Mutual Fund Research Newsletter
Copyright 2011 Tom Madell, PhD, Publisher
Jan 2011 Updated: Jan 11, 2011

We Remain Firmly Bullish

by Tom Madell

Many of us might have held back on investing in stocks, either a little or very much so, over the past few years on the assumption that things have been just too precipitous all over the world. Especially for those who held back a great deal or even completely, here are a few things that may have escaped your attention:

Thus, anyone keeping the faith over the last two years has been well rewarded. It once again seems to demonstrate the under-recognized axiom that whenever we are most bombarded by what appears to be the worst kind of fear-inducing/confidence busting conditions in the markets, the markets often surprise most everyone by doing just the opposite as might be expected. For as long as I have followed the markets, it seems that a good way to do well has been based loosely on the principle: "What you see is not what you get. Or, to put it another way, it is especially important to heed: Don't let emotions drive your investing and "don't follow the crowd."

But because each of these above principles is really quite hard for most people to recognize, no less to actually follow, it may therefore be wise to try to find an advisor who, in your judgment, can put the above bogeymen of investing aside. In our opinion, often only the right professional can help you defeat negative fears (as well as excessive waves of optimism); this does not include many brokerage house advisors who may be attempting mainly to personally profit by selling you something.

For the last 14 mos., that is, since Nov. 12, 2009, we have been quite positive on the prospects for nearly all categories of stock funds on our site, as well as at our compatriot site at Back then, we emailed an Alert to subscribers and posted the Alert on our site. In it, we indicated that our research suggested all major categories of stock funds should be considered BUYS. (Click here to see a copy of the emailed Alert.)

Subsequent to the initial broad BUY recommendation in our Jan. 2010 Newsletter, we raised our recommended overall portfolio allocation to stocks to 57.5% for Moderate Risk investors, and to 75% and 30% for Aggressive and Conservative investors, respectively.

Note: We also made even earlier BUY recommendations for Small Cap Growth (Jan. 31, 2009) and Large Cap Growth (Oct. 8, 2009). Here, the results have been even better. Specifically, using the two Vanguard Index funds that we have been recommending in our Model Portfolios, which are also close proxies for the average return for all funds in these categories, one's returns for those who bought immediately after our signals have thus far earned returns of greater than 100% in Vanguard Small Cap Growth and 25% in the Vanguard Growth Fund (VIGRX).

Throughout 2010, we remained highly positive on stocks for most investors, with our Oct. '10 Stock Model Portfolio recommending an even greater allocation to stocks for Moderate Risk investors and for Aggressive investors, bringing the total for these investors up to 62.5% and 85%, respectively. Even with the elapsed time since our Nov. 2009 Alert, 7 out of the 10 major fund categories recommended then remain in what we consider BUY territory. The remaining 3 (Large Blend, Large Value, and diversified International Stocks) are currently classified as HOLDs.

Long-term readers of our Newsletter will recall that since we began our portfolios back in 2000, we have not frequently called for such high allocations to stocks. Therefore, our late '09 thru all of '10 predominantly bullish calls should be regarded as that much more significant, especially as compared to many forecasters who tend to be almost always be bullish (or worse, bearish). For example, starting in April '08 and continuing thru the following year, we recommended a greater allocation to bonds and cash than to stocks for Moderate Risk investors; the S&P 500 subsequently dropped around 40% over the ensuing year. By July '09, this demonstrated high degree of caution was no longer the case as we raised our stock allocation.

General Comments on Overall Investment Environment

As implied above, we remain quite bullish on stocks prospects over the next several years, and especially over the next 5 to 10 years. It should be remembered too that we are not traders, attempting to capitalize on short-term market movements. So whenever we issue a recommendation, we are recommending that fund/category for periods of up to 5 yrs. or maybe even beyond. Frankly, we can not really tell, nor are particularly interested, in what the next 3 to 6 mos. might hold for stocks. In fact, our long-term track record shows we have been most successful in predicting which categories of stock funds will do well after 5 full years; our 3 yr. record, while still quite good, is slightly less strong; the same is true for our 1 yr. record. (Refer to "Our Track Record webpage" for a detailed view.)

We realize, though, that such relatively short-term considerations are exactly what holds back many investors; they seem to want near total assurance that prices won't drop over the next 3-6 mos. in order to feel secure in making new investments. While understandable, I would suggest that one give up on the idea of getting that kind of assurance. It only helps to take your eyes off what should be the more important target - what fund prices will be like several years down the road. To be a successful investor, one simply has to be willing to accept the fact that over the short term, stock prices will vary considerably, and often unpredictably. But over the longer term, while there are never iron-clad guarantees, your odds of success should be quite high whenever you elect to invest when conditions, especially undervaluation, suggest that an asset category is below where history suggests it should be and economic fundamentals are improving. We believe we are in such an environment now.

A preoccupation with short-term worries (which are really just guesses) should only be the providence of professional traders who make bets on short-term movements in order to try to make large profits in a short time. Sometimes they will be correct and at other times not, and so luck will often play a big part in whether they succeed given all the time they must devote. (Incidentally, such trading becomes highly impractical when investing in funds because most funds have limits on the no. of times they allow you to exchange into and out of funds. Perhaps this is one of the appeals of ETFs since they tend to trade like stocks without such limits.)

