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What Happens if I Die?

A <I>Street Insight</I> writer thinks about asset allocation for a 50-year time horizon.

Editor's note: This column was written by James Altucher, normally an exclusive columnist for

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, where you can read Altucher's commentary regularly, please click here.

Without dwelling on the morbid aspects of what an article with this title entails, I felt it was important to put down in writing an investment blueprint that would serve the spouse and children of an enterprising investor in the event of his or her demise.

My main consideration is that successful investing isn't easy -- it's not responsible simply to buy the

S&P 500

and wait out the drawdowns. Nor is it wise to buy bonds at their all-time highs and live on the meager interest income they would provide as compared with other investments.

I am a long-term bull on the economy and the market, but I'm also a long-term believer that the worst we can imagine is what we should, in part, plan for.

My wife is not a financial specialist. She is uninterested in speculation or technical analysis, she doesn't want to fade gaps every morning or look for pricing anomalies in the market, and would rather not speak to stockbrokers regularly. Don't get me wrong: All of this she could do well, were she inclined. But like most people, she has no wish to reorient her life around trading.

This motivates the following criteria for any long-term, posthumous investment strategy:

She rarely must change anything. There will be occasional annual rebalancing, but it will be infrequent and uncomplicated.

Some volatility is fine, and not every year need be an up one. Not every year need result in income.

Long term, the investments should do fine regardless of economic circumstances, including full-blown disaster.

The main focus of the criteria below is capital preservation in the face of catastrophe (anything from dollar devaluation or a fattening trade deficit to war to nuclear war), and long-term growth that exceeds the needs of my family. Again, not on a daily or even annual basis, but long term: over the course of the next 50 years.

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The first three categories will require annual rebalancing using the basics of mean reversion. That is, if any of the following three categories goes up for two years in a row, it must be rebalanced so that the percentage allocation for that category equals its original percentage. For inflation-indexed assets or commodities, this is important, because it's never been the case that these assets have gone up forever. And it isn't likely to be the case now.

10% -- The TIP


iShares Lehman TIPS Bond Fund


is the exchange-traded fund that invests in short-term, Treasury-backed, inflation-indexed bonds. Right now inflation is at a low and may stay that way. If that's the case, other bonds will do as poorly as the TIP. During those periods in which inflation spikes, however, my guess is that, like all good asset classes, the TIP will overshoot far more than it needs to. (It will also overshoot on the downside, but if it goes up for two years in a row we have the benefit of knowing that this allocation will be clipped by rebalancing.)

20% -- Silver

Why not gold? After all, in case of disaster, the metal of choice over the past 20 years has been gold. Unlike silver, however, gold is not really a useful metal; it is a "precious" metal. True, gold can be used in an incredible diversity of industrial purposes, but for almost all of them silver is a better, cheaper alternative.

Since the Hunt Brothers failed to corner its market in the 1970s and early 1980s, silver has been in the dumps. The primary reason is the perception that film photography, one of silver's major applications, is being muscled out by digital cameras. Nevertheless, demand for silver for photography has increased each year over the past 20. Ninety percent of all pictures taken worldwide are still done with silver-halide photography. Not only that -- the shiny paper used in digital photography also contains traces of silver.

Some other factors to take into consideration about silver:

It is an industrial metal used for processes ranging from printing circuit boards to making batteries to bonding titanium and stainless steel. In fact, if there were a major, extended war, the greatest demand for silver would come from the U.S. government to make jets, submarines and weapons.

Demand has outpaced production every year since 1990, and the situation just got a lot worse because the U.S. government announced in mid-2002 that for the first time since the 1930s it is no longer a seller of silver; it's now a buyer.

Silver is also a precious metal, like gold, and eventually will be considered as such in any flight to safety. But its industrial fundamentals make it more interesting as an investment. We've just seen a 20-year decline in the price of silver. This situation is already beginning to reverse, however, and I think we can see a 20-year rise, as well.

How to play silver? I would buy

Pan American Silver



Apex Silver Mines


. Bill Gates owns 10% of Pan American and George Soros and family owns 25% of Apex.

20% -- S&P Hedge Fund Index

This is an index of about 40 funds spread out over every type of strategy, from nondirectional models such as merger arbitrage, statistical arbitrage, convertible arbitrage and fixed-income arbitrage, to more directional strategies such as global macros and managed futures. The index was formed in December 2002, but the pro forma results are available back to 1998. So far, the index has returned a consistent 9% to 10% a year, with 80% of the months profitable.

