Fail-Safe Investing By Harry Browne

Fail-Safe Investing By Harry Browne – Book Summary.

The 17 Simple Rules

Fail-Safe Investing

These Fail-Safe Investing rules will assure that your investments will enhance your life and will grow into a safe and comfortable retirement. And they will make certain you don’t lose your hard-earned money.

The 17 Simple Fail-Safe Investing Rules of Financial Safety

Rule # 1 Build Your Wealth upon Your Career

You’ve probably heard of people who made a fortune investing. But in most cases they started with a sizeable stake — several hundred thousand dollars or more — from an inheritance or a previous career.

Working together, your career and your investments can build a prosperous, secure future. But never forget that your wealth begins with your career — the way you make your day-to-day living.

If you save enough from your business, profession, or job, you eventually may earn more from investing than from working. But unless you first pay attention to working and saving, you’ll never share in the wealth that investing can bring.

Investing is the second part of the road. The first part is the money you earn and save from your job.

Table of Contents

Why You Must Invest

Investing wisely can amplify and enhance what you earn by your labor. And it is the only thing you really can count on for your senior years. You can’t depend on Social Security to take care of you.

Social Security operates on a simple principle: You give your retirement money to politicians and they squander it on something else.They may spend it on someone else’s retirement — or on building monuments to themselves one thing they will never do is to put your money in a trust fund earmarked for your retirement

Your Career Provides Your Wealth

The closer you are to retirement now, the bigger chance you have to get something back from Social Security. But, in general, the safest way to consider the matter is to assume you won’t get anything — and then treat anything you do receive as found money.

You can count on for your retirement only what you put away yourself. And you must make sure that what you put away is safe and growing at a healthy rate.

Fail-Safe Investing Rule # 2 Don’t Assume You Can Replace Your Wealth

If risky investments turn out badly and you lose everything you have, you might be able to earn it all back again. But don’t count on it.

You earned your wealth because your talent and effort harmonized with the circumstances in which you found yourself. But the world won’t stand still for you or repeat itself when you need it to.

So assume that what you have now is irreplaceable, that you could never earn it again — even if you suspect you could.

Recognize, too, that without prudence whatever wealth you’ve accumulated is vulnerable to the same kinds of surprises — litigation, regulation, investigation, market setbacks, changing tastes, or just plain misjudgment. So you need to find a way to protect your savings from every eventuality — a task that, fortunately, isn’t as daunting as it might seem.

You’re violating Fail-Safe InvestingRule #2 any time you think it’s okay to go for broke with the savings you’re counting on for the future — or when you treat your wealth with anything other than the utmost respect.

Protecting what you have requires setting up an investment program whose first priority is to preserve what you’ve worked for.

Recognize how precious your wealth is, and resolve to say “No!” to any proposition that asks you to risk losing it.

Rule # 3 Understand the Difference between Investing and Speculating

Investors often get into trouble by speculating when they think they’re investing. If you don’t understand the difference between the two, you can put yourself in a dangerous situation.

When you invest, you accept whatever 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 clever timing, forecasting, or selection.

There’s nothing wrong with speculating — provided you do it only with money you can afford to lose.

Rule # 4 Beware of Fortune-Tellers

We live in an uncertain world.

You may make the best choice you can, but you know you can’t control the actions of other people. Nor can you know for sure how other people will react to future events.

Even though you can’t eliminate uncertainty, you know there are ways to deal with it.

Respecting uncertainty, you make choices that let you capitalize on opportunities, but with safeguards that protect you from being hurt too badly if things don’t turn out as expected.

You won’t have to look very far to find someone who claims to have a foolproof way to know which way the markets are moving. The investment world is overpopulated with seers who claim to have amazing forecasting records.

Safety doesn’t come from trying to peer into the future to eliminate uncertainty. Safety comes from devising realistic ways to deal with uncertainty.

The beginning of investment wisdom is the realization that we live in an uncertain world — and that no one can eliminate the uncertainty for you.

Rule # 5 Don’t Expect Anyone to Make You Rich

Perhaps it is unrealistic for you, investing part-time, to expect to outdo the professionals.

Investment advisors come in many garbs — such as stock and commodity brokers, newsletter writers, financial journalists, money managers, and financial planners.

