The Permanent Portfolio – Financial Planning for Real Estate Agents

Have you heard this investing strategy?

“Put all of your eggs in one basket and then keep your eyes on the damn basket”

Well, I put most of my eggs in one basket and have a big mess of broken eggs right now. Here’s what happened…

  1. I sold my real estate business with financing. This means one of my assets is a note receivable, which is dependent on the real estate market.
  2. Minton Publishing provides products and services to real estate agents, who are dependent on the real estate market.
  3. I own numerous real estate investments, including apartment buildings, single-family homes and commercial properties. All of these investments have lost a significant amount of value.

The real estate market crash has had a major impact on my net worth because almost everything I had surrounded real estate. I worked my ass off to build my net worth and have watched the majority of it disappear within the last 20 months. All of my eggs were in one basket and I couldn’t protect the damn basket.

My mindset was to invest into assets that I understood. I lived real estate, just like you do, so it seemed to make sense to focus my investments in real estate. Hell, we know property values; rent rates, demand, financing and can spot great deals. We would be stupid not to take advantage of this, right?

Wrong – at least in my case.

This recession and market crash have provided another major lesson and that lesson is to diversify our investments outside of real estate. All of my major assets have suffered significantly because I didn’t diversify. Please don’t make this same mistake yourself.

As the real estate market rebounds, set a goal to invest 10% of every penny you make into something outside of real estate. It’s more important for you to invest outside of real estate, because your day-to-day income comes from real estate. If your income comes from real estate and the majority of your money is invested into real estate, you’re going to have a problem or two. This may not sound exciting, but I can assure you it’s the safest thing you can do. You might be wondering where you should invest this 10%?

I suggest checking out the Permanent Portfolio outlined in a great little book titled “Fail-Safe Investing – Lifelong Financial Security in 30-minutes a Year by Harry Browne.

In Harry’s book, he recommends a simple portfolio designed to protect you from financial loss and based on all of my experiences investing, I believe this is the best strategy. Up until now, my investment objective was to maximize my return. Not any more. My objective today is simply to preserve.

Greed is definitely not good.

Harry recommends dividing your investment savings into 4 different categories:

  • 25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as VFINX or FSKMX.
  • 25% in long-term U.S. Treasury bonds, which do well during prosperity and during deflation (but which do poorly during other economic cycles).
  • 25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means a money-market fund. (Note that our current recession is abnormal because money actually isn’t tight — interest rates are very low.)
  • 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation. Browne recommends gold bullion coins.

He refers to this approach as the Permanent Portfolio because it’s designed to protect you against ANY “ugly” economic cycle. In fact, here’s a quote from his book:

“The portfolio’s safety is assured by the contrasting qualities of the four investments — which ensure that any event that damages one investment should be good for one or more of the others. And no investment, even at its worst, can devastate the portfolio — no matter what surprises lurk around the corner — because no investment has more than 25% of your capital.”

If this approach appeals to you, I suggest Goggling “Permanent Portfolio.” You’ll probably be surprised at what you find. As an example, in 2008, one of the worst years in history, the Permanent Portfolio returned 1.97%. Compare this slight gain in 2008 to  the 37% loss in the S&P 500, the 36% loss in the Total Stock Market Index Fund, the 41% loss in Real Estate Investment Trust and the 18% loss in High Yield Bonds.

The Permanent Portfolio’s results for 2008 are actually very impressive considering the large losses in almost every traditional investment class. You can find several other studies of this approach for longer periods of time online, and I promise you’ll be happy with the results.

Browne’s book was written in 1999, and I wish I had read it then instead of now. Had I invested all of the money I put into real estate into creating my own Permanent Portfolio, I would have a hell of a lot more money. I also wouldn’t have to worry about the economy, value of the dollar, national deficit or the real estate market for that matter.

In his book, Browne specifically recommends that you don’t invest into anything in which you can lose more than you’ve invested in cash. For real estate investments, this means you shouldn’t invest unless you obtain a non-recourse loan or pay cash for properties.