Something about buying this index repulses me. It's just too diversified, and there's little chance of substantial above-market appreciation. That said, it still meets my two criteria:

Over the long run, the index probably will offer returns slightly above the market. Over the past few years, 10% annually beats the average return of the S&P 500 of about 2% a year. And at much lower volatility.

If there is a potential world disaster or flight to safety, the S&P Hedge Fund Index most likely will outperform, and probably return positive.

The S&P 500 is represented by the purple bars, and the graphic demonstrates the five most-volatile months of the past several years. The worst period was August 1998, when the blowup of Long Term Capital caused an enormous lack of liquidity in most hedge fund strategies. That said, the hedge fund index suffered a 2% drop and quickly recovered.

How to play? Contact

PlusFunds, which is offering a mutual fund product in conjunction with Rydex funds that behaves like the S&P Hedge Fund Index.

Stocks -- 45%

When I recommend a 45% allocation to stocks, I don't mean the market. This process has convinced me of one thing: I don't believe that the best long-term investment (50-plus years) is the SPY, the exchange-traded fund for the S&P 500. In the excellent book

Triumph of the Optimists

, by Elroy Dimson and Paul Marsh, the authors point out that over this past century, by far the best investment one could've made was buy the U.S. market in January 1900 and hold. Your return if you did that? 1,500,000%. That's not so shabby. But who knows if that's going to repeat? I'd much rather pick a cross-section of stocks that have the following criteria:

They are largely uncorrelated.

They are not diversified to the point at which above-market performance in any individual stock would be diluted out of significance.

They ride demographic trends that are uncorrelated with any single-year market performance.

Some, if not all, offer substantial income potential.

They are low beta.

They can survive without current management. (A truly good manager finds a good successor.)

They and their sectors are, if not bulletproof, largely idiot-proof. (These are famous last words but we can try our best.)

Here are the stocks and their percentage allocations. (The percentages will add to the 45% overall allocation for stocks):

IACI -- 10%

Over the past several years, Barry Diller has brilliantly transformed



from a media/entertainment company to a pureplay Internet commerce company. He began at the very bottom of financial interest in the Internet, having the wisdom to buy when there was blood in the streets. From to Expedia, from Lendingtree to, Diller has created an e-commerce empire that rivals



on profitability and


on diversity of products.

Since 1985, I have been a user of the Internet, and most of my savings are traceable to a company I founded in the 1990s that built or helped build the original Web sites for companies such as

American Express



Time Warner


. In 1999, investment bankers were inviting me to their Christmas parties ("we really want to do business with you"). By early 2001, they stopped returning my calls.

"The Internet was a myth," one banker said to me.

"Technology is a scam," said another. But I've made my living because of the Internet, and I don't expect that to change.

The threat of the Internet to traditional retail is real. The productivity gains created by the Internet have wreaked havoc on industries ranging from manufacturing to information technology, and it's probably just the tip of the iceberg. If any company has the potential to become the

Berkshire Hathaway


of this century, I think it is InterActiveCorp. Could it be expensive now, as some people argue, at a 30-plus forward P/E? Maybe! But who cares? This is a 50-plus-year investment.

While people have been gravitating toward the Internet for big-ticket items (where cost of delivery is a smaller factor than for low-priced items), there has been another trend in retail, which takes us to the next recommendation:

DLTR, FRED, DG, NDN -- 2.5% each

Every month



has been chipping away at the sales of traditional retailers ranging from




Toys R Us



FAO Schwarz

. However, nipping at the heels of this bulldog are the dollar retailers:

Dollar Tree






Dollar General


, and

99 Cents Only Stores


. The trends include:

More people buying items in dollar stores each year than the year before.

The diversity in these stores is getting larger each year as lower-cost methods of producing these items are outsourced to countries like China.

Operating margins are rising. A typical DLTR store is profitable within 12 to 15 months of opening and has about a 20%-plus operating margin.

Over the past 10 years, growth in dollar stores has exceeded growth in grocery stores. Same-store sales growth at dollar chains also has exceeded same-store sales growth of Wal-Mart stores each month.

Will an improving economy hurt these stores? I doubt it. Even richer families (more than $70,000 annually) have been increasing the number of trips per year they've been making to the dollar stores, as the following table demonstrates:

Again, these stores have had quite a run since I first recommended them in a

Street Insight

article last December. That said, I think it's just the beginning and it's also the primary area of retail that won't be as affected by the rise of the Internet.

KMP -- 10%; NBP and EEP -- 5% each

Kinder Morgan Partners


has a dividend yield of 5.4%.