So we suggest that most long-term investors not focus on what "might" happen over the next 6-12 mos., if that can even be predicted at all. Rather, we suggest focusing on the longer-term outlook several years ahead. While this is still relatively unknowable, we believe it makes more sense to think about potentialities than deficiencies in investing (or anything else).

We do worry about the size of the US deficit and consider that there is a chance that Congress and the President will not choose to come to grips with it. We fully expect that political gamesmanship will actually bring us to the brink of the near terrible repercussions which will follow if creditors lose confidence that we can continue to make good on our obligations. Evidence suggests that it is only once we are "on the brink" that our elected representatives will finally start taking the necessary steps to get our financial house in order. Thus, our longer term bullish outlook can prevail as to why stocks can do reasonably well in spite of all the troubling things we see around us. (It should be mentioned too that we agree with many economists that the extension of the Bush tax cuts, extended unemployment benefits, and the 2% reduction in Social Security taxes, all of which unfortunately still "borrow" from future monies, will certainly add some current stimulus to the economy.)

We see diminished, although not flat-out bad, returns on the longer term horizon for bonds. One very troubling corner of the bond market is municipal bonds. States and local entities that issue these bonds are going to have a great deal of difficulty in raising the required funds to provide services and to pay for promised pensions. The likely result (especially since the Federal government has apparently dropped a subsidy whereby they were paying part of interest on state-issued bonds) could be lower muni bond prices. Therefore, we recommend a somewhat cautious and limited allocation to muni bonds for the time being. We continue to favor corporate bond funds in general over government bond funds, which include municipal bonds.

Jan 2011 Model Portfolios

Overall Portfolio Allocations

For Moderate Risk Investors


Current (Last Qtr.)


65% (62.5%)


30 (35)


5 (2.5)

For Aggressive Risk Investors


Current (Last Qtr.)


85% (80%)


15 (15)


0 (5)

For Conservative Investors


Current (Last Qtr.)


40% (20%)


50 (60)


10 (20)

Note: Obviously, there are different "shades" of being a "conservative" investor. Some investors in this category might choose to be far more conservative than our conservative allocation recommendation. However, my Newsletter aims to help investors get the best returns using just 3 investor classifications. We earnestly believe that even conservative investors should have some assets in the stock market.

It will likely be hard for those who choose not to invest in stocks to profit much from our advice. (While we do offer advice on bond allocations, we have frequently have reported that our bond category recommendations are not very likely to beat what you could achieve merely by investing in either the Vanguard Total Bond Market or the PIMCO Total Return funds, or a combination of both.) Of course, too, we have frequently emphasized that investments in decent bond funds will nearly always be a better long-term investment than keeping money tied up in cash or CDs. This remains as true now as ever, even with many forecasters predicting that interest rates and bond prices may suffer as the economy continues to recover and especially if inflation begins to creep back into the picture.

Specific Category Allocations


Favored Categories

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

Our Current
Recommended Fund

Large Growth

25% (22.5%)

Vanguard Growth Idx

International Large Growth

20 (25)

Vanguard Internat. Growth (See Note 1)

Large Blend

17.5 (20)

Vang. Large-Cap Idx

Mid-Cap Value

5 (5)

Fidelity Low Price Stock (FLPSX)

Large Value

10 (12.5)

T Rowe Price Equity Income (PRFDX)
Vanguard Financials ETF (VFH) ((See Note 2)

Mid-Cap Growth

10 (5)

Vanguard Mid-Cap Growth Index (VMGIX)

Small Blend

12.5 (10)

Vanguard Small Cap Index

Note 1: We are recommending that investors select an international fund with a growth orientation. (In previous Model Portfolios, we generally recommended the "large blend" category. However, our recommended fund remains the same because it continues to have a large growth style.
Note 2: For aggressive investors, we continue to recommend funds with a relatively high allocation to the financial sector, such as the above Vanguard ETF. Our research suggests the financial sector is highly undervalued on a long-term basis but has started to perform well over the last year.


Favored Categories

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

Our Current
Recommended Fund

Interm Term Govt

12.5% (12.5%)

Vanguard Tot. Bond Market


45 (45)

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

Intermediate Term Muni Bonds

7.5 (10)

Vang. Interm. Term Tax-Exempt


10 (7.5)

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

Short-Term Non-Govt

5 (5)

Vang. ST Investment Gr.

Long-Term Non-Govt

5 (5)

Vang. LT Investment Gr.

High Yield

15 (10)

Vang. High Yield

Note: We are not currently recommending International Bonds.

How Our Model Portfolios Performed over the Last 1, 3, and 5 Years

Final data is now available on how our prior Stock Portfolios performed when held over longer-term periods, as we recommend.

The data show that the average total returns of our recommended categories outperformed the S&P 500 over 1 and 5 year periods, but not over a 3 year span. Both the outperformances and the underperformance were relatively small. Ever since we began issuing these Portfolios, we have had an outstanding record of outperforming the S&P 500 Index. Thus, every single Portfolio has beaten the Index since we began 11 years ago over a 5 yr. period, or 25 out of 25 times! This remarkably consistent track record is something we are very proud of as we have heard of no other similar portfolio allocations with an equally market-beating track record.

Click here to see a summary table of how our Stock Model Portfolios have performed since we began publishing them in Jan. 2000.


click here to read Part II of this Newsletter.