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An Exciting New Portfolio Concept
for U. S. and Foreign Investors
by Robert B. Gordon,
Sc. D.
July 10, 2004
We have been troubled for several years with our inability to respond to requests from abroad for suggestions on using our portfolio concepts. In this essay, we describe using a type of portfolio that can be duplicated in any foreign country with a variety of mutual funds available to investors.
We will demonstrate a number of ways to use this concept with the help of a list of 6000 funds available in our FastTrack tm database. It should be possible for many readers in other countries to build a somewhat similar portfolio or at least one based on the same general ideas.
THE "PERMANENT" PORTFOLIO IDEA
During the past year we have been developing a type of portfolio that can be used by investors of all ages, temperaments and needs. It is permanent in the sense that it does not involve trading but does require periodic rebalancing to keep the original composition. It is based on one very important concept, namely, to use several asset classes of different volatilities from quite stable to quite volatile. This essential starting requirement, creates changes in the dollar amounts of various securities that can be taken as profits from the stronger acting assets when the portfolio is rebalanced.
Over a time period of, say 10 years, with periodic rebalancing, the total assets grow and each asset, regardless of its volatility retains it’s original percentage in the portfolio. So that is what we mean by "permanent". It may be necessary, over time, to replace an individual asset or change the percentages of some assets but the original concept remains intact. The portfolio management requires very little time, and if the selection of assets is good, the portfolio continues to gain in asset size over a number of complete market cycles.
In recent months we have made some additions and improvements to our original ideas. We found some very interesting funds that did not quite qualify as being in the stable asset class. However they were stable over the long run so we call them "Stable over the long run". This gave us 4 asset classes: Stable, Long Term Stable, Volatile and Short. It was the last class, short, that caused trouble for our readers abroad since these funds seem to be limited to the U.S.
In early application of the original portfolio concept, we used mutual funds for all the asset classes. Then we began to add some stocks in the volatile asset category, e.g. the precious metals and natural resource areas in an attempt to get better performance than in the comparable larger mutual funds. That is the status of the portfolio concept recently. There was tremendous flexibility in the variety of funds that could be created, ranging from very stable to quite volatile, depending on the ratio of stable to volatile assets in a given portfolio. So this concept was capable of serving the investing needs of virtually any age and circumstance, but only in the United States.
NEW ALL- MUTUAL FUND PORTFOLIOS
In the remainder of this article we will discuss portfolios using mutual funds in 3 different asset classes:
1. Stable 2. Long term Stable and 3. Foreign Equities
When it comes to determining the relative stability of a given portfolio we will use the same formula as previously;
Stable Percentage = % Stable elements + 1/2 of % Long term stable elements
For our present purpose of demonstrating the new proposal, we intend to us the same highly stable fund HSGFX and will vary its percentage in a number of portfolios ranging from quite conservative to moderately aggressive. To help our foreign readers. we will omit the short fund asset class from our portfolio suggestions although American readers can easily add one or more short funds to any portfolio given below.
To replace the Volatile Asset class, IN THIS ESSAY ONLY, we have decided to use a completely new category, namely foreign stock funds, by which we mean American mutual funds holding foreign equities. There is a huge number of such funds which are available to American readers by screening on the Morningstar web page. Foreign readers, can assume that American stocks in their own "foreign" mutual funds are their equivalent asset class.
Now, it should be understood that, using any class of mutual fund as a substitute for a prior volatile class, must always be considered as quite different from volatile individual gold stocks or oil stocks. In picking foreign stock American mutual funds we can only be assured that they will be different from their American stock counterparts. In the coming bear market leg, we may all be surprised at the depths to which both American and Global mutual funds may eventually fall. However. we expect major funds from good families to eventually recover in the next bull market leg, regardless of whether the mutual funds are foreign or American.
EXAMPLES OF ALL- FUND PORTFOLIOS
Conservative Portfolio #1
Stable Assets
HSGFX
Hedged growth 60%
Long Term Stable
FCAPX
10%
DXXXX
10%
OXXXX
*
10%
Sub total
30%
Foreign Equities
AXXXX
5%
OXXXX
*
5%
Sub total
10%
Grand Total 100%
* First letter is the letter O
Please know that all six funds used above are from major American fund companies with superior records of either Morningstar 4 or 5 stars. They can be found by Morningstar screening as given in our recent essay for FCAPX.
This very conservative portfolio is scored as having 75% stable components and should please conservative investors seeking steady growth over time. The portfolio value may decrease in value for awhile but will eventually recover with a good return in the next bull leg. Quality funds as above will be in business for a very long time.
A moderate portfolio will be given a smaller stable element and modest additions to the other two classes.
Moderate Portfolio #2
Stable Assets
HSGFX
Hedged growth 50%
Long Term Stable
FCAPX
12%
DXXXX
12%
OXXXX
12%
Sub total
36%
Foreign Equities
AXXXX
7%
OXXXX
7%
Sub total
14%
Grand Total 100%
This moderate portfolio with 68% stable assets is much more conservative than any earlier example with small amounts of volatile assets. With their well experienced managers, one or more of the 5 unhedged funds may surprise with some unexpected bear market gains.