No matter what their occupational titles, they fit into two groups;

  • Helpers
  • Market-Beaters

Investment advisors acting as Helpers can be very useful — helping you set up a portfolio and translating some of the more mysterious areas of investing for you.

It’s when they put on their Market-Beater hats, promising to provide a better return than the market is offering to everyone else, that you better watch out.

But no one can guarantee to provide a return better than you achieve through conservative investing.

Rule # 6 Don’t Expect a Trading System to Work Reliably

Just as some advisors selectively reconstruct their track records, so do many proponents of trading systems. The true record may not be as good as the one you’re shown.

Trading systems are based on the unstated assumption that the world doesn’t change. But the world is in constant change – as desires change, demand changes, and supplies change.

Fail-Safe Investing Rule # 7 Invest Only on a Cash Basis

When someone goes completely broke, it’s almost always because he was operating with borrowed money — even someone who was quite rich.

Because you have to pay interest on the borrowed money, your actual profit will be a bit less than double what it would have been without borrowing, or your loss will be a bit more than double that of a cash investment.

You can avoid this kind of fate. Investing on a cash basis doesn’t insure you against loss. But it effectively eliminates the risk of losing everything, because investment prices rarely go to zero.

In your personal life, you know that debt can be dangerous — that it is better to earn interest than pay it, that it’s easy to get in trouble once you start borrowing.

Handle your business and investment affairs on a cash basis, and it’s virtually impossible to lose everything — no matter what might happen in the world — especially if you follow the other rules as give in Fail-Safe Investing.

Rule # 8 Make Your Own Decisions

Many individuals have lost their fortunes because they gave someone (usually a financial advisor or attorney) the authority to make their decisions and handle their money.

When it comes to fail-safe investing setting up such a portfolio for yourself is safer than turning your decisions over to anyone — even to the smartest person in the world.

Above all, never give anyone signature authority over money that’s precious to you. If you ever put money into an account for someone else to manage, it must be money you can afford to lose.

Once you accept that all the decisions are yours to make, you can entertain anyone’s advice — through newsletters, personal consultations, books, whatever.

These sources may help you clarify your own thinking, your own goals, and your own strategy.

Signature authority means giving someone the legal authority to make financial transactions on your behalf without having your signature on each transaction.

But if you expect someone to make the right decisions for you, you’re in trouble. No one (not even I) will ever treat your money with the same care you will.

Rule # 9 Do Only What You Understand

Don’t ever undertake an investment, a speculation, or an investment program that you don’t understand.

If you do, you later may discover risks you hadn’t been aware of — or the risks may find you.

It doesn’t matter whether your favorite investment advisor, your best friend, or your brother-in-law understands the investment perfectly. It isn’t his money.

Fail-Safe Investing Rule # 10 Spread the Risk

No one investment is good for all times. Diversify across investments and institutions. See also Unshakeable by Tony Robbins.

Rule # 11 Build a Bullet-proof Portfolio for Protection

For the money you’re counting on to take care of you for the rest of your life, set up a simple, balanced, diversified portfolio.

The portfolio should assure that your wealth will survive any event — including events that would be devastating to any one investment. In other words, this portfolio should protect you no matter what the future brings.

It isn’t difficult or complicated to build a bullet-proof portfolio. You can achieve a great deal of protection with a surprisingly simple mix of investments.

A portfolio is a collection of investments you hold.

The three absolute requirements for such a portfolio are;

Safety: It should protect you against every possible economic future. You should profit during times of normal prosperity, but you also should be safe (and perhaps even profit) during bad times — inflation, recession, or even depression.

Stability: Whatever economic climate arrives, the portfolio’s performance should be so steady that you won’t wonder whether the portfolio needs to be changed.

Simplicity: The portfolio should be so easy to maintain, and require so little of your time, that you’ll never be tempted to look for something that seems simpler, but is less safe I call such a portfolio the Permanent Portfolio, because once you set it up, you never need to reconsider the investment mix — even if your outlook for the future changes. You leave it alone — to hold the same investments, in the same proportions, permanently.

Your portfolio needs to respond well only to those broad movements. And they fit into four general categories:
1. Prosperity- A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.
2. Inflation- A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).
3. Tight money or recession- A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, and usually leads to a recession – a period of poor economic conditions.
4. Deflation-The opposite of inflation. Consumer prices decline and the purchasing power value of money grows.

