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    Financial Tips for Free Market People

    After hearing the unfortunate news earlier this year (2006) about the late Harry Browne's passing, I decided to snag myself an electronic (PDF) copy of his popular and very useful investment book, Fail-Safe Investing: Life-Long Financial Safety in 60 Minutes. As corny and "phishing prone" as the title may sound, the book really is legitimate, and quite useful. Unfortunately, I removed a problematic kernel from my Linux laptop here like an idiot without replacing it with another, and I of course didn't make a CD back-up of my important documents! Long story told, back up or buy a hard copy on Amazon (URL abrogated for ease of bookmarking).

    The purpose of this periodically updated essay/mini-lesson is to give the financial novice a brief and general introduction to investing. I seek to make this not a exhaustive, complete evaluation of securities, but rather to create a general platform or "base camp" from which you the reader can venture off into various topics germane to the field. Now, with these thoughts in mind, let us begin our exploration into investing, securities, and the best ways to pursue the best balance between risk and potential gains.

    Lesson One: Determine Your Goals

    • Why do I want to invest?
      There are many different reasons why one might want to invest, the most common three being to save for retirement, to protect your job earnings (through asset diversification), and to eliminate the effects of the form of taxation we commonly refer to in America as "taxation". My own personal reasons for investing is a combination of the latter two mostly, but I do try to keep retirement in mind for down the road. The bottom line is that the nature of your goal is far secondary to just having one in the first place! As J.J. Luna writes in his self-employment book, Work From Home at Any Age (sample chapter here, "Find your guiding star- and follow it".
    • How much risk can I handle?
      This is a very important question, and one that only you can effectively answer. There are a few rules of thumb of sorts to help you analyze your risk tolerance:

      First, treat your investment principal as you would regular savings, i.e., in very high standing. Remember that, though your odds are usually better (in a mutual fund at least), investing is a lot like gambling; you can potentially loose everything you put in! To make a long story short, think carefully about what would happen if you lost every penny of the $X you put in. Would you still be relatively well off? If not, perhaps you should consider other opportunities that involve less risk.

      Second, always view your investing strategy as a means to an end, not as an end in of itself. Remember that your regular job should be the basis of your income, and your investments are there to maintain and/or supplement it. Do not squander your own money or borrow funds from others to finance your finances, as it were! Doing so will put you deep in the hole, as many people have found out the hard way over the years. As obvious and redundant as it sounds, the whole point of investing is to gain interest, not loose it all.

    Lesson Two: Diversification is Key!

    • What is the purpose of diversifying?
      In simple terms, a good investor diversifies his assets amongst different investment "media" (if you can call it that) and/or securities companies in order to minimize (but never eliminate!) risk. The reasoning behind this is that if one or more of your holdings tanks for a period of time, the remainder of your assets will continue to stay afloat. This can be done in one market, say in stocks, by investing in a well performing mutual fund rather than by purchasing individual stocks. Not only is this option less risky overall, but usually cheaper and less of a headache to deal with too.
    • What kind of portfolio breakdown should I have?
      Harry Browne recommends an equal portion of each of the following four types of securities:

      1. Stocks- As one would expect, having conventional publicly traded stocks is an important part of one's investment portfolio. The best idea for simplicity and stability is to invest in a well performing mutual fund. Personally, I am currently a shareholder with Domini Funds, which specializes in "socially responsible" companies in a variety of industries. It seems to be performing well, but the choice is really up to you- just be sure to do ample research before hand! If you have the up-front capital to do it, you may want to invest in multiple mutual funds. This is probably not feasible for those of us with lower annual incomes though.

      2. Bonds- No, I don't mean the (allegedly?) steroid ridden baseball player, but the loan kind. You can either buy into a bond mutual fund (Domini and most others offer these), or you can put your money in your bank or credit union's money market fund or Certificate of Deposit (CD) program if they offer it. Unlike stocks, you are guaranteed to not have huge dividends. On the other hand, you are also guaranteed to get whatever percentage the bank offers you unless the bank fails, at which point your lack of returns are probably the least of your problems. :)

      If you're like me, you probably take issue with this option, at least as far as it comes to government securities, which typically constitute the majority if not totality of such funds. I am currently looking into the existence of private corporation only funds, and will post any reliable information here as soon as I receive and verify it. If you have any tips on this, please e-mail me.

      3. Cash- This is precisely what it sounds like- your regular savings, be it next-to-useless Federal Reserve Notes (FRNs) or real money such as the Liberty Dollar. For liquidity, you will doubtlessly have at least some of both.

