Since investing forecasts for relatively short periods of just a year or so, are just as likely to be wrong
as correct, you should not count on any prediction you read to give you anything more than an inkling of what might
happen in 2015, even when coming from me.
In fact, when I slightly trimmed down my Model Stock Portfolio allocation for Moderate Risk Investors (but not for
Aggressive or Conservative Investors) last January, I had anticipated somewhat more modest returns from stocks in 2014 than we
actually got. Luckily,
I never became outright bearish, which we only now know would have be proven a mistake, at least with regard to 2014 returns.
But, it still seems to me that the fundamental longer-term theme that we were alluding to at the time remains intact. Most categories of
stocks have become even more overvalued. At some
point, investors will likely be jolted out of their seeming complacency about stocks, resulting in greater numbers of
stock categories showing possibly extended mediocre, or
even, negative returns.
In fact, the media and some investors may be misinterpreting the positiveness of current scene, as illustrated by what
happened in mid-December. Stocks jumped big time
as a result of the statement from the Federal Reserve they would be "patient" in deciding when to raise interest rates. This was
apparently interpreted to mean a further
continuation of long-standing near zero interest rate policy that has helped stocks since the financial
But a closer, more rational, analysis shows that the Fed was merely changing away from the words "considerable time" to
on middle of page 7)
New Model Portfolios Beginning the 1st Quarter 2015
By Tom Madell
Year after year for 15 years now, my Newsletter has given investors specific suggestions as to how to construct a model portfolio
which includes a diversified mix of stocks, ETFs, bonds, and cash. Sometimes, it might have appeared that the recommendations were like
many other investment forecasts. That is, about half the time they might be right and half the time wrong, and perhaps therefore, of
But year by year, by constantly tracking how our Model Portfolios have performed, we have proven that these recommendations, if
they were guesswork or only 50% likely to be helpful, must have been awfully lucky. Long-time readers, or anyone who wants to
review how our Portfolios have done, will realize that our recommendations have been far more successful than would be expected
by mere chance.
While readers will, with all assurity, continue as always to
come and go from our site, we have enough loyal readers who have profited from our recommendations that we
still find it worthwhile to publish our work. And once again, as the data we will present below should show, people who stuck
with our recommendations, which are meant to be for the long term, have come out ahead. I know of no other source that provides
this kind of valuable information to readers. Do you?
We wish all our readers success in 2015 but, more importantly, in the many years ahead.
From outward appearances, 2014 was another outstanding year for those who invest in funds and/or ETFs.
But, upon closer examination, this was mainly true for investments that happened to be parked in the right places.
Unfortunately, in quite a few instances, the otherwise excellent returns within a portfolio were lessened substantially
by funds that did not perform nearly as well.
As we wrote about last month,
funds invested in S&P 500-like products by far proved to be the best place to be, followed
by other Large Cap funds. Investing
anywhere else, except for a small number of sector funds, would have earned you middling returns at best (averaging at least
5% below the S&P 500 index), and piddling ones (averaging at least 10% less), or
(continued on page 2
(New Model Portfolios Beginning the 1st Quarter 2015,
continued from page 1)
even, at worst, negative returns, mainly in the
case of international investments.
Even the much vaunted ETF world was not immune to the underperformance plight. A quick perusal of the performance of the 100 largest ETFs
shows only a small percentage topping the typical S&P 500 index fund.
So how would readers of this Newsletter have done if they followed my specific
Jan. 2014 fund recommendations?
In summary, you might say that I was moderately on the right track in
suggesting a somewhat
reduced allocation to stocks (52.5% for
Moderate Risk investors) at the beginning of 2014 along with only a small exposure to underperforming Small Caps
and a nearly as small an exposure to volatile sector funds. Like
many investors, I incorrectly assumed in my Jan. '14 portfolio that International stocks (but not Emerging Markets)
would be a good place to be after several prior years of underperformance.
We were also pretty close to correct so far when assuming in our Jan. '14 Newsletter
"that many well-chosen bond funds ... are still likely to produce positive,
although relatively small, returns over the next several years provided that the Federal Reserve keeps its word and holds
short term rates near zero, helping to anchor long-term rates."