Years ago, I learned there were two kinds of debt: good debt and bad debt.  Good debt was debt incurred to buy an asset that pays you every month. Bad debt was incurred to buy consumer-related items like clothes, furniture, cars and vacations.

I’ve lived below my means for many years and have invested a great deal of money into real estate using what I believed was “good” debt to compound my returns and have watched every penny of equity disappear. This has taught me that all debt is bad. There ain’t no such thing as “good” debt. Debt creates obligation and you cannot have financial freedom with obligation. Sure, it can help you make more money in prosperous times, but it can and will take you down in bad times.

What have you learned about investing, real estate and debt from this recession? Please share your lessons in the comments to this post!

22 Comments

  • stop fascism

    Reply Reply April 25, 2011

    I love your point of view and seems like I’m not the only one.

  • Sharmaine

    Reply Reply September 6, 2010

    Rob,

    No comment for the investing strategies. Right now, I’m coming out of the hole of red ink and my passion for real estate has all but disappeared. I think despite the tough times we find ourselves in right now, there are many lessons to learn. For me, paying cash is the lesson…forget the credit score…pay cash in the future. That lesson has been drilled down in my bone marrow. Cash. Cash. Cash. And even though I wish I could wake up tomorrow and everything would be ‘back to normal’, I have finally been able to be grateful for the lessons I’ve learned. Sounds like that’s what you were saying too.

    I’ve streamlined and then streamlined the streamline (smiles). After having struggled for many years before I got into real estate and then enjoying the fruits of my labor, I see clearly what is truly important in life and it’s not things or material possessions. As always the pendulum will swing back and this time, we will have wisdom on our side and make better choices. Many of us are in that boat and for a long time I was not a happy camper at all. But I see the value of the valley experience and I move forward in faith making better choices next time around and I also look at what else makes me happy to see how I might recover doing something else that creates joy and income.

    I was wondering whether you had the option to buy your business back. My thought is that whoever bought it probably loved the opportunity but may not have the same drive, expertise, passion and know -how that you do. If you took the reins again, knowing what you now know and having all of the systems and insights (over and above what the purchaser might have), could you possibly make it more profitable than if you took the monthly payments? Which way could you recover more profit?…Just a thought.

    As always, our lessons will pay great dividends in the future. Great times just ahead!
    Sharmaine

  • september 2010

    Reply Reply September 4, 2010

    Hi Rob,

    I think you misunderstood my point. I was just trying to point out that by putting some “simple to follow rules” in place, you can avoid the problem caused by adhering to such extremes as, all debt is bad, unlimited free time and indulgence is good.

    JC

  • Sharon

    Reply Reply August 31, 2010

    I am a Realtor in fact, I own my own indepedent company in a small town in upstate New York. I thought I made a great move buying my house for no money down 7 years ago, and spending over $100,000 in renovations including building an outbuilding for my office. Now my house is $75,000 under water, as I used my house as a cash machine to finance my business. My real estate taxes and insurance, (as well as other things) have doubled, and my business has tanked. I can’t sell a single one of my listings. Good news is, I just used what savings I had to buy another house for peanuts in this down market. I tempted to cut and run from my underwater house, thereby severing my $3000 a month nut (taxes and insurance alone are $1000 per month) and freeing my cash flow to live and breathe easier in this down market. My expenses on my new house? $500 per month owned free and clear. So, I am thinking of using your debt free concept to take care of myself. I am 57. How much longer can I work like a dog on a treadmill? It’s the “your money or your life” idea. Take back the house, and give me back my life.

    • Rob Minton

      Reply Reply September 4, 2010

      Sharon,

      I don’t blame you. Hopefully the home you bought isn’t in your personal name! (Hint, hint) You never know what the lender will do in the future. Don’t let them put a lien on your new home.

      I know many people disagree with the debt free strategy. Fine by me. I’ve watched how quickly debt can turn on people and what it does to their lives. I wish you the best and enjoy your new home!

      Rob

  • Douglas Weyandt

    Reply Reply August 11, 2010

    This is a fantastic post. I’m always looking for relevant resources to share with our residents, and your article is certainly worth sharing!