      4. Precious Metals- For a good balanced and secure portfolio, you need some precious metals, namely gold and silver. I personally recommend GoldMoney for gold and/or silver. They are very reliable, customer friendly, and have prices only slightly over the going "spot" market rates. Alternatively, there is The Phoenix Dollar (coin, bars, and e-bills), and the liberty dollar again. If you're paranoid about security, you may prefer traditional bars and/or coins, but notes and coin may be the wiser choice for those who desire more liquidity. The choice is really up to you. My personal strategy right now is to do gold for security and silver for increased liquidity.
    • How should I balance these assets?
      For maximum gain and minimum loss over the long term, your best bet is to devote about 1/4, or 25% of your assets' worth to each category (stocks, bonds, cash, and metals). You don't have to worry about one or another sector of your portfolio being exactly 25% of the total, but you should rearrange things once a year if need be in order to maintain a roughly equal balance amongst everything. For example, if my metals holdings increase in value to the point that they constitute 30-35% of my total net worth, I would want to sell that 5-10% surplus and put that value into one or another of the other three. If you're really savvy, you may even want to divide up your four general categories up further if you are so inclined. This is not absolutely critical, but if you have the ability and desire, it might be worthwhile. This is how I would personally subdivide my assets:

      Stocks- I would probably divide this by either utilizing more than one (mostly) domestic fund or by supplementing my existing fund with a foreign stock fund (see this Morningstar article for caveats).

      Bonds- One could invest in foreign bonds, etc. if one so desired. I detest government securities so much that I don't care about any of them but those from the private sector, so go figure :). In terms of money markets and CDs, you can have multiple holdings with different institutions for increased diversity.

      Cash- As alluded to earlier, you can diversify your cash holdings by having both useless FRNs, Liberty/Phoenix Dollars, and/or foreign currencies (those NOT tacked to the USD!). Some would consider money market funds to be part of the "cash" rather than "bonds" category, but I included them there rather than here because they are usually based on bonds or some other type of "loan" activity.

      Metals- To begin, it is wise to have both gold and silver in your portfolio if at all possible. Not only do both hold their worth well (especially in times of bear stock/bond/currency spells), but they are also growing quite rapidly in terms of real value today. Increased demand for industrial applications, failing trust in the USD, etc. are all working to jack up the value of metals these days. However, don't go past your 25% portfolio limit, because they could always go down again in the future for a while. Some people are speculating in platinum, palladium, etc. but I have not read any good research suggesting that they are worth while for anything other than "rich man's speculation" at this time. In other words, if you can afford it, put a little into these metals and see what happens, but don't risk it if you can't afford to possibly loose it all. Please see the Morningstar.com article on industry sector investing for tips and warnings about investing in one particular section of the market (metals, energy, health care, etc.).

    Lesson Three: Further Information

    • Where can I get further details on these topics?
      Below are some good links to some useful investment information. These are not direct links to extremely detailed material, but visiting these links will give you some good places to branch out from. Spend a bit of time at these sites, and you'll be well on your way to having the tools and info you need to make informed financial decisions.

      1. How to Analyze Your Portfolio- A good article from the trusted Morningstar.com company about stock portfolio management. A good read for beginners to learn from, but is of most practical use for those with lots of capital and/or risk tolerance. I would suggest signing up for their interesting and sometimes useful e-mail newsletter.

      2. Libertyfree.com- Home of Harry Browne's published works. Here, you can get yourself a copy of his "Fail Safe Investing book, as well as other great works such as the ever popular "Why Government Doesn't Work. I've read both and got a LOT of value out of them!

      3. GoldCentral.com- An excellent resource for up-to-date gold price charts, market news, and professional analysis of the precious metals industry. They also offer free informational brochures, and also serve as a retailer for common and rare gold and silver coins. A metals backed IRA retirement package is also available. Details can be found at this page. In addition, new gold and silver ETFs ("exchange-traded funds") are available from some investment firms. In a nutshell, an ETF is something like a mutual fund or hedge fund for commodities (in this case gold or silver) rather than company stocks. As a result, investors can reap the benefits of a bull gold market without having to deal with the hassle of handling/storing gold themselves. The downside to ETFs is that the SEC and IRS will likely know about it, and thus can confiscate it incrementally through taxation or all at once through forfeiture if they feel like it and can come up with a moderately lame excuse. For more information on ETFs, please see this FAQ.

      4. KeepYourAssets.net- An extremely reliable and affordable company providing asset protection and privacy services. This is definitely the place to go in order to ensure that your new found wealth is protected. If you would like to minimize your tax liability and protect what you earn, a good protection package is definitely worth the small investment of time and money it takes to get started. This site has a complete products catalog, plus an excellent "Asset Protection Crash Course" page that will teach you a lot about what threats are out there, and what you can do to protect your privacy and possessions.

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    Page last modified: Sunday, 11-Feb-2007 18:42:59 EST