FSO Editorials: Investment Education for the Entire Family by Robert B. Gordon 10/22/2003

Investment Education For The Entire Family
Give It The High Priority It Deserves
by Robert B. Gordon, Sc. D.
October 22, 2003

American adults have been told so many times by the experts about the dangers of managing their own assets that many are afraid to try. But the last four years of the bear market have demonstrated how poorly these experts have done. I expect the professional managers to do even worse in the months and years to come, providing a great opportunity for serious investors with access to the right information. I hope that this essay will convince all our readers that the experts are wrong and that money management can be both profitable and enjoyable.

I am not going to cover the glaring problems in our K-12 or college educational systems. They are doing very poorly in almost all phases of preparing our children to survive in an increasingly difficult environment. Teaching your spouse and your children how to manage money and investments is much too important to be delegated to our educators. The job should be assumed willingly by the parent best equipped to do it. And, any family who currently lacks the knowledge or experience to pass on this important knowledge should recognize they have an urgent need to fill the vacuum as rapidly as possible.

In the thousands of e-mails I have received in the past two years, I cannot recall one mentioning a joint effort by husband and wife in managing their investment program. Of course, I have had letters from widows who are trying to replace a recently deceased spouse. I have had letters from young adults who are trying to learn the basics of investing on their own. I have had one letter from an experienced woman investor who gave thanks to the lessons she learned from her deceased father.

Our mail and television advertising from life insurance companies warns families about the death of a wage earner. Some individuals do die in the prime of life so the insurers recommend an inexpensive $250,00 - $500,000 term policy. How many recipients of these large payments are prepared to invest them intelligently? There are probably a very small number of long term success stories in handling an unexpected windfall like a lottery win.

In my opinion, this lack of practical, hands on experience by one or both spouses exists in most households today. I plead guilty to acquiescing to my wife’s wish not to be involved in managing our money. We were fortunate that I did not predecease her. Early death of one spouse is not the only danger. There are a number of illnesses and injuries that can incapacitate either spouse long before they reach 65.

Of course the heart of the problem is that the Wall Street hucksters, work hard every day to convince the public that investing is very difficult and should be left to the experts. And the mutual fund industry has argued strongly against individuals and families getting involved in the most important job of managing their money. This is why many millions of Americans have not made any effort to stop their huge losses in their retirement accounts. Our brokers and mutual funds are still selling the same old investment vehicles that will eventually, as this bear market progresses, wipe out nearly all the savings in the country. But it is not too late for a few thinking families to take matters into their own hands. I am willing to try very hard to help those who decide to help themselves.

The most important first step is to dissociate yourself from bad or misleading sources of information like the daily business page or CNBC. The very next step in learning to manage money is to separate yourself from the crowd since history teaches us that, at important market junctures, the great herd of investors is always proven to be wrong. If you stop and think about it for a minute, tens of millions of investors can only be right by some rare coincidence of events. And, if my reading of history is correct, it has never happened yet. The words below from one of my favorite web sites points out one age-old problem of the investing masses, inability to sell and cut their losses.

It’s Just a Game… (Providence, RI Oct 17, 2003) - We cheer when they are up, and cry when they are down. But we always fiercely support and defend them. The Red Sox? No, our investments. Many investors act more like fans of their investments instead of owners. They cheer when they are winning and hang on too long when they are losing. Instead of bailing when their investments start to show signs of weakening, many people hold onto their investments as if they owed them some sort of misplaced loyalty and it would be turning their back on an investment that had performed so well in the past.

Just as each and every single living breathing human in every part of New England knew it was time to pull Pedro in the 8th inning of the ALCS, the stock market gives signs it is tiring and investors need to act like prudent managers and take them out of the game.

The market gave these signs in 1999, yet most investors, through allegiance to their investments or blindness, failed to see the signs of the coming problems. We have many of the same signs being given today. It is time to pull the pitcher and put in the reliever.

Unfortunately, many investors will stay with their investments too long again and watch whatever recovery they have had slip away. This is why they need to hire a money manager with a proven record of recognizing the signs of weakness. They need to have a manager that doesn’t have the same emotional ties to their investments. They need someone that is willing to take the pitcher out while he is still winning and put in the reliever to keep the gains and avoid losses.

