August 11, 2011: Avoiding Deception

Nobody knows anything about the future direction of asset classes.

I know I certainly don’t. Financial advisers don’t know either. There isn’t anything wrong with not knowing the future, except if you think you do.

In war, falling victim to deception is the ultimate sin. If you are utterly convinced that enemy troops will only be concentrated in one position totally unprotected, you will likely get cocky and amass your troops for a full on assault. This confidence can be devastating if you are wrong because your concentrated force is easily flanked.

I see this happen in finance all of the time. It is easy to conceptualize the market as the most deceptive force on the face of the planet. It does not matter how smart you are, at some point the market will deceive you. The important thing is to be prepared for it.

Spread your forces out; diversify your financial assets. We are facing the most deceptive foe imaginable and to have any predictions or any concentrations is a foolish gamble. You could achieve a lucky victory, or have your head displayed on a pike. Who knows? Why take that risk?

Yes, stocks can be an attractive asset class in a prosperous economy and for this reason I hold 25% of my capital in an equity index. But history has shown that ignoring the risks of inflation, deflation, and recession can be devastating. These scenarios can derail your financial plan, resulting in a complete rout, a financial massacre. I want to make sure I own enough low-correlation asset classes to cover my flanks because I always want to win.

If you look at this chart of the last six months, you can see my formation in action.

Being concentrated in any one position is clearly dangerous. The Harry Browne Permanent Portfolio represented by the black line offers a winning formation, no matter the battle conditions. I did not predict anything. I didn’t know if we were headed for a goldilocks economy, a depression, or an inflationary melt up. But I effortlessly won this battle.

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