  • HELEN

    Reply Reply August 8, 2010

    You look at any 12 year period in reasonable sized economic centres, around UK, Canada, USA etc and the returns have averaged out at around 7 to 8% P.A on most real estate investments. We have been preached diversification in our portfolios for a very long time but we all chose to ignore thinking we are invincible and pursue the next get rich quick scheme.

    We personally own 4 revenue properties and have always put down 25% (not many properties but slow but sure wins the race), and we have amalgamated a good sum, one acorn at a time, which we have diversified in self trading, cash, emergency fund, and various arms of investments (all no load, low MER or zero MER).

    Did this happen overnight for us? Absolutely not, too proud to go bankrupt in the very early 1990’s we dug ourselves out of a very deep hole on an agricultural business, settled our debts. We then emigrated from UK to Canada, and since then have carried zero credit card debt for more than a month, two at most, and through trial and error learnt that as humans we spend more time making money than trying to keep it, which seems ludicrous now looking back. Why oh why do we entrust our monies for investment to fund managers, where 90% perform at worst than an S&P500 index. Nowadays we allocate set amount of days/hours in a month to study our portofolios and learn more on investment strategies and various other options of diversification. Being a fairly successful and hardworking realtor (in top 5-10% out of 5800ish) naturally we love real estate, but having been very poor and now having a more comfortable less stressful, less worrying existance we know what we prefer. We have set ourselves up over several years (NOT OVERNIGHT, nice as that always appeals, and not with penny stocks etc), to be non-reliant on social security or government pensions) but to realise that material things give us the least pleasures – sharing time with those we love and enjoy over a good BBQ, meal or chit chat and partaking in free events for the most part such as biking, swimming, snorkeling, kayaking, and an occasional splurge such as a rafting trip, jet skiing or the like. To us it’s about creating memories, and through our hard work, dedication and not giving in to material “want’s”, we have so far been fortunate to ride through the storms of the past 4 years. Are we worried about the current economy? Somewhat, as our bread and butter income has started to slow down, but we’ve experienced the peaks and valleys in the past and feel confident that come the fall, when everyone’s out of vacation mode, their will always be the need for people to still buy and sell homes. In the meantime we put our efforts into learning, tweaking and adjusting in our investments and business building skills.

    • Rob Minton

      Reply Reply August 9, 2010

      Helen,

      Thanks for your detailed comment and I applaud you! Congrats on surviving the early 1990s! I’ll bet the lessons you learned from this previous experience (1990s) helped you prepare for the current economic crisis. This was the intention of my post – to try and help others prepare for the next economic crises by diversifying! It doesn’t make much sense to make the same mistake(s) more than once.

      Sounds like you used the income from your real estate to setup an emergency fund, and other non-real estate investments. I think this is super smart and this is why you’re able to enjoy life now!

      Rob

  • Nitya M Grenham

    Reply Reply August 7, 2010

    Rob,

    I read this the other day.. and I have been thinking about it quite a bit.. actually reading Titan right now based on your recomendation… And from what I infer here you still belive in Real Estate.. But you think as Agents we should be putting 10% aside in non real estate assets.. Which is common sense… In this business liquidity is important….

    Do you happen to have any thoughts of making some Lemonade.. and come up with a plan/product/ investment plan/ marketing strategy to help capitalize on this mindset change? Its not just real estate agents who feel this way.. And it would be nice to have marketing congruent with this… To both help our clients, and of course run a profitable business/ life…

    Any Thoughts?

    Warmest Regards,

    Nitya

    • Rob Minton

      Reply Reply August 9, 2010

      Nitya,

      I think the best way to capitalize on real estate investing in your business and for yourself personally is to buy great properties below value and use every penny of income to build reserves or pay down debt. Nothing too complicated. Properties purchased at today’s prices are providing a lot more cash flow, which can be used to create an attractive retirement fund outside of real estate. I actually wrote about this approach in the Investor PLR Report, which I recently released. You might outline this strategy with your clients and help them invest into real estate with a safe, long-term plan.

      Rob

  • Justin

    Reply Reply August 5, 2010

    Fantastic suggestion Rob! I’ll be buying Browne’s book later this weekend.

