Mutual Funds Research Newsletter
Copyright 2010 Tom Madell, PhD, Publisher
April 2010. Published March 31, 2010
Updated: Apr. 16, 2010

April 2010 Model Portfolios

In keeping with our Nov. 12, 2009 Buy signals, which remain in effect for all 9 major US "grid" categories as well as diversified international funds, we are now recommending an increased allocation to stocks and a lower allocation to bonds.

It is extremely important to understand what our allocations are intended to suggest. Our overall asset allocations, and our current increase from 57.5 to 60% for stocks for the average investor, do not imply we are suggesting that the stock market will necessarily do well over the short-term, including over the next year or even more. Rather, the allocations and the increase do suggest that we currently have a somewhat more positive view than previously of how stocks will perform on an annualized basis over approximately the next five years or so. We are also taking into consideration an expected sub-par performance by both both bonds and cash.

In making our overall allocations, we try to judge the potential gains possible in stocks vs bonds vs cash, while taking into account the risks that could make too large an exposure to a given asset a danger when so chosen.

We previously pointed out in our Feb. 2010 Newsletter that, while we remain positive on the relative benefits of being in stocks vs. bonds over at least the next five years, we think that for investors who are thinking of adding seriously to their current positions, it might be better to wait for a lower entry point. In fact, the very level we suggested as a possible point for considering trimming one's stock position, 1168 on the S&P 500, has already been breached. (This point represents a 75% gain from Mar. 9, 2009)

Applying what our research has shown, we feel pretty good about the longer range prospects for stocks. That said, there is no way to be sure how stocks will do in the shorter term (say in the next year or so.)

We continue to feel that some sort of correction, say around 10-12% from their current levels, is necessary before stocks again show a more enticing entry point. But we must make clear we do not think that this dip, if it does materialize, is just around the corner. It could take months or even until early next year before happening. But until it does, we will remain cautious about personally adding to our stock positions.

That said, long-term investors who are investing for the next 5 to 10 years perhaps should not be deterred regarding a possible correction. Such invidividuals might want to continue to increase allocations to stocks in light of the still relatively low prices of stocks which generated our still in effect Buy signals last Nov.

While we do not expect 10 or more percent returns in stocks over the next decade, we continue to think that annualized returns in the 6 to 8% range are likely. (See Steve's article for a further discussion of why some prominent investors now anticipate below normal returns.) Such returns, while not as good as historical norms, should easily outpace our expectations for bonds. Here, we would estimate annualized returns of perhaps 3.5 to 5% are most likely. (Such bond returns would be somewhat less, although not hugely so, than those achieved over the prior decade.)

Overall Asset Allocations

For Moderate Risk Investors


Current (Last Qtr.)


60% (57.5%)


35 (37.5)


5 (5)

For Aggressive Risk Investors


Current (Last Qtr.)


80% (75%)


15 (20)


5 (5)

For Conservative Investors


Current (Last Qtr.)


35% (30%)


45 (55)


20 (15)

Specific Category Allocations


Favored Categories

Recommended % of
Stock Portfolio
(last qtr's %)

Our Current
Recommended Fund

Large Growth

27.5% (30%)

Vanguard Growth Idx

International Large Blend

25 (25)

Vanguard Internat. Gr.

Large Blend

22.5 (22.5)

Vang. Large-Cap Idx

Mid-Cap Growth

5 (7.5)

Vang. Mid-Cap Growth (VMGRX)

Large Value

7.5 (5)

T Rowe Price Equity Income (PRFDX)

Small Growth

5 (5)

Vanguard Small Cap
Growth Index

Small Blend

7.5 (5)

Vanguard Small Cap Index

Comments: For those investors willing to seek out and try some less well known funds, we recently came upon two with outstanding track records: The Yacktman Fund (YACKX) and the Fairholme Fund (FAIRX), both Large Value funds. Each of these funds has enviable characteristics in terms of past performance, manager tenure, and tax efficiency.

Incidentally, we have recently increased our exposure to the Large Value category, especially as compared to 1 year ago, when we recommended a 0% allocation.


Favored Categories

Recommended % of
Bond Portfolio
(last qtr's %)

Our Current
Recommended Fund

Interm Term Govt

10% (12.5%)

Vanguard Tot. Bond Market


42.5 (40)

PIMCO Total Return Instit (PTTRX)
or Harbor Bond Fund (HABDX)

Intermediate Term Muni Bonds

15 (15)

Vang. Interm. Term Tax-Exempt


7.5 (7.5)

PIMCO Real Return Instit (PRRIX)
or Harbor Real Return (HARRX)


7.5 (10)

T Rowe Price Intl Bond

Short-Term Non-Govt

10 (10)

Vang. ST Investment Gr.

High Yield

7.5 (5)

Vang. High Yield

How Our Recommendations From 1, 3, and 5 Years Ago Performed

As regular readers of this Newsletter know, we are not just about espousing our views of what we think will be market-beating investment opportunities for fund investors. On a quarterly basis, we look back at how our previous forecasts fared. And our readers should be aware that when measured from a long-term perspective, our Stock Model Portfolios have regularly outperformed the S&P 500 Index as described on our home page.

Final results for our Portfolios are now available reflecting performance thru the 1st Qtr of '10.

Stock Model Portfolios

Over the Apr 1 '09 thru Mar 31 '10 period, if one invested in the stock categories we recommended at the start of that period and received the average return for each of our recommended categories, one would have achieved a return of 49.1%. The return on on S&P 500 Index came in a hair above our result at 49.8%. This small shortfall was entirely due to our 10% allocation to a little known category designed to protect investors in a falling market, Long-Short. Without that investment, our Portfolio would have beaten the Index. (Note: We reduced and then eliminated that category by late last year.)

Over the last 3 years, our Model also trailed the S&P 500, here by a scant 0.5%. (The Index returned minus 4.2% annualized vs our minus 4.7.) Our main shortfall was that the typical International fund, which comprised 25% of the portfolio, lagged the Index. However, our long-time choice, the Vanguard International Growth Fund, did beat the Index, and also beat the average International fund by over 3% per year, although still in negative territory.

Over the last 5 years, holding our Model would have beaten the Index by 0.72% per year. This marks the 22nd straight time our Stock Model Portfolios' have beaten the Index when held over an entire 5 year period. The outperformance averages 3.89% per year over the the 5 yr. period.

Bond Model Portfolios

Over the Apr 1 '09 thru Mar 31 '10 period, the Vanguard Total Bond Market Fund, our benchmark for comparing our Portfolio, returned 7.4%. Some of our recommended bond categories were either way above or way below this return, especially the long-term government bond category which returned 1.0%, while our specific fund recommendation, the Vanguard Long Term Treasury Fund, returned minus 7%. However, our Intermediate Term Non-Govt and International Bond recommendations returned 15.7 and 23.2% respectively. And intermediate to longer term muni bonds, which we pointed out at the time were a good substitute for government bonds, returned approximately 8 to 13% tax-free, depending upon length of maturity.

Over the last 3 years, the Vanguard Total Bond Market Fund returned 6.05% annualized. This proved too hard to beat for most of our bond categories. But, on the positive side, our combined recommended overall portfolio allocation to bonds and cash of 47.5%, made at the start of Apr. 2007 and not altered over the period, would have helped neutralize the losses the average investor suffered in stocks.

Over the last 5 years, the Vanguard Total Bond Market Fund returned 5.35%. Here too, the benchmark beat our recommended categories by a small amount. However, had one invested and continued to hold our largest specific fund recommendation made at the at the start of Apr. 2005, Pimco Total Return, the overall Bond Model Portfolio would have approximately equalled the benchmark.

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