FSO Editorials: Retirement Planning for the Rest of Your Life by Robert B. Gordon 02/16/2005

Retirement Planning
For The Rest of Your Life
by Robert B. Gordon, Sc. D.
February 16, 2005

I have recently learned by direct personal experience of the extremely high cost of death and nursing care and advise all my readers to be realistic in their retirement thinking. I am not an expert in retirement planning, but I wish to refer you to an important current article by Gary North, which I urge everyone to read. Here are his conclusions.

The lack of personal saving by Americans is a widespread phenomenon. It has not arrived overnight; it will not depart overnight. It represents a major shift in the direction of present-orientation. Americans are buying present goods with the money they could have invested in order to establish a legal claim on future goods (interest and dividends). Morgan Stanley's chief economist Stephen Roach put it this way on December 10.

America's federal government budget deficit is a very serious problem. . . . Declining personal saving is an outgrowth of the Asset Economy -- namely, aging and myopic homeowners banking on unrelenting house-price appreciation to do the saving for them. The fact that America is now in the midst of a housing bubble is especially worrisome in that regard. The problem with persistent structural budget deficits -- a long-term prognosis that is centered in the 2.5% to 3.5% steady-state range -- is that the US has no cushion of private saving to fund it. That's the intractable current account problem in a nutshell. . . . America's saving problem is off the charts -- possibly the most serious imbalance in an unbalanced world...

I repeat the point I made earlier -- budget deficits matter much more when there isn't a backstop of private saving.

News on the Internet gives the same old, old remedies for investors. (1) To save and invest more money in a retirement plan and (2) To invest in higher yield investments. Certainly, no one should refrain from urging young investors to do these things but all these articles appear to be landing on deaf ears. In my extended family of 3 generations, I have made a hard effort in the past 3 years to induce my grandkids to start serious savings programs, but perhaps they are a bit too young. Surely those who care for the future of their grandchildren should launch a full-blown sales program to begin serious savings programs by the time they are thirty.

At the very start, each savings program must be a well thought-out investing program. Think about the billions of dollars that were “saved” in the last five years of the Internet buying panic of 1995-2000. The lucky ones probably lost only half of their savings in the 2001-2002 market crash. The unlucky ones caught in the Internet frenzy may have nothing left but wallpaper. But where was the sound investment advice to guide an investor?

In the mass mania atmosphere existing prior to the 2000 Crash, my guess is that both sound advisors and those seeking them were probably very scarce. Let’s remember that in 1995, it was 21 years since the last bear market. The entire country was involved in a huge bull market. There were of course a few individuals who were fighting for conservative investing but their efforts were mostly lost to the attractions of the bull market.

We now have a good start on what is expected to be the second major leg down in this great bear market. Soon, it will be very difficult for the bulls on Wall Street to sell their wares. There has never been a bear market of this great length, going into its sixth year. But this year may be the time when our masses recognize its enormity. Eventually, perhaps this year, our over indebted consumers may slow their spending and precipitate an old style recession. If this were to happen now, with millions of short sellers trained in the art, many new Wall Street records would be set later this year. Eventually, our ordinary people will be affected with adverse effects on our still fragile economy.

Young investors just starting out or older investors nearing retirement may have to make changes in their retirement plan. Please note that our plan presented below can quite readily be built or altered to hold 4, 6, or 10 funds and remain both profitable and easy to manage.

There have always been a few good sound advisors whose teaching has been available to those who seek it. We now also have a pair of mutual funds available at low cost, the Hussman Growth and the Hussman Income funds that use appropriate hedges to balance any price loss in down markets. The growth fund is now in its fifth year and has proven the effectiveness of the hedge to preserve capital. The income fund is in its second year and we believe it will prove as safe as its sister fund. We believe the two Hussman funds should form the first strong base of any conservative mutual fund program aimed for retirement.

In addition, we add the Permanent Portfolio fund, a 33 year-old fund with six asset classes, then three top income funds, 3 growth funds and a short fund all to be accumulated, along with the Hussman funds. We suggest starting to rebalance this conservative portfolio at intervals of one year plus one day to collect long-term capital gains, which have significant advantages over short-term gains. So once a year we start out again with the same percentages as in the original portfolio.

Do not let the size of the full program shown below scare you or overwhelm you. You can start with the first two funds and add one more fund at a time. Please note below that BEARX is listed twice for 19% total.

