Speculation vs. The Permanent Portfolio

I received a comment last week in response to my post about the possibility of a pullback in the near future.  A pullback seems less likely at the moment now after the Fed's meeting and Bernanke's press conference this past week.  However, I would still like to address the comment and add some more thoughts.

The question posed to me was, what would be good to have in a portfolio (presumably in the case of a pullback).  He says that his only current investments are in a 401k.

First, I should reiterate my opinion of 401k plans.  I don't think you should ever contribute more than what your company matches.  The only exception might be is if you are trying to get your income low enough for a certain tax deduction or credit beyond the amount being contributed to your 401k.  If all you have is a 401k, I really would encourage you to do everything you can to get some more liquid funds.  If you can save some additional money, you can split it between gold and cash as an emergency fund.  If this means doing a second job for a while or cutting your costs, I think it would be worth it.  Obviously every person's situation is unique, but I think my suggestion would apply well to most adults.

When I said that there may be a pullback, particularly in stocks and commodities, I was saying it as a speculation.  If all you have is a 401k, then you should really ignore most of my speculative advice, unless you have good fund choices and you can put a little more weighting into gold and commodities (for right now).  But a 401k is not meant for short-term trading and you may even get hit with fees for doing that.

I am a strong advocate of Harry Browne's permanent portfolio.  I think it is good to view this as a home base.  If you put 80% of your investments into the permanent portfolio, that will leave you with 20% for speculation.  Let's say your speculative investments do well.  For example, maybe you put half of it into silver and it has doubled in price.  If you are really uncertain about where things are headed from here and if you fear a pullback, maybe you could take the original amount you put into silver and shift that over to your permanent portfolio.

While the permanent portfolio can certainly go down, I consider it the best safety investment there is.  Cash by itself is not a safe investment because you are risking it being devalued by inflation.

Imagine playing a game where you have a home base for safety.  You can run away from the base and try to grab something, but you risk being hurt.  If you run out and get something, sometimes it is best to run right back to your safety base before trying to grab something else.  I look at grabbing things as your speculative investments.  I look at your home base as the permanent portfolio.

You should take as much time as you need at your safety base.  If you are unsure of what is going on around you, just stay put.  There will be other opportunities in the future.  You can wait for a long time before you are more certain that you can jump out and grab something without putting yourself at too much risk.

This is really a time to protect what you have.  There are a lot of risks right now and you should make sure you know them if you are speculating.  If you have absolutely no stomach for risk, then put all of your investments into a permanent portfolio setup.  You can sit back and enjoy the show while continuing to sleep at night.  If you want to take more risk, do it with a smaller amount of money.  You don't have to hit the lottery.  Just make sure to protect the vast majority of your assets at your home base. Keep them safe from this risky environment.