Somewhat Aggressive Portfolio #3
Stable Assets
HSGFX
Hedged growth 40%
Long Term Stable
FCAPX
12%
DXXXX
12%
OXXXX
12%
Sub total
36%
Foreign Equities
AXXXX
12%
OXXXX
12%
Sub total
24%
Grand Total 100%
This portfolio gives a more equal percentages of assets to the American and Foreign funds which is as good an estimate as we can make in advance and may turn out to be a winner over the other two.
THREE YEAR PERFORMANCE OF PORTFOLIO 3
Let’s check the 3-year performance from July 7, 2001 to July 7, 2004
Stable Funds Pct.
Gain Wgt. Pct.
HSGFX
40% 15.3%
6.1%
Long Term Stable
FPACX
12% 14.5%
1.7%
DXXXX
12%
8.6% 1.0%
OXXXX
12% 10.0%
1.2%
Sub Total
36%
3.9%
Foreign Equities
AXXXX
12% 24.2%
2.9%
OXXXX
12% 7.9%
1.3%
Sub
Total 24%
4.2%
Grand Total 100%
NA 14.2%
One thing we can be sure of going forward is that the next three years will not be like the last three. They could be better or worse, but one thing our American readers can be sure of is this. The two funds whose complete symbols are given above have shown excellent results over the last 3 years. And, for our selection of the other four American and Foreign equity funds, we used the same high standards of 4 or 5 Morningside stars.
ATTENTION: FOREIGN READERS
We have long been unable to answer their pleas for help in finding funds that were available in their countries for use in our portfolio ideas. By leaving out the short funds which may only be available in the U.S. we have hopefully made a big start to do better.
Our defining of the foreign equity funds as a separate asset class means that, for investors abroad, their American equity funds are the equivalent asset class for them. We have enjoyed a large readership from all the continents and have been very unhappy that, until now, we had not come up with a way to help them. Our foreign readership is spread over large nations like Australia and small countries like Khatmandu.
Having been widely traveled on all the continents in earlier times with my deceased wife, I have always treasured many unusual messages from abroad. Perhaps one of the oddest occurrences resulted from my publishing a note several years ago written by a man in Emerald, a very small town in southwest Australia which he described as one stop from the South Pole. Soon after, I got a note from a German national living in Ethiopia saying he had a daughter living in Emerald. Then there was the Bulgarian software engineer working in Iceland, a very small country, on virus software.
It is rather interesting that, from the population of France, I have received just 3 e-mails, two in French and one in English. I am counting them on one hand and after three years may only need one hand for the rest of my life. No other e-mails were in a foreign language which is good since I have not used a foreign language since 1939.
I especially love my foreign readers, including a German woman who was making five copies of my articles and giving them to her lady friends. And the recent letter from the Arctic Circle in Finland and my friend in Singapore who wants to give me a tour the next time I am in his city. Of course, I also love my devoted readers in America including a woman teacher of the blind and another who is a retired neuroscientist and now writing books. My late wife’s brain is now being examined by some type of neuroscientists in a special laboratory working to find cures for brain diseases. I hope to hear from them soon.
Please excuse me for getting off the track for a moment, but I write for my readers, not my own enjoyment. I am happy that this message may help at least a few investors abroad and hope they will let me know if it is at all helpful.
FOREIGN BOND FUNDS
We cannot end without mentioning that a corollary idea to foreign stocks would be foreign bonds as a separate asset class. Of course, we have been using them in our stable asset class to balance U.S. bonds that are declining as the dollar drops. But both American and foreign investors could use a wide variety of bonds in one or more separate asset classes. And they will work differently as desired in portfolios just as any other asset class.
So foreign readers could make their own new asset class from their "foreign" mutual funds holding American bonds. This idea may have to go on the back burner until the Dollar makes a big turn around. How many other asset classes can our friends abroad come up with. Please send me any suggestions so that I can pass them on.
Now that we have "broken the ice" to get some portfolio building abroad, I hope our foreign readers will start sending me portfolio suggestions rather than asking me for them. The secret is to build a portfolio from the most highly different asset classes that are available. It is these differences that can lead to future profits from portfolio rebalancing.
MARKET COMMENTS
The U.S. markets are heading down as we write and may be speeding up their pace soon. Get your financial affairs in order. And help your family and friends to be prepared. CNBC and most advisors are still bullish, but I got an unusual advertising piece from one 3-man firm in the mail which said STOCK MARKET PLUNGE AHEAD. So watch out below!
According to the latest EW report, gold is near the top of a bear market rally and is expected to drop quite rapidly thereafter, much to the disappointment of the gold bulls. We will know who is right in a few weeks.
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© 2004 Robert B. Gordon, Sc.
D.
Dr,
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Robert
B. Gordon, Sc. D.
Sun City West, Arizona
July 10, 2004
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