Summary of “Fail-Safe Investing”: Invest in a secure and simple way: “If you are unsure about whether to invest, it is always best to choose the safer route for you portfolio “.
By Harry Browne, 2000, 176 pages
Note : This guest column was written by Aurélien from the blog Je deviens riche. Fail Safe Investing is part of the Personal MBA.
Chronicle and summary of “Fail-Safe Investing”
The financial world is a mysterious environment, full of technical terms that make no sense to most of us. However, the real secret to how to invest can be summed up as follows: your investments must be secure and easy.
Whether you have a small or large amount of money, Fail-Safe Investing will teach you how to invest it and grow it securely.
In the world of finance, as in other areas, your common sense can prove more useful to you than the lingo and trading systems you may come across.
Don’t expect a secret formula from Fail Safe Investing. It will show you 17 simple rules that you may already know and that will give you confidence when you make your investments and ensure you don’t lose your hard earned money.
These rules come from my 30 years of experience in the financial industry. They worked for me, I hope they will work for you.
Rule n°1: Build-up your asset base from your salary
The development of your professional career and investments can provide you with a more prosperous and secure future. If you invest a big enough share of your income the returns can be more than the income itself. But if you don’t work, you won’t be able to invest.
Investment needs to be the second phase of the process, the first phase should always be to work to generate your income. Investments alone have never made anyone rich.
Don’t try to out-perform the financial professionals with your investment choices, as they have spent their career in this job. Don’t be fooled by ads that promise you riches at the cost of a few thousand dollars.
Did Luciano Pavarotti become the greatest tenor in the world because he read a book or subscribed to a newsletter?
Your investments should not be your only source of income, you shouldn’t quit your job to focus full-time on them.
Why do you need to invest?
How does social security work? “You give your retirement money to politicians who squander it on other things.”
What they don’t do is invest that money for your retirement. The money needed for that will come from other sources. This “pyramid” scheme will be increasingly hard to implement and will need to be replaced when it goes “boom!”.
Until then, the only thing to do is to reduce current pensions, raise the retirement age and increase contributions.
The closer you are to retirement, the more likely you are to receive something. The younger you are, the easier it will be to plan for your own retirement.
With a bit of common sense, your investments can:
- Ensure a secure and comfortable retirement;
- Improve the quality of your life (have a more comfortable home, pay for better education for your children or anything else that is important to you);
- Enable you to leave a more substantial inheritance to your beneficiaries.
Conclusion: invest in a secure and easy way.
Rule n°2: Don’t make the assumption that you will be able to rebuild your wealth.
Should you happen to lose all of your money, you might be able to “rebuild” yourself. But don’t expect that to happen.
Your career may include many personal successful achievements which are down to you but also due to other circumstances. These circumstances may turn out not to be in your favour. Remind yourself that what you own can never be replaced in any circumstances (even if you’re capable).
Everything you own is at risk, so you need to protect your savings.
You break rule number two every time you are prepared to use your savings. Your capital is precious, you must be able to say “no! “every time there’s a risk that you could lose it.
Rule n°3: Understand the difference between investment and speculation.
When you invest, you accept that you will get the same returns as the other investors within that sector.
When you speculate, you try to “beat the market” and get better returns than other investors when you make forecasts. This means that you have skills or expertise that other investors don’t possess.
You invest when:
- hold a long-term market position without the need to choose an investment sector that is likely to outperform the market.
- invest your money in a fund that mirrors the market or in a bank account.
- have a balanced portfolio with different investments, some of which will perform better than the others – and keep your portfolio afloat – when times are bad economically.
You speculate when:
- select stocks, funds, investment sectors that you believe will outperform the market.
- invest your money in shares based on your expectations for the short term.
- base your investments on the economic outlook
- use technical analysis or any other analysis or system that alerts you as to when to buy or sell.
If you hope to beat the market, it increases the risk that what you get back from your original investment could be lower than if you invested in a safer and more stable investment, it could even be totally wiped out.
There is nothing wrong with speculation (if you only use money that you can afford to lose) but the money you have set aside for your future must never be gambled on the hope that you are better than other investors.
Rule n°4: Be careful of people who tell you they can make you rich.
We live in a world of uncertainties where it is impossible to know peoples’ reactions to future developments.
Even though you can’t predict the future, you are able to make safe decisions for your future personal and professional life with the use of the knowledge that you have available even if things don’t go as expected. You know how to weigh up the risks when you make a decision.
