16 Golden Rules
of Financial Safety
16 Golden Rules
of Financial Safety
by Harry Browne, editor
Harry Browne's Special Reports
Over and over we read of a famous person
who made a great sum of money as an entertainer, sports star, or business
genius -- only to lose it all.
Sometimes the individual lost his money because of poor investment decisions
or because he became involved in a business for which he had no aptitude
or experience. Other times it's because a money manager had too much control
of the money and too little monitoring. Or a would-be tax expert set up
a complicated tax-shelter scheme that didn't work and brought on heavy penalties.
Every time I read one of these stories, I'm saddened. Someone has lost
everything and is unlikely to recover it because his big-income days are
past.
When you read that one of the richest people in the world -- someone
like Bunker Hunt or Donald Trump -- has declared bankruptcy or is in financial
trouble, it's easy to feel a sense of futility about managing your own money.
If such a person -- able to afford the best financial advice in the world
-- can't hang onto his money, what chance do you have?
But the individual didn't fail because he received a bad forecast about
the future, lacked access to the right kind of information, or picked a
poor investment. His undoing was in violating some basic rule of financial
safety. Had he followed the simple, common-sense rules of investing, his
wealth would still be his.
And the rules by which he is bound, and which he violated, are the same
principles that apply to your finances. If you abide by those rules, there's
practically no chance that you could lose all you have.
I call these common-sense principles the 16 Golden Rules of Financial
Safety.
1. Your career provides your wealth. You most likely will make
far more money from your business or profession than from your investments.
So don't take risks with complicated investment schemes in the hope of multiplying
your capital quickly. You're risking a lot to gain a little.
2. Don't assume you can replace your wealth. The fact that you
earned what you have doesn't mean you could do it again. Markets change,
laws change. And as time passes, increasing regulation makes it harder and
harder to earn a fortune. So treat what you have as though you could never
earn it again.
3. Don't use leverage. When people go broke, it's almost always
because they were operating with borrowed money -- even through they may
already have been quite rich. If you handle all your business and investment
affairs on a cash basis, there's practically no chance you could lose everything
no matter what might happen in the world.
4. No one can predict the future. Events in the investment markets
result from the decisions of millions of different people. And those events
never unfold as expected. Investor advisors have no more ability to predict
the future actions of human beings than psychics and fortune-tellers.
5. No one can move you into and out of investments consistently with
precise and profitable timing. You'll hear about many Wall Street wizards,
but the investment advisor with the perfect record up to now most likely
will lose his touch the moment you start acting on his advice.
6. No trading system will work as well in the future as it did in
the past. You'll come across trading systems or indicators that seem
to have signaled over and over where an investor's money should have been,
but you can assume the systems will stop working when your money is on the
line.
7. Recognize the difference between investing and speculating.
When you invest, you accept the return the markets are paying investors
in general. When you speculate, you attempt to beat that return -- to do
better than other investors -- through astute timing, forecasting, or stock
selection, and with the implied belief that you're smarter than a mere investor.
There's nothing wrong with speculating -- provided you do it with money
you can afford to lose. But the money that's precious to you shouldn't be
risked on a bet that you can outperform other investors.
8. Don't let anyone make your decisions. You don't need a money
manager and, above all, never give anyone signature authority over money
that's precious to you. You have no way of knowing what he may be prompted
to do someday by pressures or problems.
9. Don't ever do anything you don't understand. It doesn't matter
that your favorite investment advisor or a friend understands something.
They won't cover your losses. It's better to leave your money in Treasury
bills than to take the chance that someday you'll discover there were risks
or liabilities you couldn't see at the outset.
10. Keep some assets outside the country in which you live. Don't
allow everything you own to be within the reach of your government. You'll
be less vulnerable, and you'll feel less vulnerable -- and you won't have
to worry so much about what the government will do next.
11. Beware of tax-avoidance schemes. Tax rates are still low
enough in the U.S. that you might gain very little from the risk and effort
of constructing elaborate tax shelters. Complicated tax schemes may include
many vulnerabilities and liabilities of which you're not aware.
12. Don't depend on any one investment or institution for your safety.
Every investment has its bad periods: the inflation of the 1970s hurt stocks,
bonds, and even Treasury bills -- -while the 1980s were terrible for gold.
Real estate lost its luster when the tax rules changed in 1986. And as we've
seen you can't count on institutions either -- as banks, S&Ls, and pension
funds have gone under.
13. Create a balanced portfolio for protection. For the money
you need to take care of you for the rest of your life, set up a simple,
balanced, diversified portfolio (what I call a Permanent Portfolio). Design
the portfolio to assure that your wealth will survive any event, including
events that would be devastating to one or more of the portfolio's investments.
This needn't be complicated; you can achieve a great deal of diversification
with a surprisingly simple portfolio.
14. Speculate only with money you can afford to lose. If you
believe it's possible to beat the market, set up a separate pool of money
(what I call a Variable Portfolio) with which you can speculate to your
heart's content. But make sure this pool contains only money that you can
afford to lose.
15. Enjoy yourself with a budget for pleasure. To enjoy your
wealth, allow a budgeted amount that you can spend each year without concern
for the consequences. If you stay within the budgeted amount, you can blow
this money on cars, trips, anything you want -- knowing that you aren't
blowing your future.
16. Whenever you're in doubt about a course of action, it is always
better to err on the side of safety. 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 replace them.
Editor's Note: After 22-1/2 years of publishing, Harry Browne
announced that he will stop publishing Harry Browne's Special Reports. He
will continue his speaking engagements and has set up an "exploratory
committee" to consider the possibility of running for President again
in 2000. He is committed to building the Libertarian Party into a force
strong enough to challenge the older political parties.
Harry Browne has authored: How You Can Profit From the Coming Devaluation
(1970), You Can Profit From A Monetary Crisis (1974), Inflation-Proofing
Your Investments (1981).
His favorite book was How I Found Freedom in an Unfree World: A
Handbook for Personal Liberty.
After many years out of print, this classic has been
republished in a beautiful new hardcover edition.
Originally published in 1973, this timeless manifesto for personal liberty
has changed the lives of thousands of readers -- helping them break free
from the constructions imposed by traditional thought. The book is just
as powerful today as it was 25 years ago. It can help you solve one or more
problems in your own life now -- and it can be the ideal means to teach
your children or grandchildren the benefits of personal responsibility and
thinking for oneself.
This new edition is available now, from select booksellers and the publisher.
This edition contains a new Foreword and Afterword offering insights into
Browne's personal philosophy and his decision to run for President in 1996
as the candidate of the Libertarian Party.
How I Found Freedom in an Unfree World is available for $19.95 plus
$3.90 (Priority Mail S&H) from Liam Works, Ste. NL, P.O. Box 2165, Great
Falls, MT 59403-2165., or U.S. toll-free 1-888-377-0417 or international
orders (406) 761-4806, Fax (406) 453-1092.
In the Commemorative Final Issue, Harry distills 5,000 pages of investment
advice, insight and political opinion into 44 pages. In the Final Issue,
you'll also find his 16 Golden Rules of Financial Safety (soon to be published
in booklet form), he refutes The Great Year 2000 Scare, Mutual Funds and
sources for advice, and good practical advice for common sense investing.
The Final Commemorative Issue is available for $25 from Harry Browne's Special
Reports, 1601 W. 38th St., Ste. 207, Austin, TX 78731 or call 1-800-531-5142.
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