Designing Your Own Mutual Fund Portfolio

Designing Your Own Mutual Fund Portfolio
by Robert B. Gordon, Sc. D.

In the past 3 years I have published at least one hundred portfolios ranging from 3 to 10 stocks or mutual funds, They were intended to help investors of various levels of experience from just starting to quite experienced. I failed to give the rules for building a good portfolio, one that would meet the needs of the investor.

The first thing to do in planning a new portfolio is to decide the nature of the job to be done and estimate its planned life. Planning ten years ahead is fairly easy compared to thirty or forty years. We have recently produced a five fund portfolio we claimed would be good for 50 years. Obviously, we meant that the portfolio was believed to have a very long life - longer than most other portfolios. We made this claim because of the superior life expectancy of the 5 funds making up the portfolio. Lets write down why these funds may be here and functioning in 50 years.

The Hussman Growth and Income funds are each allotted 15% of the portfolio and are occasionally rebalanced against each other to retain their15% allocation. Although these funds are still young, their protection by hedging during price declines has been well proven. We see no reason why they will not provide uniform prices protected from major declines in the future.

The great mainstay of this proven portfolio is the 30% allocation to the Permanent Portfolio fund which has a superb 33 year history of slowly rising prices. In rebalancing of the 5 fund portfolio, this fund will be a mainstay with its six asset classes in precious metals, Swiss and U. S. bonds and stocks.

We have had a few questions about our use of the Clipper Fund which we expect to be a superb contributor in combination with the Prudent Bear Fund. We have picked the Clipper Fund because of its superb list of 5 Investment Directors managing assets of about 7 billion dollars. Some other funds probably have just one director managing investments of the same size. Concern has been expressed over the Clipper Fund holding 1/7 of its assets in dividend paying securities of the Fredi-Mac funds. I expect any losses here will be balanced by gains from our reverse BEARX fund.

The Clipper Fund has one of the best records of the generally favorable last twenty years but we expect some bad returns in the future which will be counter balanced by gains in the proven Prudent Bear Fund, a short fund that gains when the general market goes down. Since the future market is not known in detail, we can not make an estimate of returns in a down market. So we end with a 20% allocation in the Clipper Fund balanced by another 20% in the Prudent bear fund. We expect this combination has a good probability of producing gains in both up and down markets due to the careful proven management if the Prudent Bear Fund.

A BRILLIANT REPORT OF A READER’S SUCCESSFUL LIFE

For many months my mail box was filled with very short congratulatory messages signed Linda. My letter to Linda requesting more information brought this surprising report.

"Dear Dr. Gordon,

I have been thinking about your request to know more about me. I have not been asked about myself in a very long time and I find that I don’t know where to start in describing who I am and how my outlook on life was nurtured. But I will try.

Chronologically, I am 58 years old. Just writing that number causes me to wonder what age really means. I am in good health and generally look much younger than my years. I am also relatively agile, still able to jog a few miles and enjoy it. But I was not always as spry as I am now. As a child and a young person, I rarely participated in any physical activity besides occasional floor exercises done at home. I spent most of my time keenly observing the world around me and feeling a bit awkward in it, except when I was in nature. I loved poetry and felt that it was the highest achievement that a person could aspire to. I read many volumes of poetry and literature from the world’s storehouse and wrote poems, stories, and essays for adults and for children.

I studied English Literature in college and won a scholarship for graduate study, but I declined due to financial reasons. My life at that time was completely devoted to the arts and humanities. I forgot to mention, I was born and raised in New York City. After college, I found a job in the city as a social worker. The work was difficult and even somewhat treacherous for a young, starry-eyed poet. I lived in a small apartment on the Lower East Side, then a fairly inexpensive haven for artists, writers and various other people who were struggling financially. It surprises me now that I didn’t give much thought to finances other than to try to save some money in a savings account. I didn’t know, however, that there were any other vehicles for investment besides savings, and I am sure that I was not alone at the time in this misconception. Also there wasn’t as much education about the subject as there is today.

My life at that time was totally immersed in social/ societal issues of the poor. After a while I left the social worker job and got another one as a teacher. The students were difficult, and this job was more treacherous than the first. There were frequent riots, and students had as many problems with reading and writing as they do today.

After some period of teaching, I got married and moved with my husband to California for a better life. It was even worse. This was in about 1975. We/I couldn’t find a job anywhere and ended up living in a derelict section of San Francisco. I was determined to find a job and taught myself to type on a public typewriter attached to a broken pay meter in the San Francisco Library. I think it cost $.25 for a certain period of time. I didn’t have the quarter, but I searched through a row of machines and found one with a broken meter that worked. I don’t remember where I got paper from, but I took a book off a shelf about puppetry (something I was interested in) and taught myself to type by copying the pages. I worked assiduously at that for a week. On my way home one afternoon, I saw a sign in a bookstore window "Typist Wanted". I went straight in, passed the typing test, and got the job. That was my start toward financial freedom, though it was very rude and meager. The salary was $90.00 a week and the place we lived in cost $45.00 a week. In an odd way, it is not much different from what some people are going through now. Many people are paying more than 50% of their take-home salary on expenses, I am sure.

Although I found a job, my husband did not and he reacted, as some people do, by getting despondent and drinking heavily. I am convinced that people can survive if they are rich in spirit, but poverty of materials often engenders poverty of spirit and that causes the collapse of many family structures. My husband left me soon after the birth of our daughter, and at that point I no longer had a job. It was a desperate moment, filled with both the beauty of new life and the hopelessness of irreconcilable conflict. Another thing I am convinced of is that beauty can exist in the same moment as misery, though it may require a lot of searching. I resolved to change my life. I returned to New York and lived with my parents.

