Conservative Retirement Portfolio for the Next 3 Years

by: Golden Economizer

My recent articles, Simple Retirement Portfolio For The Next Three Years, and Aggressive Retirement Portfolio For The Next Three Years, received a lot of comments, both positive and negative and people jumped to a lot of conclusions.

The first article in the series showed the results of a model portfolio that I created three years ago as an exercise to show my 82 year old retired friend (now 84) how easy it would be for a non-professional such as myself with a little insight and a little research to create a portfolio that would outperform the results he was getting from his paid professional financial planner, who had not even been equaling the total return of the S&P 500. The purpose was to jolt him out of his complacency and consider other options than continuing to pay a professional for advice that was returning less than a simple equity index fund. I am happy to report today that I successfully accomplished that purpose.

Many people commenting were outraged at how much risk they perceived in the concentration of the portfolio, but were generally very impressed with the 40% total return over three years. Personally, I don’t consider a 40% return over three years to be all that impressive in and of itself, but what makes it more impressive to me were several things:

  1. During that three year period the S&P 500 index declined by 3.75%
  2. That three year period encompassed the sharpest market downturn since the 1930’s
  3. There was no trading, adjustments or re-allocation done for the three years
  4. 4 of 10 portfolio picks had negative total return, 6 of 10 had capital losses

A lot of critics assumed that this was my portfolio recommendation for my 82 year old friend to invest all his investment assets, even though I had specified it was just an exercise to illustrate other possibilities to a man who had abandoned complete control of his investments to a financial industry hack who was being compensated the same amount no matter how poor the performance of his recommendations.

Well I’m glad to announce today that my friend has decided to take my advice to invest in the Conservative Three Year Portfolio I’ll outline today. I’m sure that I’ll get lots of comments how this is way too risky and not nearly diversified enough for a man in his eighties, even though he will only be putting a portion of his investment capital into this portfolio, and he also owns a piece of income producing real estate.

To those people, I say put up your own model portfolio for all to see, and we’ll compare results three years from now. I’m certain my friend will be MORE than pleased with the results from my Conservative Three Year Portfolio, and I’ll be surprised if anyone taking this challenge will show higher returns. I’m sure I’ll be getting many comments saying how it’s not really conservative at all. Let me just say that conservative is a relative term, and I don’t expect what I mean by “conservative” to coincide with what you mean by it.









Sprott Physical Silver Trust ET

PM Physical Trust




ETFS Physical Silver Shares

PM Physical Trust




Sprott Physical Gold Trust ETV

PM Physical Trust




Central Gold Trust of Canada

PM Physical Trust




Silver Wheaton Corp

PM Marketting





Oil Pipeline





Nat Gas Pipelines





Consumer Staples





Electric/Gas Utility





Gas/Oil Pipelines





Mortgage REIT





Telecom (Foreign)













2.96% Avg

Click to enlarge

The fourteen holdings average about 3% yield even with five holdings paying no dividend. The nine income stocks currently average a dividend payout of 6.57%.

The four physical precious metals trusts hold numbered bars of bullion held in Switzerland and Canada, which are audited annually by external auditors. After 19 straight years of world central bank gold sales, this trend reversed in 2009 as central banks became net buyers of gold.

World silver demand has exceeded world mined silver supply for the past ten years, and inventories have been continually depleted to post WWII lows. World silver mining production continues slow growth, while industrial demand continues to grow rapidly and investment demand is mushrooming. In 2010 China alone imported 115 million ounces of silver, and as recently as 2005 they exported 94 million ounces. The total world annual silver mined is about 700 million ounces, so this has a major impact on supply. India alone this year is expected to import over 38 million ounces of silver. World investment demand for silver increased by 500% between 2007 and 2009. Supplies from above ground stocks of silver were 1/7th as much in 2009 as in 2008 (most recent figures available).

