Yesterday we talked about Harry Browne’s tried-and-true Permanent Portfolio concept. And as we noted, asset allocation is the key to building such a portfolio today.
The idea underlying the Permanent Portfolio is brilliant in its simplicity – build a bulletproof asset portfolio that will thrive regardless of what’s happening with the economy.
That’s where asset allocation comes in…
Asset allocation is about spreading your money – your capital – across several different asset classes according to a personalized model. The purpose here is true diversification.
I suspect many of us hear the word diversification and CNBC’s definition comes to mind. You know—buy stocks in all kinds of different industries so that you have a diversified portfolio. I don’t buy that… because that approach focuses on a single asset class.
To become financially bulletproof, we must build a portfolio across a range of assets that complement each other.
Individually, each asset class has its own strengths and trade-offs. But magic happens when multiple assets are strategically assembled under the same roof.
A robust asset portfolio will consist of:
- Reserve Assets
- Strategically warehoused cash
- Capital-efficient stocks
- Cash flow investments
- Alternative investments
Reserve assets are the cornerstone – they protect and grow our purchasing power over time.
Strategically warehoused cash keeps up with inflation while providing us with constant liquidity.
Capital-efficient stocks compound our wealth over time and give us exposure to long-term economic trends.
Taken together, these three segments of our asset portfolio will create true financial security for us – regardless of what happens with the economy.
Then cash flow investments generate extra income for us every single month. We can use these investments to create thousands of dollars a month in passive income as we build up our portfolio.
Once we’ve reached the point where the income from our cash flow investments exceeds our expenses – we’ve achieved financial independence.
Lastly, alternative investments provide us with resiliency in the face of any major crisis. They can serve as a chaos hedge to ensure that we can weather any financial storm comfortably for an extended period of time.
At The Phoenician League, our motto is “financial security first, then financial independence”… and there’s nothing mystical about it.
To achieve both, all we need to do is build out a modern permanent portfolio using the principles of asset allocation. We’ll talk about each asset class in more detail in separate entries to come…
-Joe Withrow
P.S. My book Beyond the Nest Egg lays out a larger exposé on this approach to personal finance with specific examples. If you would like a deeper dive, you can get the book with several choice bonuses right here: https://beyondthenestegg.com