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Building A Stable Growth Portfolio
~ For Serious Investors Only ~
by Robert B. Gordon, Sc. D.
February 14, 2004

We have been searching hard for additional stable asset classes with the capability of bringing both diversity and growth potential. In this essay we bring good news for our old and new readers. We now have assembled a very surprising group of ten quite different stable asset classes which open up the possibility of a long life, good growth and possible added benefits from rebalancing. But first, let’s discuss each class to demonstrate their overall stability and define their differences.

The primary reason for selecting these ten asset classes is that we expect their price action to vary somewhat in both up and down markets. We arrive at this conclusion by examining their historic price action and studying their management styles. We will first describe each class and discuss their distinctive differences and then present some historic data.

In many past essays we have strived to find some fairly simple portfolios that could be used by inexperienced investors as a means of getting started. But this will be different. It is intended to be studied as a whole and either accepted or not accepted. This portfolio has enough built-in flexibility and stability to ride thru some troubled waters and need only an occasional rebalancing as long as each asset class continues to show its historic behavior. Since we have long term data on seven of ten funds, we expect the portfolio to do well.

SELECTED ASSET CLASSES

From a careful study, we have selected 10 of the most stable individual classes that fall into 5 major asset groups:

      1. U.S. Treasury bonds in different maturities.
      2. Selected Foreign Government bonds.
      3. Conservative funds with unique styles successful over long periods.
      4. Conservative bond/stock income funds.
      5. A unique diversified stock fund using options for growth and hedging.

To provide historic data for the portfolio, we selected 7 mutual funds having performance data back to at least 10/28/91 or more than 12 years. These funds all display the desired stability over both the bull and bear years. Only one of them, a short term bond fund, shows a nearly straight upward sloping graph on our FastTrack computer screen. One other fund shows a beautiful line curving upward over the 12 years. The other five show enough individuality in their price peaks and valleys that may provide some benefits from the rebalancing steps.

Treasury Bonds - We selected three funds of differing maturities from two well known, no load fund groups. Two of them are old fully managed bond funds and the third is a fund holding stripped treasury coupons maturing in 2015. Their price graphs indicate some possibility of providing gains in rebalancing. This 30% of the portfolio is of course subject to price changes of the dollar vs. other foreign currencies, so we provide a significant amount of protection thru holding foreign government bonds.

Foreign Government Bonds -  This group holds one fund with more than a 12-year price history, which shows significant gains in recent years from the falling dollar. For the second fund, we picked the PSAFX  Global Income Fund, a newer fund managed by David Tice of the Prudent Bear Fund. In its last public report, the fund was holding about 16% in gold shares which will distinguish it from the other foreign bond funds and provide the possibility of some rebalancing gains in the future.

A second income fund mentioned below, HSTRX, has also started to acquire some gold shares. Over the long term for the average investor, we like the fact that gold is being acquired (and sold) by professional managers. My 30-plus years in precious metals has convinced me that most investors will do better in the long run with professionals making the buy and sell decisions. The only exception to this in my judgment would be permanent acquisition of gold and silver coins or bullion by individual investors.

Conservative Funds with Unique Agendas -  This group holds two unique funds that clearly fit this category. The Permanent Portfolio Fund PRPFX has a more than 30-year record of stable gains in bull and bear markets to the present date. It holds a fixed portfolio of  U. S. Treasury and Foreign bonds, stocks and precious metals. We featured this fund in a recent essay. In some respects, the second fund is even more distinctive since, for many years, it has held only securities tied to a pending merger or acquisition. This is a highly specialized field and the Merger Fund has two experienced, long-term managers in charge of their constantly changing portfolio.

Over the coming years, these two funds will be interesting to watch as they have a sort of "tortoise and rabbit" race to see who does best in various market climates. I really regret that my age and health will probably not let me see the winner.

Bond/Stock Income Funds - This group has two funds holding bonds and dividend paying stocks in a 2 to 1 ratio. Both are in what Morningstar calls its "conservative allocation" group. It includes a veteran fund from a major no-load company with a superb record and a five star rating. It is very large and can only buy securities of large companies. Its assets in billions of dollars almost match the second fund's assets in millions. They will make a very interesting pair of friendly competitors. Note their comparative results in the performance table that follows.