There is a vast amount of information available on the internet supporting the impending shortage of physical silver for industry and investment, and to document how underpriced it is currently. Less than 1% of Americans own any silver at all. It is truly the investment opportunity of a lifetime. Silver outperformed gold by 3 to 1 in 2010, and I expect it to outperform gold by at least 4 to 1 in 2011, and gold will outperform most other investments. In the last 365 days, the price of silver has increased by 120.2%, gold by 29.2%, crude oil by 31.7%. Only cotton has exceeded silver’s returns with an increase of 153%, but that is not a suitable investment good for individuals, and has much more risk involved.

Silver Wheaton (NYSE:SLW) has a unique business model where it contracts to buy the silver output of base metal mines at a fixed price, and then resells it. By doing so it avoids many of the risks involved in mining, but maintains the benefits of silver exposure. About 2/3 of all silver mined today is as the byproduct of base metals mining.

BP Prudhoe Trust (NYSE:BPT) distributes royalties on 16.4% of the first 90,000 barrels per day (bpd) of average daily production from BP's share of the Prudhoe Bay oil field. This has been a steady producer of cash distributions with little to manage, just a stream of oil flowing down the pipe. It is riding the trend of peak oil, population growth and over dependence on oil for heating, transportation, electrical generation and defense, among other uses. Since the Prudhoe Bay field is a depleting resource, it should be monitored yearly for an exit point. Don’t expect much in the way of capital gains.

San Juan Basin Trust (NYSE:SJT) is a well managed well established trust which owns natural gas pipelines. It is also riding the trend of peak oil as more and more industries switch over to natural gas to replace oil and to minimize pollution. Also a depleting resource, it should be monitored annually for an exit point.

Procter & Gamble (NYSE:PG) is the well known supplier of many items people consume daily, and the most conservative pick in this portfolio. They have the lowest yield of any of this portfolio’s holdings, but have a long history of raising the dividend--for the last 54 years in a row. They are riding the trend of population growth, and will have cash flow even in a bad economy.

Alliant Energy (NYSE:LNT) is an extremely well run electric and gas utility in Iowa and Wisconsin, and a reliable dividend grower. It has been paying a dividend since 1946, and raising the dividend since 2003. It is riding the trends of peak oil and population growth.

Kinder Morgan Energy Partners (NYSE:KMP) is in gas and oil storage and pipelines, with a high dividend, high dividend growth, low payout, what’s not to like? They are riding the macro peak oil trend and have raised the dividend for 14 straight years. For the past ten years, it has delivered a total return of nearly 20% per year with very low risk.

Annaly Mortgage (NYSE:NLY) is the highest risk holding in this portfolio, and the highest dividend payer. As a mortgage real estate investment trust, they buy and securitize residential mortgage loans for a living. They have been around since 1998, but have not produced any capital gains since 2002. They are purely an income play.

What makes Annaly superior to its competitors is that it only securitizes high quality, conforming, prime residential mortgages (A paper), nothing else. This, combined with the tightened lending standards over the past few years makes their MBS’s highly marketable. Among the risks are that there won’t be an ample supply of mortgages for them to buy in the deteriorating real estate market.

I see them as a survivor which has already been through the worst the real estate market has to throw at them. Even if their cash distribution was cut in half to 7.7%, it would still be an acceptable, stable level of income for a retiree. Even if they had a 50% capital loss, a holder could just keep on collecting the income without “realizing” the loss. I may want to cheat on this one, and replace it after a year or two, depending on market conditions. They are riding the trend of the Fed’s continual expansion of the money supply and continuing government support of home ownership through Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC).

Telefonica (NYSE:TEF) is a telecom company primarily in Latin America and Europe. They are riding the trend of increasing cell phone use, decreasing landline use, and rapidly increasing population in Latin American countries. Cell phones are becoming increasingly affordable to the poor and provide a very reliable income stream to support the high dividend. It provides the portfolio with some international exposure. It hasn’t produced much in the way of capital gains over the past ten years, but has an excellent current yield and has increased its dividend for 8 straight years.

