FSO Editorials: "Become Your Own Financial Advisor" by Robert B. Gordon 10/15/2003

Become Your Own Financial Advisor
Selected Funds for Long-Term Appreciation
by Robert B. Gordon, Sc. D.
October 15, 2003

In the recent bull market that ended almost four years ago, nearly all American adults succumbed to the slick sales pitch of Wall Street and the Mutual Fund giants: Buy and hold for the long term, dollar cost averaging, cut fees and taxes with index funds etc. For nearly two decades, virtually all the experts, CFA’s, CFP’s, analysts and brokers, were swept up in the growing stock mania. There was a small minority of independent thinkers who had read the history of market cycles over the past 300 years, including our 1929 Crash and the ongoing Japanese 1989 Crash and Depression. An even smaller minority, who were cognizant of the Elliott Wave Principle, were expecting and preparing for the huge bear market that would follow the world's largest stock crash. Forewarned by our knowledge of history, even the bearish minority was amazed at the huge stock bubble during the mania’s final months.

Now, almost 4 years later, at the top of a one-year rally in the bear market, the investing public and most of the market analysts are as bullish as they were 4 years ago at the top. They are seriously wrong and will live, as investors in all prior manias, to become extremely bearish at the next real market bottom. History will then repeat and most investors will shun the stock market, perhaps for a full generation.

We have been in e-mail contact with a small number of experienced brokers and financial advisors who say they cannot convince their bullish clients to change their old bull market habits to the new environment. Bearish advisors, who understand the disastrous scenario that lies immediately ahead, are in very short supply so my advice to readers is that they prepare to take matters into their own capable hands using ideas along the lines of recent essays. As long as I am physically able, I will continue to help you be a happy do-it-yourself investor.

In the market mania leading to the 1929 Crash, a number of "investment trusts" were founded to permit individuals to participate in ownership of stocks and bonds. Several present day mutual funds trace their history back to those early days. As I recall, there was little activity in forming new funds until the1950’s when a new generation of investors had been born. This small beginning grew into a mini-mania in the 1960’s that came to be known as the Go-Go years with their "Nifty Fifty" blue chip stocks that needed only to be bought and never sold.

Several speculative mutual funds rose to a huge price peak and then failed when they could not meet a flood of redemption requests. Stock market prices peaked in the mid sixties and reached a major bottom in December 1974 at the end of the 1972-74 bear market. This was followed by nine straight years of net redemptions from mutual funds. My guess is that when this bear market ends, there will be net redemptions for at least a generation.

In the 1950's, mutual funds remained very small by today’s standards and life was much simpler with no computers and on-line purchases. Eventually this small industry grew to a gigantic size with the primary objective, not to serve the investors, but to compete with other industry giants for the investor dollars. With just one major exception, they never made major reductions in their huge fees when millions of assets grew to billions and then trillions. I think there will be a day of reckoning for this industry and it may have started with the current investigations.

For some time, we have been writing about building a portfolio designed for periodic rebalancing to it’s original proportions. This essay describes a much simpler way to do the same job and with fewer dollars to start. But, dear reader, before jumping to conclusions, please withhold any judgment until we can provide the details. The simpler approach is surely an easier way to start and requires only a few thousand dollars. However, it also has the capability of handling fairly large amounts of money. There are also reasons why some investors might choose to go both ways since the two approaches can supplement each other. The approach described here could be used as a vehicle to build capital for a much larger 10-asset portfolio.

I have never managed a mutual fund but have owned hundreds of them over the past 50 years. My experience indicates that it is much easier for a fund manager to excel with just a single asset class. Many large funds have two or more managers to manage a diversified fund, for example, one for stocks and one for bonds. But single managers with the capability to handle multiple assets have no personality conflict in reaching their decisions. So the management problem is simplified where there is a single manager, and especially so if it is a very bright manager.

This essay was made possible by a reader giving me the names of two multi-asset funds conceived and managed by a rather young Ph.D. market strategist. He started and directs a Strategic Growth Fund which has grown rapidly in size due to his management skills and an unusual Total Return Fund investing in many asset classes. The web page of this fund group holds a tremendous amount of information on each of these funds plus many reports written by the manager on the details of how he is managing each fund. I have read his words and read the fund literature and have been highly impressed by the management concept and the performance to date, achieved in a difficult market. The stated objective for these two funds is that they will provide the only funds you will ever need. This seems like a big order but I have been sufficiently impressed to buy both funds so I can follow their progress.

Both of these young funds plan to use a wide range of investment vehicles to achieve their goals. The growth fund uses primarily stocks which can be protected in down markets by use of 100% hedging with appropriate stock index options. It can also use 150% leverage in favorable markets. The income fund uses many types of domestic and foreign bonds, partly hedged if and when needed, plus dividend paying common stocks in different industries, including gold. My conclusions on these two superbly managed funds is that, in combination and using the right ratio, they provide a wonderful way to accumulate capital for investors of all ages. Once the assets have grown to a planned size, investors can then decide what changes, if any, should be made. They can be purchased for $1,000 each in regular accounts or $500 in tax-free accounts.

I happen to have both of these funds in my FastTrack database of nearly 6,000 funds. The Strategic Growth Fund has grown with an annualized return of 19.2% from 11/21/2000 through 10/9/2003. The Total Return Fund has grown 7.9% annually from 9/18/02 thru 10/9/03. I am sure that when you read all of the available information on these two funds, you will be impressed by the great management strategy and performance. Both funds are no load with a 1.5% redemption fee if sold within 6 months, otherwise none.