10-Fund Portfolio
Percent	Symbol	Amount	Stars	Fund Name
9%	HSGFX	$1,000	*****	Hussman Growth Fund
9%	HSFTX	$1,000	N/A	Hussman Income Fund
9%	PRPFX	$1,000	*****	Permanent Portfolio Fund
9%	BEARX	$2,000	N/A	Prudent Bear Fund

9%	BERIX	$3,000	*****	Berwyn Income Fund
9%	ICENX	$1,000	*****	Icon Energy Fund
9%	OAKBX	$1,000	*****	Oakmont Equity Income Fund

9%	PCRDX	$5,000	N/A	PIMCO Real Return Commodity Fund
9%	NBRFX	$3,000	*****	Neuberger Berman Realty Fund
9%	FSMEX	$2,500	*****	Fidelity Medical Equipment
10%	BEARX	N/A	*****	Prudent Bear Fund

Most of these funds have lower initial purchase amounts for IRA accounts. Many of the best funds in the country are now closed to new investors because they cannot invest new money to their high standards. We have only one fund above, OAKBX, which in some danger of being closed. We suggest small initial purchases be made now of this great fund so they can purchase more later as a fund investor.

To really appreciate the high quality of all these funds, the best way is to go to the Morningstar pages that are free to investors. View the available information and their price charts over the last five bear years. Note this list has all five star funds except those not rated. I not only searched for quality, but for a high degree of diversity to do well in all kinds of markets.

Depending on how you wish to build your portfolio, I suggest that you acquire funds in the same order as shown in the table above. I suggest that you buy at least the first 4 funds as a block so that you make a small purchase of Prudent Bear fund that is expected to do very well in the coming bear market. It is a good idea for everyone to be used to the varying action of short funds and the sooner the better.

Let’s stop for a minute to see the thinking that led to the development of this universally acceptable 10-fund portfolio. First of all, it had to be easy to build in several segments. This has been done: (1) the first 4 funds make an excellent starting portfolio at any age and will be the most conservative fund group. They have a high probability of not losing money, but will still have a modest growth rate.

Adding two more great performing income funds, BERIX and OAKBX, the best in the country, and ICENX a very strong petroleum fund will create a strong 3-fund income growth portfolio. BERIX is quite small and has an unequalled 10-year record. ICENX is an oil fund with a record that tops even Vanguard’s similar fund.

In the last group we have included 3 somewhat speculative growth funds that we think, after close investigation, will be a very positive factor for the entire portfolio. The new commodity fund managed by the large Pimco bond organization owns safe bonds and purchases the commodity futures with funds borrowed against the bonds. This is considered to be highly safe when done by a reputable firm. The real estate fund is very small and is managed by an industry veteran brought in by Neuberger and Berman to run the new fund. Over a period like the next 20 years we expect this fund will do very well. The final ninth fund is a new Fidelity fund with a fine growth record. In our opinion, we expect medical equipment to do much better than other phases of the health industry that are more burdened by government regulation.

27% in 3 very conservative hedged or balanced funds
27% in 3 conservative income and energy funds
27% in 3 somewhat speculative real estate and growth funds
19% of bear market insurance protection provided by BEARX.

I started to buy a group of short funds 6 years ago and found that they are no harder to manage than the long funds that every one is familiar with. I believe they are absolutely essential to any investor hoping to travel safely through the stormy markets ahead. While learning, just remember they move opposite to the market with one important exception. Unlike most other funds, Prudent Bear fund is fully managed and holds both long and short stocks in different amounts at various times. Properly managed, BEARX can be very profitable. So right now with a new bear market starting, BEARX should be held long for profits, while in bull markets it should be sold until the next bear market arrives.

The entire group of 10 funds can be purchased for less than 25,000 or much less in an IRA. This is a good time to acquire all these promising funds. Please remember that the prices of all the funds will vary over time and they should all be held for the long-term. If you cannot do this, you will be better off to be in cash. But a long-term dollar cost averaging program over the next 20 or 30 years should do very well for a seasoned investor. And if you are a new investor, you will be a veteran sooner than you expect.

During the foreseeable future, the bear market is almost certain to have large ups and downs in price. This will be of enormous value to an investor putting in regular investments from a salary or other earnings. But we do not recommend making large lump sum investments.

By making monthly or quarterly investments, you will be taking advantage of market fluctuations and obtain a lower average purchase price over the years.

The worst mistake you could make would be to make a large lump purchase from an estate settlement and thereby foregoing the opportunity to buy at lower prices through a series of small regular purchases.

As mentioned earlier, if you simply add new money infrequently to your portfolio – say once a year – the overall total at the end of twenty years will be greater and perhaps much greater depending on the low probability of the dates of price lows coinciding with a few very large payments. We think it is best to contribute the retirement money on regular dates and rebalance regularly.

Some months back in my archive in FSO, I wrote much material with practical examples on the great profit advantages of portfolio rebalancing. These sometimes large profit opportunities come and if not taken, simply evaporate. Over twenty years, these profits could be enormous if taken and not lost due to indigence or other cause.

For most investors, we recommend that the retirement portfolio be rebalanced every year-end plus a day or two to be sure that the gains be long term.

I am going to have hip replacement surgery in a few days. It could, if not successful, be the end of my 3-year writing career. I have greatly enjoyed writing several hundred essays and may continue if all goes well. I thank all my readers for their past support. I am also very grateful for my editor’s fine work.