Abbot Labs (NYSE:ABT) is a solid, very steady dividend grower in the pharmaceutical space, having raised dividends for 38 straight years. It is riding the aging population demographic trend.

AT&T (NYSE:T) is a big telecom player with a very high dividend with a long history of dividend growth. It is riding the trends of population growth, cellular expansion, 4G internet usage and ADSL internet usage, which should provide a very steady income stream to support dividend growth for years to come.

Why do I call this a “retirement portfolio”? Because that is what pretty much everyone is saving for, and most people take advantage of tax advantaged IRA’s and 401K’s, so this would be of interest to the widest group of investors. Also, it's a retirement portfolio because it is designed to be a “set and forget” type of portfolio for long term investors with a horizon of five years minimum. And yes, I know that even this type of portfolio should be monitored at least once or twice a year. But some people are saving for a boat, or a vacation, or their children’s education, and this would require a different strategy.

The equities in the portfolio were purchased at the closing price on Friday, March 25th, 2011. This plan includes a substantial income component and is a lot more diversified than my previous two model portfolios, but is still modeled around the primary uptrend in precious metals, particularly silver. From my perspective, this trend should be obvious to any financial planner worth his salt, and NOT based on previous performance over the last ten years, although many pundits are beginning to call the bull run “long in the tooth.” This is the simplistic “what goes up must come down” theory of investing, and shows a lack of knowledge about the precious metals sector. Nothing else matters but the supply and demand fundamentals over the next three years, and the current macroeconomic trends.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: I am not a professional financial planner. I am a macroeconomist with an interest in retirement planning and helping people preserve their life savings from the ravages of mismanaged government policy and corporatism. I believe that following the obvious macroeconomic trends will make you more money than focusing on individual investments and sectors. Today in 2011, the most important trends to follow are the multi year price imbalance in the precious metals market, peak oil, the continual devaluation of the dollar and all fiat currencies, world population growth, baby boomer demographics, the continual decline in the housing market, and the insolvency of the banking/financial/insurance sector. To keep things simple, the goal is to limit the portfolios to no more than ten to twenty individual holdings. Mutual funds, ETF’s, ETN’s and derivatives of any kind are to be avoided, although physical precious metals funds are necessary to substitute for physical bullion holdings.

Excessive diversification for the sake of diversification may limit your losses but will also limit your gains. Concentration is obviously good if concentrated in the correct areas. Traditional retirement allocations have included both stocks and bonds based on past performance that bonds would often perform opposite to stocks. In the coming few years, I believe that the bond bubble will burst, and stocks will also perform poorly. A portfolio of precious metals, certain commodities, and carefully chosen stocks will outperform. I’m currently avoiding all retailers, bankers and homebuilders based on the current economic conditions.

I would advise any investor at this time to have at least 50% of their investment capital in physical silver and gold bullion to protect against the coming currency collapse. You would need to achieve incredibly high, unrealistic investment returns to compensate for the fact that the US dollar is losing 50% of its purchasing power every 10 years. But since most people are too complacent or find other objections to investing in physical bullion, my model portfolios are designed for use in self directed retirement accounts by those who won’t follow my good advice to purchase physical bullion. All are designed as long term buy and holds with a minimum time horizon of five years. Portfolios should be examined once or twice a year to insure that all holdings are still compatible with current macroeconomic trends, and have not cut dividends. I’m not interested in the many short term trading strategies using these same trends that may produce higher returns, as these are time consuming to actively manage, and assume more risk. I’m interested in helping the individual investor who prefers to manage his own assets, while getting superior total return without wasting money on a professional who gets paid no matter how poor the results. Do not use this model portfolio as investment advice. Your own portfolio should be customized for your individual situation. Always consult a financial professional, but avoid the 98% of financial professionals that don't think for themselves, and don't have a thorough knowledge of the fundamentals and long term trends in the precious metals markets, peak oil, and other macroeconomic trends.