    Another book I recommend (whether you like his born-again-christian approach or not) is:

    The Total Money Makeover
    -Dave Ramsey

    He’s got quite an amazing story. Got his start in real estate and was a millionaire in his 20’s. Lost it all in the 80’s when tax laws were changed. Crumbled into bankruptcy after 2 (??) years of hell on earth.

    Now older, wiser, and worth a LOT more. (Last I heard, his company employs a few hundred people and did over $40million last year alone).

    http://www.daveramsey.com
    http://www.totalmoneymakeover.com

    I’m not an affiliate. Just a firm believer that ALL DEBT IS BAD.

    Death to Debt!

    -Justin

    • Rob Minton

      Reply Reply August 6, 2010

      Justin,

      I remember listening to one of Dave Ramsey’s cassette tapes many years ago. I think it was called “Financial Peace” and he shared his real estate investing story. I have his Total Makeover book, too. I think is financial plan is safe, sound and very smart. I didn’t think this way previously. I do now. Thanks for the suggestions. I agree “Death to Debt!”

      Rob

  • Mike

    Reply Reply August 5, 2010

    This is a great update to your “Millionaire” book for real estate agents. If I remember correctly, you mentioned that some of history’s greatest investors put all of their eggs in one basket… it’s great to see another perspective, too. Thanks for all your updates – I enjoy reading about your insights.

  • Dan

    Reply Reply August 5, 2010

    The main thing I missed in this analysis was a “big picture” view. Harry’s portfolio returned 1.97% in 2008, when most others lost money. That’s great but how does it stack up against other investments if averaged out during a 20-year period?

    Harry’s formula calls for ZERO investment in real estate, even at or near the bottom of the market. Is that really such a good idea, especially for investors who understand real estate but have little feeling for precious metals, etc.?

    As I recall, Harry Browne first achieved fame years ago for his enthusiastic endorsement of Swiss bank accounts. How good an idea has that turned out to be?

  • Hey Rob – Don’t hog all the credit 🙂 A lot of us listened to the “man behind the curtain” when it came to “Leveraging” real estate. Some of us intentionally (and some un-intentionally) became addicted to real estate as our “drug of choice” because:

    (A) It was getting better returns than the stock market (Pleasure)

    (B) We found something that we were good at…and it was easier to
    do things that come easy/natural,…than do things that are new….
    and harder. (Pain)

    Your story reminds me of one of my first jobs as a teenager, working
    in a Caro-Maid Ice Cream plant. On my very first day, my boss told me that one of the benefits of working there was that I could eat all the ice cream I wanted!

    So, for my first few hours on the job, I sampled Strawberry Captain Crunch, Chocolate Eskimo Bars, Butter-Pecan Delight, banana fudgescicles, etc; I “worked” with one hand, while eating “FREE” ice cream for almost 4 hours…Imagine a conveyor belt full of ice cream right in front of you!

    I can admit now that the temptation was too great for my young 16 year old mind; looking back, I realized that I ate much more/faster than what I should have, mainly because I was afraid that my boss would rescind his offer if he had a clue as to how much ice cream his new employee was eating!

    Yep, you guessed it…pretty soon, I started to feel a little “queasy”
    …and it wasn’t long before I was bent over a garbage can, while my co-workers were teasing me and advising that I find some Pepto-Bismol.

    By the end of my first day of working in an ice cream plant, I swore off “FREE” ice cream.

    Real estate has that same effect on people, too. We run after single family houses, mobile homes, multi-family, etc…everything looks so-o-o-good and we realize that we should pace ourselves…but we don’t..and then there is a correction/adjustment that we couldn’t predict and we swear we will never do THAT again.

    Those that grew up with little/almost nothing…remember how we got from not being able to spell “assets” to having a little “portfolio & net worth.” ….and hopefully we will remember your words of wisdom.

    Thanks for sharing.

    I appreciate you,

    Bobby Wallace
    Charleston, SC

    • Rob Minton

      Reply Reply August 6, 2010

      Bobby,

      I love your comments and only wished you lived here in Ohio so we could hang out. I would be 500 lbs if I worked somewhere offering free ice cream, because I wouldn’t swear it off as quickly as you did!