You don’t believe the words of a random person who claims that they can predict the future. If they really could, they would use this skill to make themselves rich, not just charge you a few hundred dollars for their “knowledge”.
Investments are no different from anything else. Share prices vary in accordance with the decisions made by millions of people. No one is able to predict the behaviour of millions of people. Security is not predictions of the future in order to reduce uncertainty. Security means the choice of a safe route irrespective of these uncertainties.
You break rule 4 when you suspect that an event will take place. Anything can happen. Nothing might happen.
Make certain that, whatever the future, your finances are not affected. Then you won’t need to worry about future surprises or whether you’ve made the right predictions.
Rule n°5: Don’t expect someone to make you wealthy.
“The investment advisors who are currently the best performers will fail as soon as you follow them“.
There are several categories of investment advisors: brokers, newsletter subscribers, financial journalists, and financial investment advisors.
Regardless of their titles, they can be divided into 2 groups :
- Investors: Those who use their experience and knowledge to help you build a portfolio that suits your needs and helps you to achieve your objectives. They can teach you the tools and strategies needed to succeed in the world of investment. They can offer you investments that meet your needs, which you don’t know about. And, they can ask you the relevant questions required to help build a portfolio that suits your needs.
- Speculators: They suggest that you speculate to beat the market. They will offer investment options that you may not be aware of. No matter what their experiences and their financial intelligence, they can’t predict the future because no one can predict what thousands of people will do. They will show you incredible numbers, previously achieved, but the future is different and often the results are different once you have invested.
When you hear of someone who has produced miraculous results, reflect on what your thoughts would be if you were told that someone had performed a miracle. Luck often accounts for what people call a miracle. You must employ the same level of suspicion in similar scenarios within the world of investments.
There are tens of thousands of advisors who make recommendations and, by the law of averages, some of them will be on a good streak. If 4,000 people toss a coin over and over again, there will be at least 1 who tosses it 10 times in a row and it lands face up. Very unusual! But would you bet your life’s savings that the 11th time would be face up?
Why do I say that someone who has good results is likely to start to lose from the day that you follow their advice?
Because you don’t act on the advice of someone you don’t know. You only hear about them after – and because – they have recently made several good decisions.
Once they have had their lucky streak, they get a name for themselves. However, in the interim their luck has changed and they begin to lose money.
Investor’s advice can be very helpful to build up your portfolio and get to grips with the murkier areas when it comes to investments.
But when they change into a speculator and promise to outperform the market, it’s time to move elsewhere.
Rule n°6: Don’t expect to get rich from a trading system.
If someone tells you that they have found a system to win at horse races, predict lotto numbers or bingo every time, you will think that it is too good to be true and you will be right.
You have probably already been offered similar things with investment schemes. Trading systems are programmes that tell you when to buy and sell your shares, with no decision on your part.
Remember one crucial rule about trading systems:
“The system that has worked perfectly up until now will start to break down when you start to use it to gamble your money.”
The success of a system is due to chance or coincidence.
Trading systems are made up by two main sources:
- The observation of human behaviour that is translated into a quantifiable mechanised structure.
- Data processing (example: whenever the T°C is above 30°C for 10 days, the market changes direction the next weekend).
Trading systems are based on the premise that the world does not change.
Of course, all the trading systems shown to you will have performed very well in the past. Otherwise you wouldn’t have been shown them. But don’t forget:
“The system that has worked perfectly up until now will start to break down when you start to use it to gamble your money”.
Rule n°7: Only invest your own money.
If someone is broke, it is almost always because they have borrowed money. Even if they were initially quite well off.
If you invest with borrowed money it increases your risk because if the investment is unsuccessful, your losses will increase.
No investment is infallible. If you borrow money it can increase your losses as much as it can increase your profits.
If you invest “cash” it does not prevent losses. But it does effectively eliminate the risk the loss of everything because prices rarely fall to zero.
If you diversify your investments (not only in shares but also through other channels), even a significant loss on one option will be offset by the profits of the other investments.
Use cash to make your investments and it will be almost impossible for you to lose it all. No matter what happens in the world, you won’t care, and this is without the inclusion of the other rules in the book Fail-Safe Investing.
Rule n°8: Make your own decisions.
Lots of people have lost their fortune because they have given the decision making authority on their own money to somebody else. There isn’t one financial consultant who will look after your money as well as you.