Northern Borders Partners



Enbridge Energy


yield 7.4% and 8.2%, respectively. These easily can change, depending on profitability, because the companies are structured as master limited partnerships, meaning most of their income gets distributed to owners.

Kinder Morgan delivers energy resources across 25,000 miles of pipeline to its customers: very simple business; locked in by long-term contracts; and very hard to compete with. It's also estimated that another 40,000 miles of pipeline will be needed over the next 10 years.

The CEO, Richard Kinder, takes a salary of $1 and never issues himself options, so basically all of his income comes from the dividend. He learned the trade primarily at


, where he left after an argument with Ken Lay about the merits of owning real assets like pipelines (note: He won the argument). For the sake of diversification, I included at smaller levels Northern Borders and Enbridge, two other pipeline companies that offer a higher dividend. But KMP has consistently raised earnings estimates, bought back shares, raised its payout -- and I like the CEO. Next to IACI, I think this is the best-run company in the country.

IDT -- 5%

Howard Jonas, the founder and CEO of



, is probably a better market-timer than even Barry Diller. He spun off 40% of his startup



at the peak of the market in 2000 to

AT&T Wireless


for $1.1 billion. He spurned an acquisition offer from Winstar for over $1 billion and a year later Jonas paid $40 million for more than $5 billion in assets from Winstar after it went bankrupt. He's also been very selectively buying up the assets of other bankrupt telecom providers over the past two years. So what do we have? A telecom company with $1 billion in cash, zero debt and a ton of assets that aren't burdened with the debt problems of their predecessors.

For 20 years, Jonas has been pioneering the idea that phone service is a commodity made cheaper by technology. Jonas has basically been the king of cheap phone calls, whether it's through being one of the largest providers of prepaid calling cards (making IDT one of the largest providers in international phone traffic) to the development of voice-over-Internet protocol technology with Net2Phone.

While companies like






are just beginning to go down the route of trying out VoIP services (and struggling with mountains of debt), Jonas has positioned IDT to be a main beneficiary of these new trends. In addition, he has the added help of

Liberty Media


and Chairman John Malone, who bought a 9.9% stake in IDT in 2000.

For whatever reason, despite being the healthiest survivor in the telecom space, no analysts cover the company and very few mutual funds own shares. Jonas owns 40% of the company and the only major transaction he's done lately is to buy an additional 1.25 million shares of Net2Phone at $4.50 (it's now at $6.68). Will this company be around in 20 years? Most likely.

5% -- Cash

Buried, of course, under the bed or in a chest 3 feet under the ground.

What I didn't include


Even if China is the "United States of the 21st century," there is no good way to invest in it right now. China's stock market represents only a tiny portion of the country's industry. It's also rife with corruption and heading toward the kind of fall that afflicts all emerging markets before they finally blossom.

The market.

As I mentioned, the broad market, best represented now by the S&P 500, has done great for the past 100 years, but I'm not necessarily confident it can maintain the record. In the 1800s, the market underperformed bonds, and I think it's a tossup whether that happens again over the next 50 years. Picking the best companies and sticking with them is a better choice, as well as diversifying at least 50% into other assets.


I have nothing against Fidelity or mutual funds. But they don't work well in my mission. They don't outperform the market as a group (and I'm not even recommending the general market), and they're too expensive given that one can buy a cheap ETF if the goal is to simply track an index. There are some great mutual funds out there now, but they will disappear when the current managers retire. No point having money stuck there if I'm thinking of a 50-year portfolio.


The euro has done great and there is a risk in holding so many dollar-based assets. However, if the dollar weakens, my portfolio is structured so that almost every asset should be OK. The dollar stores should do great, and silver, the TIP and the S&P Hedge Fund index will do fine. Even in the worst-possible case of a dollar devaluation, currencies have a way of coming back even stronger than before (look at Brazil this year).


I really hate gold. The only reason to invest in it long term is if you think there will be a worldwide disaster from which we never recover. If that happens, you have bigger problems than your portfolio. And anyway, don't worry about it -- you own silver.

Is this the optimal portfolio? The one that will appreciate the most? Probably not. But, allowing for rebalancing, this is how I would invest my money if I could never touch the allocations again.

James Altucher is a partner at Subway Capital, a hedge fund focused on deep value and arbitrage opportunities, where opportunities are identified using proprietary software. At the time of this column's writing, his fund had no position in the securities or assets mentioned (other than cash), although that could change at any time. Email him at has a revenue-sharing relationship with under which it receives a portion of the revenue from Amazon purchases by customers directed there from