Bob Brinker's Moneytalk: Excerpts, Summary and Commentary, November 29, 2008. Dow: 8829 (up from 8046 last week); S&P 500 Index: 896.24 (up from 800.03 last week); Nasdaq: 1535.57 (up from 1384.35 last week) Oil: $55.03 (up from $50.35 last week)
Bob Brinker's guest-host was Bill Flanagan today. Brinker usually takes holiday weekends off.
Flanagan began the program by mentioning that it was nice to have a bit of good news in the stock market for a change. He said that it is the first time there have been five consecutive gaining-sessions since July, 2007. He recited the current year-to-date market decline percentages: Dow down 33.4%; S&P 500 down 38.9%; Nasdaq 100 down 43.1%.
Flanagan commented that we sure don't want things to get any worse than they are -- or so bad that there is no light at the end of the tunnel, but that it would be naive to assume that we have seen the end of what he called the "worst financial period of his lifetime."
Caller Hank from Ohio said: "I've been following Bob's model portfolio three which is a balance between equities and fixed income.........My model portfolio-three a year ago was about 50-50. Today in round numbers it's about 60-40, as the fixed side has kinda remained stationary and about a 40% loss in actual equities. So should I be rebalancing the portfolio right now to bring it back to 50-50......And more importantly, I anticipate being able to make additional contributions to my retirement program over the next four years. How do I invest that money?"
Honeybee EC: Hank is VERY mistaken about his asset allocation if he has been following Brinker's model portfolio3 since last year as he said. It was not at 50-50 a year ago. At the market top in October 2007, portfolio3 was a VERY BULLISH 66% in stock funds and 34% in fixed income funds. Brinker did not rebalance that portfolio! Sadly, the market-drop rebalanced it for him and his subscribers, with huge equity losses.
Since the beginning of Porfolio3 in 1990, Brinker has never advised an actual rebalancing of the 50-50 starting positions. Last February on Moneytalk, Brinker explained how the allocation in the portfolio varies:
February 16, 2008, Bob Brinker said: “The recommended balanced portfolio that I publish in my investment letter calls for a recommended allocation in a balanced portfolio essentially 50-50. Where you would have about half of the money in quality fixed income and half of the money in the equity market. So that’s the way I define a balance portfolio. We’ve also defined a balanced portfolio as having a range on the equity side that can go a little higher. You could have a balanced portfolio that could be 60-65% equities and the rest in fixed income.......In the investment letter, I use a 50-50 starting point. Obviously over time, that can vary, but I would say that on the upside, you would be unlikely to see it much above 60-65% equity and on the downside, you’d be unlikely to see it much below 50% equity........"
Clearly, model portfolio3 was NOT at his "starting point" a year ago when the S&P was at its all-time-high.
* Stock Funds: 144,919 / Total: 219,263 x 100% = 66%
* Fixed Income Funds: 74,344 / Total: 219,263 x 100% = 34%
* Total: 219,263 = 100%
The 66% stock portion of Brinker's balanced portfolio has taken a big hit in the past year during this 50% bear market decline. I don't have the numbers for November yet, but here are the numbers as of October 31, 2008:
* Port3 as of October 31, 2008:
* Stock Funds: $91,378 / Total: $164,891 x 100% = 55%
* Fixed Income Funds: $73,513 / Total: $164,891 x 100% = 45%
* Total: $164,891
OUCH! That's a drop of $53,541 (over 30%) in the stock portion of Brinker's balanced portfolio in one year.
This was Flanagan's answer to Hank's question: "I'm not speaking for Bob here of course. You've been following his regimen, I'd stick to it. But I believe if 50-50 is what you've been used to and adjusted your portfolio annually to re-balance 50-50, makes perfect sense. Obviously you have enough composure to realize that as bad as this storm is, it shall pass......
......It will take different forms from what we have been used to. It's not going to be led by General Motors.......I don't even know if we will have a General Motors by the end of next years.......It's going to be very bad news if that company fails, and it is very close to doing just that.......Tuesday should be the day that the auto makers go back to Washington with a plan and see what Washington gives them. .....General motors literally may not be able to make their payments after Christmas.....So in all probability they will get something to go home to be able to last a little bit longer and see what the new administration might be hammered out in the long run......
.....But the experts in the field, from Jack Welch, across the board, really seem to indicate that bankruptcy is the only way that General Motors can be saved. And that would incorporate a lot of changes and renegotiation of contracts and lower labor costs, freedom to operate plants in states that don't require meeting the union standards, expensive wages and benefits......
......There would be whole scores of brands that would disappear. I think already you may have heard that Pontiac is going out business and Saturn is fading from the horizon, and there are going to be more to come. Those suppliers are going to be impacted significantly -- the folks that provide the parts that they need to put those things together. Now this is not only affecting U.S. automakers, by the way. Toyota and Honda that operate here are also hurting and they'll be scampering off the Washington too. It's going to be a dicey time."
Bob Brinker had a caller on October 25, 2008 who asked a question that was very similar to Hank's. Brinker clearly told the caller to "wait" before rebalancing back into 50% equities. Here are some excerpts from my October 25th Summary:
Bob Brinker said: ".......And as long as there is uncertainty out there, as long as there is extreme difficulty in getting a handle on the future as there has been recently in these chaotic times all over the world, as long as that situation prevails, I would stay where you are. Now if you get down the road to a point where you say we've seen some stabilization develop -- and in the ideal world we've seen a successful test of a market bottom area develop on reduced volume, reduced emotion, if you get to a position like that, then I would consider returning yourself to 50-50. You're at 42-58. I'd stay there right now. But if you could identify a position like that -- and I'm certainly working to identify a position like that -- then I think you could think about the possibility to returning to a 50-50 situation.......
........ Believe it or not, 'This too shall pass,' this is not the end for the United States of America. There is no way that I can believe this is the end of the United States --'This too shall pass'. This economy will eventually right itself. It will return to a growth track, and it will do so without all these excesses we've been seeing. And when that happens, I think we'll be back in period where the stock market will make good returns. But I think we are in a period right now where I'd be patient and allow things to work themselves out and get to a point where you can say now it makes sense, maybe I'll return to 50-50."
Honeybee EC: Quite frankly friends, I didn't hear anything else on the program today that I found interesting or informative enough to write about.
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