You don’t need a manager for your money. If you invest it only becomes complicated if you try to trade and outperform the market.
It takes you one day to build an all-round secure portfolio. Then it will only take you one day a year to make the required adjustments.
You should never give someone the authority to sign for money you need. If you give another person money to manage, you must be prepared to lose it and make sure that if the loss is substantial, you are not liable for more than the sum of the initial investment.
No one will ever handle your money more carefully than you.
Rule n°9: Only work with what you know about.
Never enter into an investment that you do not understand. If you do, you will be exposed to risks that you weren’t aware of, where your losses are greater than the amount invested.
A straightforward investment is vital for safety. As we will see later, you can easily build yourself a portfolio that will protect your capital in every economic situation.
Rule n°10: Spread the risks.
Every investment goes through its good and bad times. No investment is ever consistently profitable.
If you have only one investment, one organisation, you will always face the prospect that your only source of investment may decline.
If you diversify your investments and institutions and keep things straightforward enough to handle yourself, you can relax in the knowledge that no other external situation will impact you.
Rule n°11: Create a robust and secure investment portfolio.
You must create a simple, well-balanced and diverse portfolio (a portfolio is a collection of investments) to safeguard your future. This portfolio must protect you whatever the future economic circumstances. For this to happen, three conditions must be met:
- Security: Periods of inflation, recession or depression must have a minimal impact on your portfolio.
- Stability: The portfolio must be consistent even under the most difficult economic conditions.
- Simplicity: The portfolio must be easily maintained and not take up too much of your time. This way you won’t be inclined to second-guess yourself.
I call this the Permanent Portfolio because its makeup will never change.
Four investments to cover all the options.
Economic conditions can be divided into 4 categories: prosperity, inflation, recession and deflation (depression). One of these categories predominates at all times. If you cover all these categories, you will be protected under all economic conditions.
The Permanent Portfolio must therefore contain an investment that is appropriate for each of these situations. The four investments that provide coverage for these four economic scenarios are Equities and Bonds in times of prosperity, Gold in times of inflation, and Cash in times of recession.
The Permanent Portfolio’s results over a 29-year period (January 1970 to December 1998) show stable growth irrespective of the economic conditions (inflation, prosperity and recession).
Therefore this portfolio meets the 3 qualities outlined above: Security, stability and simplicity.
Each investment should account for 25% of the portfolio. An annual audit to rebalance the Portfolio is all you need.
The Permanent Portfolio is a Straightforward and Secure Investment.
Rule n°12: Only speculate with money that you can afford to lose.
Although I try to discourage you to gamble on forecasts, trading systems, or on the advice of gurus, I can’t blame you if you want to “win big”. If you miss what appears to be a great opportunity, you will endlessly ask yourself if you could have made a fortune.
My only recommendation would be: only speculate with money that you can afford to lose.
All you need is a well-balanced and permanent portfolio. But if you want to try to outperform the market, keep some money aside that you can use to speculate with. Just make sure it’s not more than you can afford to lose. I call this the Variable Portfolio because the investments in it will change based on your predictions of what will happen.
Get your fix, jump in the ring. Do something you can boast about but only do it with money you can afford to lose.
Rule n°13: Keep some savings in other countries.
To be safe, don’t leave your assets within the financial grasp of your government. If you are invested in other countries, you will be less exposed and you will be more confident of your situation.
You have to bear in mind and put plans in place for what your government might do in the future.
If you can have some overseas investments it can offer security and protection against unexpected and nasty surprises: forfeiture of gold by the government, controlled trade, civil war or even open war.
These are some possible benefits if you invest your money elsewhere:
- You will have ample time and opportunity to respond to any unusual demands that may be raised by your government. No one can be sure how politicians will tackle economic issues. The standard solution is that they grab what is yours, which is generally what has happened in the past.
- Your assets will be safe even in the event of a civil war, open war, a breakdown in law and order, natural disasters, which could damage the economy, all of which could happen even where you live.
- You will have access to funds even beyond the reach of the financial sharks within your own business.
- All of your assets will no longer be susceptible to the economy, politics, or shifts in your own country.
Risks need to be avoided. Diversification overseas is a necessary step to ensure that the Permanent Portfolio can survive regardless of what is thrown at it.
Rule n°14: Benefit from tax cuts.
Taxes account for between one-third and one-half of your lifetime income and the beneficiary is your government rather than you.
