August 10, 2007: The Ideal Portfolio, thoughts of Harry Browne

Yesterday was a smack down day. For some reason, my extraordinary gains from Wednesday did not completely evaporate, just about 60% of them. So much for the "attaboy" as we ride a rollercoaster.

There are times when referring back to an old chestnut book of investment advice is useful, and interesting. I did that today (instead of selling).

Harry Browne was a very interesting and insightful person who managed to articulate his views quite clearly on everything from Swiss Banks,Portfolio Theory, Gold and the Libertarian Party which nominated him for President twice. He died almost two years ago. But not forgotten.

I have written about Mr. Browne before, and several years ago had an interesting e-mail exchange with him on a variety of topics. We disagreed quite often on policy issues, but he was always the consummate gentleman who never talked down to anyone. We did agree on some classical music selections(he was an opera buff). The following is a direct excerpt from his 1981 book, INFLATION-PROOFING YOUR INVESTMENTS:


THE IDEAL PORTFOLIO (from Chapter 27)

"For the next ten years, one investment will do better than all the others; no mix or combination of investments will be abler to beat it. If you think you've identified that investment, you may be tempted to put all of your money into it.

Unfortunately, none of us knows for sure what the big winner will be. Each of us may make a guess - and, because there are so many of us, some of the guesses will turn out to be right. But that won't mean that anyone really knew the future - only that a few people estimated shrewdly or guessed well.

Uncertainty is a fact of life. The world is too complicated for anyone to be able to project all the details of the present into the future and predict where the world will be ten years from now.

But that shouldn't make you feel helpless - only humble.

Financial diversification can protect you from what can't be foreseen. A diversified portfolio should reflect your expectations by emphasizing the investments you believe will do best. But it should also include what appear to be second and third best investments, as well as small amounts of hedges that probably will lose money if your favorites pay off. It isn't easy to put money into hedges you don't expect to do well, but there are two reasons that you should.

First, the future may not match your expectations. If it doesn't, the hedges will save you from a disastrous loss.

Second, over ten years, the road from here to there will not be a straight line. Your favorite investment will have ups and downs along the way - and each time its down, you may wonder if it will ever get up again. The hedge investments provide comfort and security during those times by partially offsetting the temporary losses on your favorites.

The surprise factory in Washington will continue to be the main source of investment uncertainty - as the government looks for a new way to paper over old problems. You can't anticipate what the government will do next year or even next month. And even if you knew what the government would do, you still couldn't be certain of the investment effects or of their timing.

If you have opinions about the future, you should act on them. But it's a mistake to confuse opinions with knowledge."


Down home basics written in 1981 still have merit today.