Money: A Model Portfolio


After an intensive study of the current literature, I have ascertained that a well-balanced portfolio for the typical libertarian investor should include the following:

1. One Winchester Model 70, with 500 rounds of ammunition. (Infra-red sight desirable.)

2. One Colt .357 Magnum, with 250 rounds (including both hollow point and armor-piercing).

3. One hundred gold sovereigns; 20 double eagles; 30 pounds of junk silver coins.

4. One year's supply of dehydrated food, preferably cached in an inaccessible secret mountain retreat; see item 8, infra.

5. False identity papers (Canadian passport optional).

6. One prefabricated windmill.

7. One solar still.

8. One inaccessible secret mountain retreat, preferably stocked with one year's supply of dehydrated food; see item 4, supra.

9. Plenty of organic fertilizer.

Really, now, is all this to be taken seriously? Wouldn't just a teeny bit of diversity be a good idea? Keep some dried fruit and double eagles handy if it makes you feel better. Even a gun or two; but remember, not even the U.S. government spends more than 50 percent of its income on defense.

Libertarians have a good economic theory. It should be remembered, however, that economics and investments are not the same thing (just as political philosophy and politics are not the same thing). Libertarians are correct when they say that the economy will go to hell if it doesn't mend its ways; it's just that this truism doesn't tell you anything about how to invest your money.

There are a couple of theoretical points which can be applied with reasonable certainty. If, for example, a government has been maintaining the price of a commodity below its market level, all other things being equal, the price will go up when (and if) the government gets out of the picture. This was the principle on which the early gold and silver bugs relied. A point often overlooked, however, is that in the case of gold this truth was grasped by some back in the fifties and they lost their money in high-leveraged positions waiting for the inevitable price rise. One can be too far-sighted.

Another economic truth which can get you in trouble is the inevitability of inflation. Inflation is not a steady, one-way proposition. It heats up and it cools down. It's going to get worse, but there will be times when it seems to get better. Right now seems to be one of its cooling-off periods. The dollar is going to be worth less than it is now, but we don't know when it will and it may well be that, in the meantime, you would be better off with your money in a savings account than tucked under the mattress in Krugerrands. A little truth is a dangerous thing.

On the other hand, if you decide to diversify out of Winchesters and Krugerrands, you've got some hard decisions. It was probably the desire to avoid just such hard decisions which accounted for a good part of the popularity of the buy-and-hold-gold advice.

There is a high probability that tomorrow will be held as scheduled and a realistic investment strategy will have to take that into consideration.

We can make the empirical observation that there have been very few good buy-and-hold investments over the past decade. The stock market has done well sometimes but overall it has been a losing proposition. The same could be said for the professional money managers of the mutual funds. If you exclude unique investments or items requiring special knowledge (paintings, porcelains, rare coins, etc.), one of the best buy-and-hold investments over the past decade has been straight interest-bearing savings media (T-bills, savings accounts, etc.).

If your timing was right, you of course did better in gold or silver, but, with correct timing, you could do better in a lot of things. If you have to worry about your timing, then you're getting out of the buy-and-hold category and into that area where you accept higher risk as the cost of higher return. There's nothing wrong with this, and it could even be considered socially desirable, but it's not what many people have in mind when they talk about investing.

The truth is (and I believe this is a truth of libertarian economics) that management of capital is an economically valuable service, for which the capitalist deserves his keep. Profits do not fall effortlessly on the heads of the owners of capital—they must work for them and this work includes the hard choices of allocating investments. This is one of the arguments for the capitalist enjoying his profits. Not even the capitalist gets a free lunch.

Davis Keeler's Money column alternates monthly in REASON with John J. Pierce's Science Fiction column. Copyright © 1976 by David E. Keeler.