FSO Editorials: A Portfolio for Steady Growth by Robert B. Gordon 11/03/2003

A Portfolio for Steady Growth in Turbulent Markets
Final Essay in a Series of Eight
by Robert B. Gordon, Sc. D.
November 3, 2003

This may well be the last in a series of essays giving suggestions for bear market portfolios believed to have merit. We have just about exhausted the list of favored asset classes and the possible ways they can be combined. Also, we admit that our crystal ball is no better than any other for predicting the future. Nevertheless, it is possible to identify the known characteristics of major asset classes and select those best suited for a long and volatile bear market. It is also possible to make sensible decisions on the weighting of different assets classes to provide overall portfolio stability.

In our earlier essays, we have emphasized the great importance of periodic portfolio rebalancing to maintain the desired portfolio compositions. We know of no other method that will enable a successful portfolio to continue its performance. However, we wish to remind our readers that the need for rebalancing declines in the case of conservative portfolios such as the one discussed in our previous essay. Higher concentrations of gold and short funds will require at least one portfolio rebalancing per year.

There is no way to estimate the need for rebalancing except to recalculate the percentages of each asset class and rebalance if at least one or two components have departed significantly from the original composition.

In recent months we have presented quite a few portfolios designed for success in a long bear market. We have identified all the asset classes that seem to be suitable and have suggested percentages for each class ranging from conservative to aggressive as the case may be. Conservative portfolios need to concentrate on short to intermediate highest grade bonds and lower percentages of short funds or precious metals.

Of course there is no reason why an investor cannot start with a conservative mix and add more of the volatile asset classes later. Less experienced investors should definitely stay on the conservative side at the start. Every new portfolio should be considered to be a learning experience for at least the first year.

Every investor, starting to manage a portfolio without any outside help, should realize from the start that all my suggestions are outside the limitations of conventional investing. Only a very small number of brokers and advisors know about using these unconventional assets. And, very important, their supply is limited and could never be used by millions of investors.

Now, please do not think you have to worry about using an unconventional approach. Just remind yourself every day that the millions of investors in conventional stocks and bonds have been and will continue to lose heavily. Anyone starting out with a conservative asset mix will probably be bored with the lack of excitement. If that happens, just relax and enjoy the steady returns.

The core position in our portfolio suggestions is a large, conservative base in U.S. Treasury bonds and a larger amount in sovereign bonds of major foreign nations. These bonds must be of short to medium maturity to be relatively stable in price. These two classes of bonds are available from a number of large no-load mutual funds with excellent records.

In the portfolio detailed below, we also add a sizable position in an unusual no-load stock fund with a brilliant bear market record from use of up to a full hedged position in down markets. Go to www.hussmanfunds.com for information.

To the 60% of stable assets listed above, we add a 25% diversified short position in stocks and long term bonds and a 15% position in diversified precious metals.

Asset	Value	Total Growth 1/2/2001 - 10/29/2003
U.S. Treasury Bonds	$7,500	$7,849
Foreign Govt. Bonds	$7,500	$9,849
Foreign Bonds + Gold Fund	$7,500	$10,189

Hedged Strategic Growth Fund	$7,500	$12,132
Short Stocks + Gold Fund	$7,500	$10,629
RYJUX Short Bond Fund	$5,000	$4,337

ASA Closed End Stock Fund	$2,500	$6,958
North American Silver Stock	$2,500	$9,008
Global Resource Fund	$2,500	$4,261
Total	$50,000	$75,190

The total return for the 34 month period, with no rebalancing, was slightly more than 14.5% annually. All of the assets except the short bond fund showed gains for this period. However, this portfolio, after nearly 3 years, is far from the intended balance. The precious metals have grown from the planned 15% to over 25%. Profits taken right now would be added to the safe bond fund reserves and not lost in a sharp price drop in gold and silver which are always quite volatile.

We rebalanced this portfolio four times on dates where the volatile assets showed a high or low price. The dates and the asset totals after rebalancing are given in the table below: (Please note there was no rebalancing on the last data.)

