What to do with your money

My overall investment strategy centers on Harry Browne's plan explained in his short, simple book FAIL-SAFE Investing (www.harrybrowne.org).  You can read it in less than an hour.

The plan is in two parts.  One is the Permanent Portfolio, a carefully balanced mix of investments that is designed to be as bulletproof as possible - able to withstand inflation, deflation, wars, recessions, depressions, you name it.

The second is the Variable Portfolio, which is, frankly, your gambling money.

You don't need to have a Variable Portfolio, but lots of people do, so the speculative suggestions made in this newsletter are for this purpose.

Investments cannot do double duty.  Something you allocate to the Permanent Portfolio - let's say gold - cannot also be allocated to the variable Portfolio.  If you want to speculate in gold, you need to buy extra for the Variable Portfolio, so that when you decide to sell to take your profits, you don't make a hole in your Permanent Portfolio.

The way I see it, there are three ways to adapt to the present financial crisis.

• Plan One is to cover against a deflation only, and move all your money into T-Bills and insured CDs, expecting to move back into non-dollar assets when you are sure the deflationary forces have abated.
• Plan Two is to move everything into the Permanent Portfolio.
• Plan Three is to stay in both the Permanent Portfolio and Variable Portfolio, grit your teeth, and ride through whatever happens.

For my personal investing, I'm staying with Plan Three.  Here's why.

As I said earlier, it's important to avoid being fixated by the crisis du jour.  I believe that as long as the war lasts, which I expect to be decades, the dominant economic trend will be debasement of the dollar.  No matter how severe a deflationary episode might be, I think we will always return to that primary trend, war and inflation, for the rest of my life.

These have been the trend since the Berlin Wall came down.  There have been several deflationary episodes since then, but I've ridden through them, so I think I'm emotionally ready to ride through another.  And another, and another - there will be many more, count on it.

But everyone's temperament and circumstances are different, and declines that barely catch the eye of one investor can be paralyzing for another.  Lots of people who think they can tolerate a sharp drop in their investments find out when it happens that they can't.  They panic and sell at exactly the time they should be buying.

If you aren't highly confident you can comfortably live with whatever you regard as a huge drop, without panicking and bailing out, then my advice is to sell at least part of your Variable Portfolio.

This isn't to say the Permanent Portfolio will suffer no declines at all, but it remains the most robust strategy I've ever seen.

That's plan three.  Plan One is, in my opinion, very risky.  To stop the deflationary forces, the Fed is injecting unimaginable amounts of new dollars into the economy, therby rapidly increasing the chances of a sudden global flight from the dollar.

If all your assets are in dollars, you'd better not sleep.  I'm serious.  A stampede out of the US currency would likely begin not in the US but in some foreign country a dozen time zones away.  You don't want to wake up at 6AM some morning and find you should have switched everything to gold and silver four hours earlier.

Also, the government admits consumer prices are rising at more than 4% per year.  If your T-Bills and CDs are earning 3%, on which you are taxed, then you are suffering a guaranteed loss, and the worse inflation becomes, the greater the loss.

Whatever you do, don't believe anyone who tells you to switch to a single investment that is safe.  Federal officials have done so much damage to the financial system that there isn't any such thing as safe.  There's safer, but there isn't safe.

So, in my opinion, it's a choice between Plan two and Plan Three.  If you aren't highly tolerant of risk, stick with plan two, so that you are ready for either inflation or deflation.

Fasten your seatbelt and be psychologically ready for a wild ride.