, you might have lots of cash equivalents, but you wouldn’t have 25% gold.

Picking a single year isn’t a productive example because the point of investment is to keep for multiple years.

With a 10+ year horizon, you should definitely be willing to stomach a 25% drop one year, because that happens. And of course the market was up over 100%+ in the following 10 years.

It’s not useful to compare Browne’s allocation without mentioning how it was much worse than the s&p500 over that period.

To compare strategies, you want to look at them compared to one another. And of course past performance doesn’t guarantee future performance. But it can be helpful.

“Almost never loses money” is not a very good strategy unless you are in retirement already. Most people aren’t in retirement so if they choose a never lose money vs strategy they will end up with less money than a “loses 25% sometimes, but averages more.”

Re: Harry Browne’s Rules of Financial Safety (1999)

#218

Post by chii »

blitzar wrote: post #29
quonn wrote: post #5

Earlier quoted context omitted.

Probably due to „dilution“ where the number of shares is expanded, leading to lower value per share. I was surprised by this, too. It‘s perhaps the most important thing to know when working for startups or investing in them.

Listed companies can and do this as well, typically not on a scale that is so noticeable.

> not on a scale that is so noticeable.

it's more likely that the equity raised are deployed to produce more value than the "loss" due to dilution.

For a startup, this might be harder, since the revenue is less clear, and thus the valuation is very inaccurate. For a mature/listed company, the revenue is much clearer and thus the valuation is more accurate.

Re: Harry Browne’s Rules of Financial Safety (1999)

#219

Post by vparikh »

My simple rules about money and investing for the future:

- Max out 401K and place it in S&P 500 mutual fund - Take an additional 15% and but into an S&P 500 mutual fund - Don't look at it, just keep buying at regular intervals until you decide to retire.

The rest of your money - do what you wish (within reason) and stay out of debt.

Simple? Yes.

Contrary? Yes.

Proven historical returns that beat inflation? Yes - https://www.officialdata.org/us/stocks/s-p-500/1973?amount=1...

You can thank me when you retire :)

Re: Harry Browne’s Rules of Financial Safety (1999)

#220

Post by chii »

OrvalWintermute wrote: post #213
throw0101a wrote: post #133

Earlier quoted context omitted.

Gold is an unproductive asset, that does not do anything useful against inflation, and when used to back currency (e.g., Gold Standard) does not help with stability (and may actually cause instability): * https://www.theatlantic.com/business/archive/2012/08/why-the... * https://archive.ph/FWKcL

Gold is great as a hedge for many things, and that is exactly how I use it. However, I am not suggesting all people have to have a physical supply. There are 3 ways at least that it is regularly used as an investment Physical Gold Gold via a fund e.g. SPDR (GLD) https://www.spdrgoldshares.com/ Gold mining stocks e.g. SPDR (GLDM) https://www.spdrgoldshares.com/ Gold does work as a hedge against sustained inflation, bu…

> Gold also works as a hedge against currency hyperinflation

currency hyperinflation is often caused by (very) bad monetary policy (or other decisions) from the gov't, or an apocalyptic event of some sort - which, even if you try to hedge, will not save you from the fallout from such an event.

You'd be better off moving away to a more stable country, or if there's no where to move, you'd be needing guns and ammo. Either way, investment returns would be the last thing on your mind.

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