Values After Rebalancing					Current $
Asset	09/21/2001	10/07/2002	01/03/2003	09/23/2003	10/29/2003
U. S. Treasury Bonds	$8,220	$10,089	$10,278	$11,074	$11,032
Foreign Govt. Bonds	$8,222	$10,089	$10,278	$11,074	$11,206
Foreign Bonds + Gold Fund	$8,222	$10,089	$10,278	$11,074	$11,158

Hedged Strategic Growth Fund	$8,222	$10,089	$10,278	$11,074	$11,180
Short Stocks + Gold Fund	$8,222	$10,089	$10,278	$11,074	$11,235
RYJUX Short Bond Fund	$5,480	$6,726	$6,852	$7,383	$7,365

ASA Closed End Gold Fund	$2,740	$3,363	$3,426	$3,691	$3,665
North American Silver Stock	$2,740	$3,363	$3,426	$3,691	$3,632
Global Resource Fund	$2,740	$3,363	$3,426	$3,691	$4,214
Total	$54,799	$67,259	$68,520	$73,627	$74,687

Please compare the two 10/29/03 figures in the tables above and note the big difference between the unbalanced portfolio and the one with 4 rebalances. Note the large discrepancy between some asset classes. The considerable growth in the precious metals and the low values for the conservative bond funds makes this unbalanced portfolio much riskier than the starting portfolio. It is very important that every reader not forget this fact. And the out of balance condition will get much worse if the portfolio is not rebalanced. Remember that keeping a portfolio in balance is the mark of a disciplined investor, not a speculator.

Despite the bullish opinions being given on the many gold web pages, please note that Bob Prechter is a lone bearish voice and saying that both gold and silver have yet to complete a final bear wave down to much lower prices. And with the bear market in stocks about to resume its long march to very low prices, I personally am unwilling to dismiss the bearish opinion on gold and silver. So please remember to use rebalancing to prevent the precious metals from assuming more than the originally planned percentage in your portfolio.

This essay is probably the last of a series giving a broad range of portfolio ideas believed to have merit in a long bear market environment. New readers should read the others to get a broad overview in order to see the full range of the risk vs. reward spectrum. The next phase of this bear market will turn some novice investors into hardened veterans and cause others to become discouraged and leave the market, perhaps for good.

But before any investor decides to give up, I hope that they will at least try to build and manage a portfolio somewhat like the conservative asset mix discussed in our previous essay and returning about 9% annually. Keep the amount of money low enough to gain the experience while continuing to sleep well. Putting all the assets in one discount brokerage account makes the management job very simple and easy.

One suggestion that may be of value to some investors is to approach the next phase of the bear market as a laboratory for comparing two portfolios which vary in volatility. This real world experiment could, in a six month period, provide information on where to be in the sleep well vs. volatility spectrum. No one else can do it for you and it could change your attitude towards investing.

Before you start to build a portfolio, please remember that the relative amounts of less volatile and more volatile asset classes is very important. Starting out, it is always better to be on the conservative side, or perhaps even better, to build both a conservative and a more aggressive portfolio. Actual market experience is always the best way to make sound decisions.

The 13-month bear market rally appears to be nearing an end as we write. Primary wave 2 is ending and a severe wave 3 decline is due to follow. Almost certainly, the number of people in this country with any idea of what lies ahead is below 1%.That includes our government leaders in Washington, our financial leaders in New York and our news channels The exact time when the general public turns from bullish to bearish is unknown at present but will surely happen. Our country will be subjected to a very long and difficult period and this bear market will finally end as did others before it. However the timing will continue to be in great doubt due to the many complicating factors involved in a world wide economic catastrophe.

A wonderful opportunity to have free access to Elliott Wave reports is coming up in the week of November 12 to 19. Go to www.elliottwave.com and register your name and password. You can then read their 3 weekly Short Term updates plus monthly reports of the Financial Forecast and EW Theorist. These reports will give you a good feel for what is happening now and coming up in the near future during a very critical period in the stock market.

I want to thank all the readers who sent good wishes and prayers for my wife and me in recent weeks. I have been working beyond my physical capacity and plan to slow down somewhat in my writing schedule. But, I want to encourage everyone not to slow down on e-mails with non-personal questions that I can try and answer. Please remember that I cannot answer specific investment questions. Your e-mails are my only contact with you and are very important to me. I read every letter and try my best to be helpful in a reply. Remember that your comments are the major reason I continue to write.