The second fund, the Hussman Total Return fund HSTRX, is only 18 months old, but is starting with a great charter and a bright manager. It can buy U. S. and foreign bonds, dividend paying stocks and gold which it has recently begun to purchase. It can also hedge (protect) its portfolio up to 30% in down markets, if needed.

It would be hard to find two funds so different in their age and management, but together, in my judgment, they make a great combination for serious investors.

A Stable Common Stock Fund -  Last but not least, is the Hussman Strategic Growth fund, HSGFX, an impressive 31/2 year record and earning 5 stars from Morningstar. It is unique so far, but I am sure someone will try to copy its great record of growth and stability. I bought this fund as soon as I learned of its existence and have recommended it to my readers ever since.

The manager, Dr. John Hussman, buys a diversified portfolio of value stocks and holds them for a long time, while using index options to (1) increase the gains in rising markets or (2) hedge (protect) the gains in falling markets. This system has worked amazingly well in the bear market so far and, in my opinion, is now well tested. This fund has earned a place in a portfolio of conservative stable funds.

TWELVE YEAR PERFORMANCE HISTORY

Here is the performance of seven funds from 10/28/91 to 2/12/2004:

The graphs of these funds on my FastTrack computer screen were all rising but two that leveled off recently. Their recent returns over the past year and a half are even better than above, as shown below. Readers are encouraged to go to www.bigcharts.com and view the fund charts over the past 10 years.

PERFORMANCE SINCE  9/18/2002

Here is the performance of ten funds from 9/18/2002 to 2/12/2004:

Please study these two sets of performance data, remembering that they both end on the same current date. Note the large change in the U.S. and Foreign bond funds and the considerable improvement in the Permanent Portfolio fund as a result of its gold and silver holdings. So three of these ten funds are now holding precious metals in some form: PSAFX, PRPFX and HSTRX. The PRPFX holding is permanent, but managers of the other two funds can buy or sell as they see fit. These positions add greatly to the potential future performance of the ten fund portfolio.

WHAT’S MISSING FROM THE PORTFOLIO

1. Common stocks. The one Hussman fund can be 100% hedged against losses and has proved its techniques
2. Growth funds, heavily advertised to lure investors
3. International stocks to diversify your losses
4. Small Caps, Large Caps and Index funds
5. Market neutral funds
6. Short funds
7. Volatile funds that may have heavy redemptions
8. Funds being sued by the SEC
9. Funds expected to lose shareholder assets

DISCUSSION

The future of the U.S. and other World stock and bond markets is almost completely unknown at this time. What is known is that we are facing turbulent economic conditions and financial markets. However, our young and middle age adults cannot wait indefinitely for all the clouds to disappear if they wish to build assets for their retirement years. I have thought very hard about their problem and have called on my more than 50 years of heavy mutual fund experience to provide some answers. I can assure you that the portfolio described above was not thrown together quickly or lightly.

I have either owned or currently own all of the ten funds. I have studied fund company leadership, the managers of the funds and their styles of managing. I have studied the performance of hundreds of funds and have picked these ten to be used as a group, because as a group they have a much greater chance of success in an unknown future environment. I definitely do not recommend that anyone reduce the number of funds since each of the ten has a unique role in making a successful portfolio. This built-in diversity not only provides safely, but may add to the assurance of good returns. This is especially true because I believe that regular portfolio rebalancing will be a factor in its eventual success.

We know there will be market ups and downs that will discourage millions of investors over the next 20 years. I cannot make any absolute predictions, but on a relative basis I expect this portfolio, kept intact and rebalanced as needed, will do very well.

Some of these funds will have negative performance in future periods. That is why we picked several funds in four of the five categories to increase the potential advantages from portfolio rebalancing. We would prefer that building this portfolio with serious money be considered only by investors with at least 5 years of experience. This background will enable them to cope with a bad performing fund or portfolio and make any necessary adjustments.