I immediately found part time work and later was offered a job teaching in a private school, if I would consent to teach Physics! I knew nothing about physics, but I said "yes" and proceeded to learn the subject from the textbook. Oddly, I found the subject to be relaxing, especially problem solving which had "correct" answers as opposed to the often nebulous and floating world of the emotions. The job was wonderful but, again, it was low paying and after two years, I made the decision to become a Chemical Engineer. I was accepted to Columbia University and started on a new career path. I did very well there and eventually graduated with Master’s degree in Chemical Engineering.

At this point, I finally stepped into the world of higher paying jobs, yet, to my surprise, there were still many obstacles to overcome. One was that women engineers were still fairly uncommon in the workplace and I had to ‘fight’ to be respected intellectually. I also found that many engineers did not have interests outside their field and, consequently, were limited emotionally. Nonetheless, I was happy to have an income and started my first contributions to my 401K plan.

But the road to financial success has thorns. I now had all those choices of what to invest in. For a while everything seemed like a good choice. Investments just seemed to keep growing. Weren’t they supposed to? It was heaven. Of course, it was naive. I lost over 40% of that portfolio in 2000.

In 1990 I left my engineering job and went back to teaching physics in a public high school, only this time I knew very much what I was doing. I went back to teaching for two reasons, one was to be more available to my daughter and the other was to help young people. I draw upon both my interests in the humanities and in science.

In the school system, I was able to start a 403B plan. Again financial choices. This time I was assigned a manager from a firm. For 10 years the gentleman balanced and rebalanced. At the end of 2002, I had nearly less than the total sum invested! I took notice. Something was wrong with the conventional rhetoric. I took what money was left and put it in the guaranteed income fund until I could figure what to do next. I began reading articles and searching for guidance as to how to make prudent investments. With my background I should have been able to understand most logic, but there are numerous variables, and the field of finance and economics can be quite entailed. I have stayed up many nights reading esoteric articles on financial intricacies, trying to follow graphs and commentaries. Nothing made intuitive sense. I also did not have a lot of time, as my days are filled with the demands of work and family. (I am very attentive to my mother’s needs especially, since she is aging.)

In my quest to understand how to put together a financial portfolio, I responded to every avenue of information, to newsletters that suggested stocks to investment and trading groups. One member of a group of traders that I met suggested that I read Financial Sense. It was there that I read your cogent articles on investing and got my first real understanding about how to set up a portfolio, but more than that, about how the background - human emotions - affects the play of events.

Dr. Gordon, I hope that this letter satisfied some of your curiosity about me and that you weren’t bored or overwhelmed by the details. Life is a curious adventure for us all. You once said that you measure a person’s success by his/her flexibility in making a move when they see something is wrong. Sometimes those moves occur over short time frames, sometimes over longer ones. I am blessed to have time. My time frames were of the long kind and I am still moving.

I hope that you are well. You are a dear mentor to me, perhaps unbeknownst to yourself. It is a magnificent gesture to give people the tools to set themselves free.

May you prosper in the new year.

Sincerely,
Linda"

We are pleased to learn about Linda’s amazing true life story. We congratulate her great progress and hope that we will have an update on her baby, now a beautiful 28 year old woman. ~ RBG

A SIMPLE STARTING PORTFOLIO

Over the past two years we have presented dozens of different portfolios, most of them using from 3 to 10 funds or stocks. Our most recent example contained 5 funds, one of which the Clipper fund CFIMX has a very high cost if not in an IRA but that fund and its partner BEARX can be added later. It must be appreciated that all of our portfolios are designed to be balanced as a complete unit. So by dropping, not one but two funds, from our five fund portfolio, we arrive at a very well-proportioned starting portfolio. It is very inexpensive and as well balanced as one can expect from 3 funds.

Portfolio 1 - A Balanced Portfolio

33%   HSGFX
33%   HSTRX
34%   PRPFX
100%   Total

With equal percentages of the three funds, Portfolio 1 is very easy to set up and maintain. Since the Permanent Portfolio has 6 asset classes, they will of course be reduced relative to the Growth and Income constituents.

This portfolio is easily returned to its original equal percentages or can be changed to any other ratio the owner desires. At this time, no one knows what the optimum ratio will turn out to be. A years experience with the 3 portfolios will help get the answer. All 3 portfolios can be bought for less than $4,000 and will provide a very educational experience. Send us the results a year from now and we will publish them.

Portfolio 2 - A Growth Portfolio

50%   HSGFX
25%   HSTRX
25%   PRPFX
100%   Total

This portfolio has half of its dollars in the Hussman growth fund which we feel should be owned by every reader for its assured rate of hedged growth.

Portfolio 3 - A Natural Resource Portfolio

25%   HSGFX
15%   HSTRX
60%   PRPFX
100%   Total

The 60% allocation to The Permanent Portfolio provides a substantial permanent allocation to gold, silver and other natural resources.

DO YOUR OWN HOMEWORK

Any reader planning to build a portfolio using the three proven funds should get the prospectuses and read them thoroughly before investing:
Hussman Funds $1000 Minimum Purchase 1-800-487-7626
Permanent Portfolio $1000 Minimum Purchase 1-800-531-5514

PERSONAL NOTE

My health has improved but I still have a long way to go. I greatly appreciate your letters and comments but am not able to answer questions at this time.