For each investor whose circumstances require a money manager, there are probably several hundred who can learn to do it themselves using some of the ideas conveyed in my recent essays. So the first act for any investor wanting to manage their assets is to simply make a conscious decision to do so. The next step is to reach an informed decision on where we are in the major market cycle. The most reliable source of this data is a current report of the Elliott Wave Forecast report issued monthly. Their current view is that this bear market will probably last for decades with major up and down moves that will surprise and fool almost everyone, including all of the leading economics experts who have yet to learn about Elliott.

In nearly 100 essays over the past two years, my goal has been to provide useful information for average investors. My focus is unchanged but I have learned a tremendous amount from the experience. I have discovered new and simpler ways to invest in a long bear market. I have found new and very useful ways to combine asset classes. I have rediscovered major advantages in rebalancing portfolios which forces investors to take frequent small profits and avoid taking large losses. I am sure that I have learned more than any reader because the new information was added to my already large accumulation over the past 60 years. Confidence is gained as successes overtake failures. The most important lesson is to recognize that a new portfolio idea is not working and needs to be abandoned or changed. The goal of all investing approaches is to maximize gains and minimize losses. This ability grows as your market experience increases. The more portfolio approaches tested in the market, the sooner will a new investor gain the necessary confidence for success.

As in any field of human endeavor, it is now very possible for new investors to ride on the back of those who preceded them. With reasonable application of time and effort to the learning job, my guess is that any investor can become comfortable managing money in a surprising short time if they use several portfolios designed to explore a number of different asset classes. I am suggesting, here, that the time to acquire knowledge will be shortened if several portfolios are run in parallel. Imagine if husband and wife ran a friendly competition between two portfolio approaches. It is possible for investing, when successful, to be fun and not a chore.

There has always been a need for parents to instill the desire to save into their children. The coming depression in our economy well certainly raise the urgency level of this need. From 1929 to 1935 I lived in a 3 generation household that learned to save each and every penny. I still pick them up 68 years later. There are plenty of places to get savings plan ideas for your young children. Your local bank is a good place to start, or do a search on Google for Child Savings Plan. Older children will need a plan appropriate for their age.

From the reports I am seeing in recent years, Americans have been spending more than they earn and are deeply in debt. This short sighted habit will surely cause serious problems long before they reach retirement age. These children of our children have, of course, lived after the Great Depression and have led a very sheltered life so far. They will very soon get the shock of their lives and learn some very painful lesson in the school of hard knocks.

I am writing these words after just reading a market update from Robert Prechter. His views of the stock market for the balance of this year and all of next year are as frightening as any I have seen since reading his At the Crest of the Tidal Wave in 1995. The happy spenders and borrowers in this country are about to get some very bad news that will change their lives forever. And their numbers are so large that it will put our economy and nation at an incredible risk, far greater than anything seen after 1929. I am sure of one thing. Our nation will learn to save, not spend, and the change will be very painful.

I did not choose this heading to get your attention. It is true that bear markets offer a much better learning environment. It may take a while, but the volume of propaganda and mistruths from Wall Street will diminish. The number of "cold" sales calls from brokers will decrease. The huge number of mutual funds will decrease. Those with atrociously bad records will be first to go, while the smaller number of well managed funds will survive. The volume of sales letters from brokers, mutual funds and advisory letters will drop substantially as their number decreases.

In my personal story Education of an Investor, available in the www.freebuck.com archive, I point out the value of my education in the 1972-74 bear market in which very few of today’s adults were involved with serious amounts of assets at stake. After that great learning experience, my only other memorable experience came in1995 when I discovered Robert Prechter’s great book At the Crest of the Tidal Wave. Learning about and using Elliott Wave theory and timing over the past 8 years has meant more to my total experience than the previous 55 years. So investors who are just starting out can look forward to duplicating most of my learning in a small fraction of the time, depending on the magnitude of their effort.

