FSO Editorials: A Portfolio Plan... by Robert B. Gordon 04/04/2004

A Portfolio Plan
for those who can assume a "Business Man's" Risk
by Robert B. Gordon, Sc. D.
April 4, 2004

For all my valued lady readers, let me say that the term in quotes above applies equally to both genders. I am pleased to have a growing number of women investors and am very interested in helping them compete well with the weaker sex.

For some months we have been trying to help inexperienced investors make a first attempt at investing on their own. We have tried to keep our suggestions as simple as possible and have offered suggestions involving as few as two or three mutual funds. There is nothing inherently wrong with these simple portfolios except that a problem of any sort down the road with just one fund can have a large effect on the overall return of the portfolio. Let’s start by listing the huge uncertainties in our national and global economy.

Never in my lifetime has our nation or world been in such an unbelievably bad economic situation. Some of our most experienced experts like Sir John Templeton, Jim Rogers, George Soros and Warren Buffett have been giving their bearish views for many months. The global financial system is deep in debt and entangled by 100 trillion dollars of highly leveraged derivatives whose risks are very unclear.

Our politicians either do not know the real bad truth or are hiding it from the public through incompetents like Greenspan and other economists who badly misjudged the aftermath of the 1929 Crash and are repeating their mistakes again on a much larger global scale. For this crisis, we need a new song, "God Save our World," to replace the one we sing now for our nation. For one thing is sure. This will not be a local disaster, but one for the entire World and on a completely new scale.

Based on my own personal and family experience in the Great Depression, the specific circumstances and consequences this time, with a world population of debtors instead of savers, will be impossible to estimate. In this country, I expect that at least 99% of our families will be totally surprised and devastated financially. With our governments at all levels broke and heavily indebted I do not see how we will handle the health and welfare of multi-millions of unemployed. It will be every family for itself to escape a major disaster.

I have been trying to warn all my readers for the last two and a half years, but have reached just a very small percentage thru my writing on the Internet. There is no way I can influence people in masses; it has to come person by person and family by family. I strongly urge each family, large or small, young or old, to get their family finances in the best possible shape.

I have made some progress in getting readers to start their own investment program rather than relying on brokers and advisors who do not have the knowledge or ability to help them. In this piece, we will concentrate our efforts on helping knowledgeable investors plan and manage a fairly large and complex portfolio. It will tend to summarize all of my research findings of the past year. Some of its information will have value for investors working with small or simpler portfolios. Now, of course, there is absolutely no reason why anyone cannot have several portfolios of different size and composition. Based on my lifetime, there in no age or other limit to expanding your investment knowledge any way you desire.

Although, we have been very critical of many funds over the years and given details in other essays, they are still the best answer for most working Americans for building a fund for retirement or most other purposes. If you have the ability, as we have, to put 6000 long term fund charts on your computer screen, there is no problem in separating the few good ones from all others. In the research we have done in the past year we have found some important failures of the industry to offer stable funds for long term ownership as exampled by the 33 year old Permanent Portfolio fund. The tragedy is that even fund companies the size of Fidelity and Vanguard do not offer the range of different funds we have found to be essential for long bear markets. Their failure will become very noticeable in coming years.

The real disgrace for the financial industry is its failure to provide honest sales information to prevent uninformed investors from buying at market tops and selling at bottoms. If they would think about it, they would realize this is not to their long term advantage. It is very hard to believe, but it appears that our financial leaders are really ignorant of the cyclical behavior of the markets that bring their wealth. It is very obvious that they know nothing about the Elliott Wave Principle that rules and explains the actions of all global markets. The industry experts parading on CNBC daily, all think we are in a new bull market which scares the daylight out of me for its serious effect on the assets of their equally ignorant fund buyers.

At the distant end of this long bear market, I see millions of sad investors finally selling near the bottom. I see a much smaller financial industry with many well known mutual fund names missing. It will probably take more than a generation for Wall Street to regain any semblance of normalcy. My goal in writing is to help all readers avoid the many problems that will impoverish the great majority of small investors.

If an informed investor has the ability to determine the unique performance characteristics of a group of funds, then one can safely add funds, known to be different, to a small portfolio. The difference, to be of value, can be both large or small. In large portfolios, I often use two similar funds with highly experienced managers just to get a comparison between them. No single fund or manager has all the answers, especially in the severe environment looming ahead. A veteran fund manager is a tremendous asset and the loss of the manager for any reason would be cause for alarm. A good example of this would be Dr. John Hussman, whose loss would raise big questions for his two funds. Fortunately, his web page informs us that he has taken steps to minimize the problem.

The very best mutual funds, properly designed and implemented, own the very best stocks in their field, thus making it unnecessary for the investor to handle this important chore. We suggest the use of stocks in a portfolio only when they fit the bill better. For example there is no mutual fund specializing in silver stocks. For aggressive investors, some oil and gas stocks are preferred for greater growth rates. A special example, and one of my favorites is PCL, a unique REIT stock paying high dividends from its huge holdings of timberland which keeps growing as the investor sleeps. This is a great growth stock for youngsters.

Another two examples are closed end funds traded on their stock exchanges, not at their net asset value, but at the market price which can vary greatly from the NAV. For example, I believe that gold stock ASA (NYSE) has traded during the market day as low as 0.5 and as high as 2.0 times its true net asset value. This is not possible with an open end mutual fund. CEF (Amex) trades in a similar manner and holds gold and silver bullion stored in a large bank in Western Canada. From its recent large price rise, I guess it is selling at a price quite a bit over its NAV.

The very best stable funds we have uncovered are expected to continue to do well for their owners. But it would be a bad mistake not to follow their progress at regular intervals thru this long bear market. Looking at their price charts at one of the internet sites is much better then looking at prices since the charts show whether the current trend is up or down. Become familiar with the historical price trends. Make sure that you understand what is the normal pattern for each fund before making any decisions. Never switch from one fund to another without a very sound reason. Our portfolio suggestions are considered permanent unless a better stable fund is found.