      Thanks for sharing! And I think the most important part of all of this is what we learn in the process. This recession and market crash have taught me many valuable lessons that will help me make better decisions going forward. I do NOT want to make the same mistakes going forward. Knowing you, I’ll bet you’ve learned a lot, too!

      Rob

  • david

    Reply Reply August 5, 2010

    Rob-
    Most of what I’ve read of yours over the last several months has been genius. This current blog entry is the opposite. Yes, it may have been folly to sell your company on a note but most real estate companies are sold that way with no other alternatives.

    There is an old saying “the best fertilizer is the gardener’s shadow.” You understand real estate and all those investments will bounce back. Double down while the market is bad. Diversify as you age, but don’t buy anything you don’t understand.

    • Rob Minton

      Reply Reply August 5, 2010

      David,

      Thanks for your comment and feedback. I’m sorry you don’t find this post helpful. It was written to try and help others from making a few mistakes I’ve made.

      I understand real estate. I understood the risks of selling my business with financing.

      The point is to be very careful putting all of your eggs in ONE basket. This is even more important for real estate agents who invest in real estate. Because our income comes from real estate, we need to be MORE conservative with our real estate investments. If not, you set yourself up for a significant loss.

      I do think the real estate market will come back, but it’s going to take some time. It’s not going to bounce back over night. It may take several years to for the market to gain strength. I do think real estate is a great long-term investment, if the focus is to pay it off quickly.

      Rob

  • Ed Neering

    Reply Reply August 5, 2010

    Rob just took the course of Dave Ramseys called financial peace. I would highly recommend this to all your readers and your following. Like you My mom is an accountant and I understand your path. I am a realtor and did alot of my investing in real estate. I luckily seen the signs in Michigan as I track the numbers religously. I sold all my single family rentals and played monoply. I partnered up with my brother and built a new building for the gym he owned. We now luckily have a multi million dollar business and only have around a 30% debt ratio to the bank. By being so highly leveraged we don’t have to raise membership dues and be worried about paying the debt. No one could ever have expected what happened with the real estate market. But in Dave Ramseys course he gos over specifically how to diversify. And he also explains not buying real estate until later,after you become debt free. The average person that takes his course is debt free within 18-24 months. After you do his plan he has a well thought out plan to reach financial freedom. It is so simple and the plan is all layed out for you. Thank you for sharing your experiences to help us all grow. I would recommend Daves course to all.

  • Paul

    Reply Reply August 5, 2010

    Hi Rob,

    Thanks for sharing. There are many others like you that have gone through the same experience so do not beat yourself up. Money can be lost but it can also be made again. I got burned for 100K with an overseas investment the banks froze our funds and I was making about 20k per month on that money. Yes, I have also learned to now to diversify risk. Thanks for the article.
    drfinance

  • JC

    Reply Reply August 5, 2010

    Your main problem was definition. Good debt is temporary debt, used to create an income stream, income which will be used exclusively to payoff the debt. Once the debt is paid off (or at least 50%), then and only then, is it treated as personal income and/or an asset. The key point is that you don’t leverage one asset for another, and keep all “debt to value” ratios below 50%.

    • Rob Minton

      Reply Reply August 5, 2010

      JC,

      Everyone is different and debt can be helpful for some people. However, I see things differently than I once did. Imagine what life would be like without having any debt? Would you have to make as much money each month, if you were completely debt free? Would you have work as much, if you were completely debt free?

      You would have complete freedom.

      One of my favorite books of all time is “Your Money or Your Life” by Joe Dominguez. The big question behind the book is: What would you do if someone pulled gun on you and said, “Give me all of your money or I’ll pull the trigger?” Would you give your money to save your life? Everyone answers “YES” to this question, because they wouldn’t want to trade their lives for their money. The reason why is because our life IS more important than our money. If you have debt, you are forced to trade your life away day-after-day to make your payments. It doesn’t matter if the debt is for an investment property or not.

      Rob

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