One simple way to avoid stock market volatility

Friday, October 10, 2008

Well, you obviously can't avoid volatility completely. But I use a simple system that reduces it. I don't have the risk tolerance or enough interest in stocks to buy individual stocks or even exclusively index funds. I wanted something I could set up and forget most of the time.

This simple system by former presidential candidate Harry Browne fits the bill. In his "permanent portfolio," investments are allocated as follows: 25% stocks (for prosperous times), 25% bonds (for prosperous times and deflationary times), 25% gold (for inflationary times), and 25% cash (for tight money/recessionary times).

The diversification allows you to ride out ups and downs with minimal risk. You evaluate and rebalance your portfolio only once per year. I also like to set stop losses so I can minimize worry even during days like today.

Check out the book if you want a nice, simple way to manage your investments.