I have been getting many questions about 401(k)’s and am troubled to offer direct suggestions because I have never had one or read the fine print on any contract. However, if my readers are in a position to reduce or stop their contributions, I may be able to help. If not, I will suggest starting a separate IRA or Roth IRA. And as a third suggestion, one can help stem the losses by using short funds to balance or reduce the losses in the 401(k).

In this long bear market, I fear that most investors in the common types of stocks praised by mutual funds will lose 80% or more of their assets if carried all the way to the bottom. If investor selling reaches a point where the fund has to sell shares to meet redemptions, the end result could be much worse. Let’s list the possible ways to reduce the losses:

Please exhaust the possibilities suggested above before writing for comments on specific funds which is where I can do the most good.

If my memory is correct, this is the riskiest portfolio I have ever presented for consideration. The stable assets are 48% and the volatile assets are 52%, but it could be changed to 60/40 stable or even 70/30 by simply rearranging the dollars allocated to each of the 12 asset classes. It could also be started by buying only the 4 very stable funds and then adding the 8 volatile classes over any time period you might choose. However when we show you some recent performance figures, well qualified investors might decide to move faster.

		3 Year Annual Performance		18 Month Performance
Asset & Allocation		Full	Weighted	Full	Weighted
Stable Assets
Permanent Portfolio	20%	15.8%	3.2%	20.3%	4.1%
Hussman Growth	10%	15.4%	1.5%	15.9%	1.6%
Hussman Income	9%	N/A	N/A	10.1%	0.9%
Prudent Global Income	9%	16.3%	1.5%	13.4%	1.2%
Total	48%		6.2%		7.8%
Volatile Assets
Prudent Bear Short	10%	9.2%	0.9%	-11.1%	-1.1
ASA (NYSE)	6%	43.2%	2.6%	19.5%	1.2%
CEF (Amex)	6%	28.0%	1.7%	28.8%	1.7%
Major Silver Stock	6%	101.1%	6.1%	99.3%	6.0%
Canadian Oil/Gas Trust	6%	40.4%	2.4%	59.1%	3.5%
Global Resource Fund	6%	33.0%	2.0%	74.6%	4.4%
Leading Energy Fund	6%	11.4%	0.7%	30.8%	1.8%
PCL (NYSE) Timber	6%	18.0%	1.1%	27.2%	1.6%
Total	52%		17.5%		19.1%
Grand Total					26.9%

We did not make up these figures, but we knew from months of study the names of the best stable and volatile asset classes. Nor did we fudge them after several attempts. This table is the first time we saw the numbers.

Now, as we have said many times, there is absolutely no guarantee what will happen in the future. But we have several protective features. The first three of our stable funds are the safest and most consistent we have found over a long study. The fourth stable fund will vary with bond interest rates and with the price of its minor position in gold.

Because of the known market behavior of the 7 volatile classes, which total 42% of the portfolio, we decided to use a 10% permanent position of the fully managed Prudent Bear fund which currently holds a 20% position in minor gold shares. The 8% short position will help moderate portfolio swings in market drops and should be rebalanced regularly with the other 11 funds.

Please note that we have selected 6% of assets for each if the 7 volatile funds which includes 3 in the precious metals area, 3 in the oil and gas area and one long range major timber firm. We note on our computer screen that these 7 funds have quite differing price charts which will give some stability to the overall portfolio.

We consider this portfolio to be well balanced with the gain coming about equally from the stable and volatile groups.

Over the next five or ten years, the 8 volatile funds will make a large contribution to the gains in this portfolio. These gains will be increased in a tax free account by frequent rebalancing at the price peaks and valleys of the volatile funds This should preferably be done in a tax free account in order not to generate a lot of taxes. However, rebalancing a taxable account will still provide some worthwhile gains when done every year and a day to create long term gains. Please do not neglect the very important rebalancing step.

The very best way to follow all portfolios is by watching the prices of the volatile funds on one of the internet sites that provide a charting capability. For sizable portfolios I highly recommend using the FastTrack software which will provide wonderful daily color charts of 6000 funds for about $30 per month. Phone 800-749-1348 for a 30 day free trial with free technical support. I have been using this great tool for at least ten years and could not live without it.

All major stock markets around the globe have been in a major topping formation for several months. The next big leg in the bear market will soon follow. Now is the time to get your finances in good order. Please do not delay as I do not want to see any of my readers hurt.

Please remember that when you have several questions, don't put them all in one big paragraph. Please itemize them so I do not miss any.

Remember that the performance of any portfolio assembled from these suggestions may not duplicate the earlier results as the future is always unknown.

Carefully and frequently managed by an experienced investor, I have great hopes for this portfolio and I am sorry I will not be here long enough to gain its full benefits. It combines the very best stable core we can suggest and 7 carefully selected volatile components with enormous profit potential in future years. The volatile assets will have very large price swings both up and down, each of which can lead to profits which are completely lost by a "buy and hold" investor. In the past 3 years on my FastTrack computer screen there were numerous highs where profits should have been taken and lows where assets should have been switched from stable to volatile assets to produce more profits in the future.

There is no reason why any investor should not consider building a similar portfolio over a two year time period, starting with the stable assets and gradually adding volatile components as they learn to manage them for profits.

We wish all our readers to have the pleasure and profits of a carefully planned portfolio. With the help of carefully selected asset classes and your steady management, the odds of success are good. But the difficult environment makes it difficult to make any predictions. We will be happy to answer your questions at any time. As in the past, we request that you select your own symbols for those stocks and funds that are not given. There is ample help available at various internet sites.