“Any plan conceived in moderation must fail when the circumstances are set in extremes.”
- Prince Clemens Metternich

High Monthly Income, or HMI, was designed for investors who are in retirement and/or approaching retirement quickly. The HMI investor has probably accumulated a wide variety of assets throughout their investing life. However, at this stage of the game accumulation alone is not sufficient. Yes, you still need to grow your portfolio but you can’t afford to assume the same degree of risk you did when your time horizon was much longer. Your primary goal now is to make sure you have enough income to meet your retirement needs for the rest of your life.

The goal of the HMI Plan is to provide investors with the advice and counsel that will allow them to generate the retirement income they need from existing assets, while simultaneously striving to protect the value of those assets from the downside risks inherent in the market.

A lofty goal? Well, yes. It is a lofty goal, but it is also achievable. How? Read on and you’ll learn about the nuts and bolts of the HMI Plan. You’ll discover the strategy and tools we’ll use to achieve our goals; the trading rules associated with the Plan’s buy and sell recommendations; the hypothetical year-by-year results of an 18-year back-tested Plan that has produced 10.25% annualized compounded growth with no downside over any two-year period. We’ll also compare the HMI Plan with the simple buy-and-hold mantra emanating from Wall Street, and we will demonstrate why buy-and-hold just won’t get you the income you need for retirement while still achieving growth in your portfolio.

18 Years of Data
In order to develop a trend-following income plan based on the past performance of long-term Treasury bonds, I first had to look at some aggregate data over a substantial number of years. This time period had to be long enough to encompass nearly every type of market climate that could have an effect on the value of bonds. I needed to see how bonds performed in both declining and rising interest-rate environments. I had to assess their performance in bullish stock markets, bearish stock markets, periods that included record highs and multi-year lows. I chose to look at this data over an 18-year time span from August 1986 through August 2004. Looking at this time frame allowed me to capture data from the October 1987 market crash, the 1990s bull market and the subsequent bear market of the early 2000s. I was also able to analyze bond performance data through a variety of interest-rate climates. Going back 18 years with this analysis has given me the confidence as well as the raw data that will back up the efficacy of the HMI Plan.

Treasury Bond Fund Trading Rules
Using the Vanguard Long Term Treasury fund as a proxy for measuring performance of long-term bonds, we have developed a trend following strategy that puts us in Treasury bond funds when the they are trending higher, and gets us out of Treasury bond funds when they are trending lower. Much like the Successful Investing trend following methodology, the HMI Plan Treasury bond fund trading rules are predicated on where the current price of the fund is with respect to its 200-day moving average. If the Vanguard Long Term Treasury fund is above its 200-day moving average, we are in a Buy in Treasury bond funds. If the fund should fall 3% below its 200-day moving average, we will exit Treasury bond funds.

The HMI portfolio allocation when we are in a long-term bond fund Buy will be a minimum of 50%, and we could be as much as 100% allocated to these funds if market conditions dictate. The allocation will depend in part on how the equity markets are performing, but we’ll touch on that in just a moment.

Special Situations Trading Rules
Rising Interest Rates
There have been times in the past 18 years when investing in long-term Treasury bond funds was just not the place to be. Periods marked by rising interest rates are usually the chief reason you should not own a bond fund. When interest rates are on the rise bond values diminish and bond yields go up. The inverse relationship between bond yields and bond prices offer us an opportunity to take advantage of a rising interest-rate environment in the HMI portfolio.

After exiting the long-term bond position, we’ll examine the yield on the 30-year Treasury bond. If the yield is above its 200-day moving average we will issue a Buy in the Rydex Juno Fund (RYJUX). Many of our Successful Investing subscribers are already familiar with Rydex Juno. This fund increases in value as the yield on the 30-year Treasury bond goes up. This fund is designed to in effect “short” the long-term Treasury bond. Remember, when bond prices are down yields are up, and when yields are up the value of the Rydex Juno fund goes up.

After entering a Juno position, we will set a 5% trailing stoploss to limit our potential downside in this special situations fund. Our allocation to this fund will range from a minimum of 25% to a maximum of 50% depending on market conditions, economic climate, interest-rate outlook, etc.

International Bonds
A position in international bonds is another way to take advantage of specific market conditions when we are not invested in U.S. Treasury bond funds. Those conditions would most likely occur in periods where the U.S. dollar was trending lower with respect to foreign currencies. When the U.S. dollar is weak vs. the world’s currencies international bond funds tend to perform very well. To capitalize on this situation, we’ll use the American Century International Bond fund (BEGBX). Our Buy criteria in this fund are twofold. If the American Century International Bond fund is trading above its 200-day moving average and the U.S. dollar Index is trading below its 200-day moving average we will issue a Buy in the American Century International Bond fund. Both conditions will have to be met here before we will allocate to international bonds, and then the allocation will be limited to between 25% and 50% of our HMI portfolio. Again, exact allocation will be contingent upon the various factors affecting the market at that time. Keeping our downside risk in this position to an absolute minimum, we will set a very tight 3% trailing stoploss upon entering the American Century International Bond fund. So much for the income plank of the HMI Plan platform. Now. let’s discuss the other critical element of the Plan its growth component.

Dividend Stocks-The Growth Component
After the 18-year back-tested analysis using the aforementioned trading rules for long-term Treasury bond funds, rising interest-rate funds and international bond funds, we had a very solid annualized compounded growth rate of 9.21%. The only problem with our income-only plan was that our hypothetical portfolio value was constantly dwindling. Indeed we were able to generate the income needed for retirement, however, at the expense of the value of our account. When I set out to solve this problem the solution came to me almost immediately. Why not include an allocation to stocks in the HMI Plan?

Stocks in an income portfolio? Could this be correct? Well, I am not talking here about risky tech issues or speculative small-cap issues. I am only taking about a very safe dividend stock mutual fund. A fund that invests only in large, stalwart companies that you will no doubt already be very well acquainted with.

Now remember when I told you earlier that the Successful Investing Traditional Plan and the Fabian Domestic Fund Composite (DFC) would play an important role in the HMI Plan? Well, it is in the “growth component” of the Plan where this confluence of services takes place. When the SI Traditional Plan is in a Buy, i.e., when the DFC is trading above its 39-week average reading, we will follow suite in the HMI Plan with a 50% allocation to the dividend growth fund iShares Dow Jones Select Dividend Index (DVY). This is an Exchange Traded Fund (ETF) that invests in some of the biggest and best dividend paying stocks in the market today.

Knowing when to get out of an allocation to dividend stocks also follows the same exit strategy employed in the Successful Investing Traditional Plan. We will exit the iShares Dow Jones Select Dividend Index in the HMI Plan when the SI Traditional Plan Sell is in effect. Simply stated, when we are in a Buy in the SI Traditional Plan we will be in a Buy in the dividend stock fund in HMI. Conversely, when we are in a Sell in the SI Traditional Plan we will be in a Sell in the dividend stock fund in HMI.

So there you have it. The HMI trend-following strategies and the HMI Plan to generate retirement income that seeks to both grow existing assets and protect against the market’s downside risks. Click here to sign up for my HMI service or call 1-800-FABIANS

Note:Doug Fabian is the editor of three paid investment newsletter services owned and published by Eagle Publishing, Inc.  The editorial duties performed by Doug are incidental to Fabian Wealth Strategies and are not considered investment advice for client portfolios. Doug is bound by the Eagle Publishing Editors Security Trading Policy that is intended to ensure compliance with all federal and state securities laws.