These are crazy times right now. The stock market is a roller coaster. The gold market is trending up, but then we have to put up with steep drops of 10 to 20 percent every few months. And who knows what is going to happen with interest rates and the price of bonds?
There are major troubles in Europe. There are major troubles in the U.S. The banks still have a lot of bad debt on their books, whether they admit it or not. The Fed has tripled the monetary base in the last 3 years, while most of this money has been stashed away as excess reserves by the commercial banks.
Will we see huge price inflation in the near future? Or will we see massive deleveraging and a bigger slowdown in velocity, leading to something resembling a depression?
These are hard questions to answer, even for someone well versed in Austrian economics. It is impossible to know exactly how the politicians and central bankers will act in the future. It is also impossible to know how other people will react. Economics is all about human action.
The number one goal of investors right now should be the preservation of capital. Safety should be your top priority. That is why I recommend setting up a permanent portfolio as described in Harry Browne's book, Fail Safe Investing.
For those looking for a little more risk without having to manage your investments too much and without having to play too many guessing games, I will offer a suggestion to you. Try setting up the permanent portfolio with a twist.
The regular permanent portfolio goes like this:
25% long-term government bonds
25% cash or cash equivalents
If you want to increase your risk/reward while staying relatively safe, change your cash portion. Keep the stocks, gold, and government bonds all equal, but put less in cash for a little more risk. For example, you could put 30% in stocks, 30% in gold, 30% in bonds, and 10% in cash.
With this setup, there will be greater swings, particularly in a recessionary environment. I would not try this strategy if you will need to tap into your investments in 5 years or less. Also, I would not go lower than 10% in cash. If we do go into a deep recession, you need some cash on the sidelines to buy the things that are "cheap".
If you are looking for something even safer than the permanent portfolio, it is going to be hard to do. If you need to tap into your investments in one year or less, then you should have most of it in cash. If you will need to tap into your investments in, say, 3 or 4 years, you could use the permanent portfolio and lighten up in stocks.
If you are a really conservative investor, you will have a hard time in this market. Unfortunately, because the government and the Fed create inflation, even having your investments in cash is not safe in the long term, as it is vulnerable to losing its purchasing power.
If you are a really conservative investor, here is the best allocation I can think of for you:
You will not get as high of a return, particularly during prosperous times. But you will be less likely to see huge swings, particularly in a recession.
Bottom line though, if you are investing for the long run and you want to keep your money relatively safe, I would just go with the regular permanent portfolio. To paraphrase what Richard Maybury says, the permanent portfolio is not perfect, but it is the best thing I know of right now to keep your investments safe.