I am basically a very conservative investor and have just one concern: what happens if the single brilliant young manager become sick, disabled or worse? This subject is not covered in the extensive literature I have studied. His performance in achieving a Morningstar 5 star ranking and over 500 million dollars in assets is commendable. I hope he enjoys a long and rewarding career. I assume that the fund manager has a replacement plan for his services but have not asked specifically about it.

In thinking about which funds I would add for diversity, I chose two funds that are also being very capably managed by a manager in a larger and older organization. In this essay I will call them a Short/Gold Fund and a Bond/Gold fund and will provide a way you can get all four fund names at the end of this essay. I feel strongly that any serious investor should know about and own some percentage of short positions in view of the long bear market that lies ahead. The excellent 3-year performance of the Strategic Growth fund had to be due to gains made during bullish rallies in the bear market. This fund can take a 150% long position, and also a fully hedged long position, but no net short position. Since no one can predict what lies ahead, I favor at least a modest short fund position in the Short/Gold fund.

Addition of the Bond/Gold Fund does not add any new asset classes, but does result in a larger Foreign Government Bond and Gold position which I feel will be helpful in coming years. These two funds add carefully planned additional diversity and management skills. In fact, I could (but won’t) give a dozen examples of portfolios for a wide range of ages and circumstances. I will give four portfolio examples to help you create your own.

In the early 1970s, I bought gold for less than $40/oz. and silver for less than $2/oz. and saw them rise within ten years to about $800 and $50. I no longer have any detail record of my sales but I do remember the drop from the highs was very fast. The morning silver touched $50, I placed a phone call to sell at the market and realized just $33. The lesson learned was that precious metals are very volatile and very hard to accumulate and sell by average do-it-yourself investors.

The average investor, who wants to profit from precious metals, will probably do better in the long run by taking small profits over the long term in a rebalancing portfolio. I believe this to be true when rebalancing both a single asset portfolio discussed in recent essays or the multi-asset portfolios presented below.

Conservative Accumulation Mix
Strategic Growth Fund - common stocks	35%
Total Return Fund - bonds, dividend	35%
Foreign Gov't Bonds, 16% gold	20%
Short Fund with 20% gold stocks	10%
Total	100%

Moderately Aggressive Accumulation Mix
Strategic Growth Fund - common stocks	45%
Total Return Fund - bonds, dividend	20%
Foreign Gov't Bonds, 16% gold	20%
Short Fund with 20% gold stocks	15%
Total	100%

Moderate Rebalancing Portfolio
Strategic Growth Fund - common stocks	20%
Total Return Fund - bonds, dividend	30%
Foreign Gov't Bonds, 16% gold	30%
Short Fund with 20% gold stocks	20%
Total	100%

More Aggressive Growth Portfolio
Strategic Growth Fund - common stocks	25%
Total Return Fund - bonds, dividend	25%
Foreign Gov't Bonds, 16% gold	25%
Short Fund with 20% gold stocks	25%
Total	100%

There are a number of different ways these four fund portfolios could be managed, depending on their size and purpose. If it starts small in size and its purpose is to accumulate wealth, I suggest that, in the early stages, the fund percentages be maintained by varying the dollar amounts added to each fund. Later on, when the total dollars become too large, the portfolio percentages could be managed by an occasional rebalancing as taught in recent essays.

If the portfolio starts at a large size, or there are no additional purchases, then I would definitely rebalance perhaps once a year. Whatever portfolio percentages exist at the start should be changed at any time when the fund performance or investor needs change. I hope that every investor has a long and happy experience with these funds, but unfortunately we will not be here to celebrate with you.

Readers will recognize that both fund portfolios, intended for periodic rebalancing, are given at least a 50% position in short term bonds to provide a stable reserve which is a key part of the long term strategy.

In my opinion, there will probably never be a more advantageous time than right now to put these great funds to work. So, do the necessary home work and decide what is best for you and then do it. Let the fund managers do their job and make changes only when the market or your needs call for changes.

In the truly unprecedented times that lie just ahead, American couples and families need to train both husbands and wives to manage money, either separately or together. These four funds have such a low cost of entry, that two competing portfolios could be started under separate husband and wife management. This inter-family rivalry could provide both fun and education and perhaps lead eventually to better returns. I plan to discuss this idea further in a future essay. Please do not dismiss it lightly. Bad things do happen to good people. One spouse will die first but one never knows which one it will be.

As my regular readers know very well, I have nothing to write about except an honest description of my 63 years of investing experience. I have nothing to sell and, in this essay, I have no relationship with the funds mentioned other than through a past or present ownership.

I have no license to give investment advice to anyone. My web publisher has permitted me in the past to mention the names of stocks or funds which are unique, the only ones in their class. I am not able to give the four fund names mentioned above because I am not sure they are unique. So, under these circumstances, I will respond to e-mails and provide the web addresses at which you can obtain the full fund information, including prospectuses and all available reports. I hope that many of you will read the weekly reports that the 5 star fund manager puts on his web page. I am sure that his ideas are original and that his writing is very good. His weekly report is posted before the market opens on Monday, so I know how he spends his weekends and now, so do you.

I have appreciated very much your kind remarks about my health and that of my dear wife of 61 years. I am doing fairly well until I visit my wife whose health is declining rapidly. My many hours at the computer have been quite a help in getting me through each day. Finally, I read and respond to every e-mail, so keep them coming.