The bear market story from this point on may well set new records for length and severity. So the learning process should provide valuable market lessons for the future and may shorten the time required to become a veteran investor - a once in a lifetime opportunity. However do not underestimate the job because it requires mastering your emotions, more important than learning what or when to buy or sell.

The important points that separate a confident investor from a typical sad loser are these:

Many investors have a major problem of unlearning bad habits. Here are a few of them.

When your hard earned money is involved, it’s good to do your homework first. Whether working with stocks or mutual funds, there is a vast amount of free information on the following web sites: Bloomberg, Quicken, Morningstar, Yahoo and Zacks. Some are better for stocks and others for funds so I suggest you familiarize yourself with their content.

The days when you could buy a few blue chip stocks and hold them to retirement are long gone. It is essential to pick only those few asset classes with potential in a very difficult environment.

There is no substitute for personal investing experience. In any investing lifetime, it is inevitable that some problems will come up that require steady nerves. From my own lifetime, I recommend that novice investors collect as much experience early in life as possible. In fact it is impossible to get too much experience. I am still learning today after 63 years. But do not let that be discouraging. With computer technology, experience that used to take decades can now be acquired in a few years. The earlier you start, the better.

In national contests publicized on CNBC, teams of teenagers picked a group of stocks and were ranked on the percentage gain over a certain time period. I doubt if that learning experience will happen soon again because it was typical of the bull market frenzy and it may take many decades before the next bull market. So let’s forget that gimmick and pick something that is practical and possible right now. A Dividend Reinvestment Plan (DRIP) for each teenager could be a very good way to start. Necessary details can be found in Google under DRIP Plans. There are about 1200 major companies which offer a DRIP plan which requires, in many cases, ownership of just one share of stock to which small added purchases may be made plus reinvestment of quarterly dividends.

In the 1960s I started two NYSE stock portfolios for my two sons under a Merrill Lynch plan which permitted regular small purchases of NYSE stocks with all dividends reinvested. I did the stock selections, concentrating on high dividend paying common stocks. I continued these plans until both sons were out of college. It was a very valuable experience for all three of us with some very nice profits to boot. But the success was due more to a rising stock market than to my stock selections. So right now I would suggest such a program for natural resource stocks such as ASA, PCL or PEO and definitely not overpriced tech stocks.

I fully realize that we have many families with two wage earners in a family and many with young children. How could a husband and wife find time to have an investing competition? Let’s see if we can come up with one. Can you spend 15 minutes a month comparing the progress of two portfolios? I think you will be pleasantly surprised if you give it a try.

Some very valuable lessons would be learned by comparing two portfolios of comparable risk level. For example, let's pick two from recent essays:

Multi-Asset Growth Portfolio
Strategic Growth Fund - common stocks	25%
Total Return Fund - bonds, dividend stocks	25%
Foreign Gov't. Bonds - 16% gold	25%
Short Fund with 20% Gold Stocks	25%
Total	100%

Single Asset Growth Portfolio
Short U. S. Treasury Bond Fund	26%
Short Foreign Gov't. Bond Fund	26%
Reverse Index Nasdaq Short Fund	12%
RYJUX 30-Year Bond Short Fund	12%
ASA Close End Gold Fund	12%
CEF Closed End Bullion Fund	12%
Total	100%

Please note that each of these portfolios holds a quite similar asset mix. The major difference is that the volatility of the short and precious metals components of the 6 fund portfolio will be greater than that of the 4 fund portfolio. This means that, if each portfolio is periodically rebalanced, the rebalancing gains will be greater for the 6 fund portfolio. However, the overall gains will be unknown until the two funds are given a test in the real market. It should lead to an interesting rivalry if two spouses choose to make the comparison. They will surely have different performance over a short time period but could be close competitors over the long run.

On a personal note, for many years, I have been running different portfolios in competition with each other where I was the only person involved. It would have been more fun if my wife had been willing to enter the competition. I know of no easier way to acquire skill in money management.

I have been flooded with e-mails over the past few days requesting fund information and have been busy responding. I want to express my sincere thanks to the many readers who sent messages of support concerning my wife’s illness. They are deeply appreciated.