Four Investments Cover All

These four investments provide coverage for all four economic environments:

Stocks take advantage of prosperity. They tend to do poorly during periods of inflation, deflation, and tight money, but over time those periods don’t undo the gains that stocks achieve during periods of prosperity.

Bonds also take advantage of prosperity. In addition, they profit when interest rates collapse during a deflation. You should expect bonds to do poorly during times of inflation and tight money.

Gold not only does well during times of intense inflation, it does very well. In the 1970s, gold rose 20 times over as the inflation rate soared to its peak of 15% in 1980. Gold generally does poorly during times of prosperity, tight money, and deflation.

Bond prices automatically rise as interest rates fall, and bond prices fall as interest rates rise — that is, bonds and interest rates move in opposite directions.

Cash is most profitable during a period of tight money. Not only is it a liquid asset that can give you purchasing power when your income and investments might be ailing, but the rise in interest rates increases the return on your dollars. Cash also becomes more valuable during a deflation as prices fall. Cash is essentially neutral during a time of prosperity, and it is a loser during times of inflation.

Rule # 12 Speculate Only with Money You Can Afford to Lose

Fail-safe Investing author says he has nothing against your speculating. His single admonition is:

Speculate only with money you can afford to lose.

Rule # 14 Take Advantage of Tax-Reduction Plans

Income taxes make you devote from a third to a half of your working life to the government’s benefit, rather than your own. If you didn’t have to pay income tax, it’s not hard to imagine what you could do for yourself, your family, your church, and your favorite charity.

I encourage you to take advantage of the simple tax-reduction strategies available — and to shun those that are too complicated for you to evaluate.

e.g. Tax Deferral. Delaying payment of taxes to a later date is called tax deferral. It’s the basic method for reducing the tax burden on your investment program.

With tax deferral, the money you don’t pay in taxes today can work to produce more earnings every year until you finally have to pay the tax

Fail-Safe Investing Rule # 15 Ask the Right Questions

ASK: What is the most you can lose on the investment? (Usually, every penny you put it into it.)

DON’T ASK, “Is there any risk?” (Of course there is risk. No investment is risk-free. Risk is simply the possibility that the investment won’t do as well as expected.)

Under what circumstances could I lose a substantial share — 20% or more — of my investment?  OR Under what circumstances could my entire investment be lost? OR Would I have any residual liability — that is, can I lose even more than the cash I invest? BUT DON’T ASK “Is this investment safe?”

In fail-safe investing safety comes not from a perfect investment, but from the right balance of investments.

Rule # 16 Enjoy Yourself with a Budget for Pleasure

Your wealth is of no value if you don’t enjoy it.

To enjoy some of your wealth while you’re earning it, budget a sum of money that you can spend each year without concern for the consequences.

If you stay within that amount, you can feel free to blow the money on cars, trips, anything you want — without worry, because you’ll know you aren’t blowing your future.

You work all your life to reach a certain goal. But while you’re slowly but surely getting there, don’t be afraid to take a few moments to stop and smell the roses.

Fail-Safe Investing Rule #17 Whenever You’re in Doubt, Err on the Side of Safety

At times you may feel forced to do something you don’t understand. Or perhaps you believe you must evaluate an investment or plan even though the task calls for more sophistication than you possess. Or maybe someone insists that you make a decision now — and you feel you could lose your life savings if you jump the wrong way.

In any of these situations, what do you do?

No matter what else you may know, I hope you will hold on to this one rule:

When in doubt about an investment decision, it is always better to err on the side of safety.

It’s harder to resist the stampede to an investment or a system when others seem to be raking in profits. But you don’t know how well other people are really doing. Even if you’re convinced that someone is doing very well, he may be doing it by taking risks that aren’t right for you.

People don’t go broke being too cautious, but they can be hurt badly by jumping into something they don’t understand, haven’t thought out, or can’t afford.

If you pass up an opportunity to increase your fortune, there always will be another chance. But if you lose your life savings, you might not get a chance to recover.

Free free to read more personal finance books.

Browne, Harry. Fail-Safe Investing: Lifelong Financial Security in 30 Minutes. St. Martin’s Griffin, 2001.  176 pages.

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