If you didn’t have to pay taxes, you can imagine all the things you could do for yourself, your family, your church or your favourite charity.
Thankfully, there is something you can do to reduce your taxes. I would urge you to take advantage of tax cuts and use those that are straightforward to administer.
Comment: The author then gives details of the different laws that restrict taxation benefits in the USA. In France, you just need to take advantage of the tax laws that exist, through life insurance, an ISA, business accounts, etc…
Rule n°15: Ask the right questions.
Investors frequently choose the wrong investments to suit their requirements because they don’t ask the right questions.
Risk: Are there risks?
Of course, no investment is without risk. The important question to ask is: What are the economic conditions that will cause this investment to decrease?
Should that be the case, are there other investments in your portfolio that will increase? What is the worst case scenario?
Security: Is it a safe investment?
What does “safe” mean? Can’t the price go down? No investment is 100% safe. The important question to ask is: What could cause me to lose a substantial part of my investment? The whole lot? Even more than that?
How much could it earn?
You can earn money in three different forms through an investment: interest, dividends and price increases. High interest rates often signify risk. High dividends mean that the company is undervalued or that it draws on its capital to pay dividends. The important question to ask is: in what conditions will the interest appreciate or depreciate most? In the best of times, will the total return compensate for your losses in other investments?
Do the shares have a strong bullish potential?
Any information you gather about a company, is available to other people. So whatever is of interest in regard to the company must already be built into the price. You only make the big profits when you bet against the herd. The herd is not always wrong, but you won’t be able to make huge gains if you bet with them.
One of the keys things when you speculate is to guess something that others don’t. If you go against the grain it does not guarantee profits, but you will never make much of a profit if you invest with the majority of investors.0
The important question to ask is: Is your interpretation of the information available different from how others interpret it?
Does technical analysis stimulate investment nowadays?
This question is the same as 2487 other questions: are moving averages rising? Is there a head and shoulders shape on the graph…? Regardless of how an indicator has performed in the past, it will probably be as good the next time around – and you’ll be able to use it again, irrespective of the number of times you have done it before.
The important question to ask is: Is there a more interesting programme on TV than this chart?
Rule n°16: Enjoy yourself with a pleasure budget.
Your money isn’t worth anything if you can’t enjoy yourself with it.
It is very easy to spend the money that you get from work, and not put enough aside for the future when you want to slow down or retire. Alternatively, you may realise that you might spend too much and will not have enough for the years to come.
To allow yourself to enjoy your money whilst you’re still at work, figure out an annual budget that you can afford without the need to worry about it. If you stick to it, you have the freedom to spend your money on cars, travel… with no concerns that the money you spend is money that you will need for the years to come.
Rule n°17: If in doubt, choose safety.
Sometimes you will be required to make a decision on something you don’t fully understand. Or someone will push you to make a quick decision that could mean you might lose your life’s savings, if that decision is the wrong one. What do you do if this happens?
Whatever the choice is that you have to make, I would urge you to follow this one rule: “If you are unsure about whether to invest, it is always best to choose the safer route“.
It’s better to miss out on a chance rather than lose your money. There is never a last chance, there will always be others. But if you lose all your assets, the opportunity to get them back won’t be there.
“If you are unsure about whether to invest, it is always best to choose the safer route“
Conclusions about the book “Fail Safe Investing”:
Fail Safe Investing, which is quite short, should be taken as a guide. The guidelines explained are very clear and can be implemented by everyone: you don’t need any technical knowledge. The implementation of these strategies, though not difficult, may require more time and effort than stated by the author. From there, the application will be very quick and easy.
One of the main advantages of this method is that the reader doesn’t need to have any financial know-how. Every investment within the “Permanent Portfolio” is clearly defined and requires no knowledge or understanding of the economy. There’s no need to make any decisions, just follow the facts presented.
In the end, the investment strategy proposed in Fail-Safe Investing is very efficient and is based on core principles that are difficult to dispute. Its “safety first” approach does not mean it lacks interest. Investors should read these guidelines before they build their portfolio.
Strong Points:
- Quick to read, no technical knowledge required
- Covers all aspects of the system (except real estate)
- An approach that highlights the importance of practicality and pragmatism in terms of decisions
- Appropriate for everyone
Weak Points:
- The real estate aspect is not covered
- An updated version is not available for 2010 (the book dates from the late 1990s)
- A comprehensive application of the guidelines proposed by the author is not as straightforward as he suggests
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