For investors with less experience, this ten fund portfolio could be started with less than $10,000 in a tax-free account since most of the funds require only a $1,000 initial purchase and at least two of them require only $500. It should make a wonderful learning experience, especially if all 10 funds are included. Adding new money each year could be used instead of periodic rebalancing to keep the portfolio as designed.

Once this portfolio has been acquired, the management time required in the first year is almost nothing. In fact you could safely take a six-month cruise and find everything in order when you return. There is not a single volatile asset class that needs attention. Sure, the headlines may be scary, but plunging stock prices, a sinking dollar or higher inflation rates will not affect your sleep.

Please go back and read my words again. I feel very strongly about how this portfolio idea should be implemented because I want it to succeed for you my readers. I have given you the symbols for half of the funds which are unique and have given the category of the others so they can be found on various web pages. I will happily answer any general questions about this ten fund portfolio.

PORTFOLIO REBALANCING

To fulfill its promise, this portfolio will need to be rebalanced whenever market action produces a significant difference between the most profitable and least profitable asset. This is readily done when new money is being added and also if the initial equal dollar amounts are retained in the future. It is not possible to give a schedule for doing a rebalance and will be strictly up to the decision of the investor manager. Every two years may be a necessary or desirable time. It is not a very critical decision in a portfolio free of volatile components. Remember that this portfolio in designed for maximum stability.

FUTURE  PORTFOLIO MODIFICATIONS

What will the portfolio look like two years from now? It should not show a great change. All ten funds will still be in business, but the dollar values of each asset will be changed. The owner will have to decide when to rebalance the portfolio on the basis of actual market action. In my view, it would be premature to consider changing the original equal percentage of each fund until at least one rebalancing has been completed. Although no one can predict what the future will bring, I am optimistic that the portfolio, as designed, will do a great job. And if it is being managed by an experienced investor, I am confident that he or she will be able to make any necessary on-course modifications that may be needed.

Nothing I have written above is intended to discourage an inexperienced investor from building this portfolio slowly over a period of time. What I do discourage is anyone starting out with a large dollar amount and little experience. It would be like a young millionaire, with no sailing experience, buying a large sail boat and sailing out the harbor with black storm clouds on the horizon. Big trouble ahead.

Please remember, we have described a very conservative portfolio that would protect the assets of widows and orphans, provided an experienced investor was available to do the management. But having said that experience is needed, let me quickly add this portfolio is not going to undergo rapid changes because each of the ten funds has been carefully selected to be conservative to the point of being almost boring. We look forward to hearing from the voices of experience who decide to build this portfolio. Let’s hear from you all.

AM I TOO BEARISH?

Recently, a reader accused me of overemphasizing the seriousness of the crisis we face and by so doing had caused an unknown number of readers to "short the market" and lose a lot of money. I have no idea of what he meant by "shorting the market," but I would say it meant being short more than 50% of a portfolio. Although it was only one of many letters I receive, I was bothered by its implication since the last thing I want to happen is for anyone to lose money. As my older readers well know, I have been expecting the world’s greatest market crash and mania since 1997. It turned out to be even bigger than I expected and did not start until the spring of 2000.

I began writing in the fall of 2001 and published many essays warning readers of bad times ahead. I did not mince any words since I knew from my fellow retirees how incredibly bullish everyone was. I knew that bold words had to be used to shake them out of their lethargy. Until the receipt of the one critical letter as mentioned above, I do not recall any others criticizing my bearishness. What I did get was letters from parents claiming they were unable to get the message thru to their children and from adult children unhappy because they could not convince their parents.

In my portfolio suggestions, I have always emphasized the need for safe reserves and, more recently, have stated many times that very stable portfolio elements should be a minimum of 50% of any long-term portfolio. When recommending volatile assets like short funds, I do not recall any suggestion of more than 25 or 30% and certainly never an amount of over 50% short. I do not plan to change my bearishness and will be pleased to receive your comments.

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© 2004 Robert B. Gordon, Sc. D.
Dr, Gordon's Editorial Archive

Robert B. Gordon, Sc. D.
Sun City West, Arizona
February 14, 2004
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