In fact, the biggest surprise here was that many bond funds
did as well as they did. Thus, those who avoided bond funds, and opted for cash instead, likely missed out on some performance
enhancing opportunities. We at the time, on the other hand, recommended a 25% exposure to bonds for Moderate Risk investors.
As I have tried to point out many times in prior Newsletters, trying to make relatively short-term predictions is something that
will always be fraught with about as many misses as hits. However, relatively longer-term ones can become able to
capitalize on undervalued areas and "misperceptions" in the markets and better allow time for those variables to play themselves out to the
A complete report on how our Jan. '14 Model Portfolio performed, as well as our
Portfolios from 3 and 5 years ago, appears later in this issue.
These returns seem to confirm the need to allow enough time to come out ahead, especially with regard to stocks.
Overall Asset Allocations
For Moderate Risk Investors
Current (Last Qtr.)
For Aggressive Risk Investors
Current (Last Qtr.)
For Conservative Investors
Current (Last Qtr.)
While it may be tempting to "go with the flow" of rising stock prices, and the same for bond prices, I believe
that many investors are perhaps expecting too much, buoyed by the relatively recent performance of the markets.
While it is impossible
to know in advance what the "correct" allocation will have later proven to have been,
our philosophy is to not go too far out on a limb in any direction.
Investors who are relatively younger and can take a very long perspective may have little reason to change their allocation from year to year.
However, somewhat older investors might be well advised to take some of their gains out of the stock market. That way, in the event the market
disappoints in the next few years, they will hopefully have at least some strong profits to show for their efforts.
Allocations to Specific Funds
Important note: It has always been our policy that when more than one fund is listed for a given category, as in the tables below,
the first one shown is our current preference, This was explicitly stated in our Jan. 2012 issue, and perhaps in other issues as well.
Any other funds listed under a single category should be regarded as listed in decreasing order of preference.
Model Stock Fund Portfolio
Our Specific Fund Recommendations
Recommended Category Weighting Now (vs Last Qtr.)
-Fidelity Low-Priced Stock (FLPSX)
Mid-Cap/ Small Cap
-Tweedy, Browne Global Value (TBGVX) (C & M)
-Vanguard Europe (VEURX) (M)
-DFA Internat Small Cap Value I (DISVX) (A) (new)
-Vanguard Emerging Markets Index (VEIEX) (A)
-Dodge & Cox International Stock (DODFX) (A)
(After publication, this fund closed.) (See Notes 1 and 2.)
-Vanguard 500 Index (VFINX)
-Fidelity Large Cap Stock (FLCSX)
-Vanguard Growth Index (VIGRX)
-Fidelity Contra (FCNTX)
-T Rowe Price Value (TRVLX) (M)
-Vanguard Windsor II (VWNFX) (M)
-Vanguard US Value (VUVLX) (A)
-Vanguard Utilities ETF (VPU) (M)
-Vanguard Energy (VGENX) (A), or
-Vanguard Energy ETF (VDE) (A)
-Vanguard Precious Metals and Mining Inv (VGPMX) (A)
1. Stock or bond funds with (C) are particularly recommended for Conservative investors; likewise, (M) for Moderate; (A) for Aggressive.
2. Highly similar ETFs (exchange traded funds) of the same category can often be substituted for any index mutual fund shown in this table;
e.g. Vanguard FTSE Europe ETF (VGK) can be substituted for Vanguard Europe (VEURX).
Comments on Changes Since the Oct. '14 Stock Portfolio
Fidelity Low-Priced Stock has been disappointing. However, the performance has been adequate given the relatively low risk profile
of the fund. We are lowering our allocation a notch especially since we believe that Mid- and Small-Cap stocks remain the most overvalued
of the 9 major Morningstar US fund categories.
We are adding exposure to an International Small Cap Value fund, which is not overvalued.
In order to limit our international stock funds to five, we are eliminating for now
our recommendation of Vanguard International Growth (VWIGX). (Note: This does not mean long-term investors should necessarily abandon VWIGX;
however, we think the above listed 5 international funds may do better.)
We are decreasing our allocation to now more risky sector funds while at the same time increasing allocations to Large Blend and Large Growth.
Model Bond Fund Portfolio
Our Specific Fund Recommendations
Recommended Weighting Now (vs Last Qtr.)
-PIMCO Total Return Instit (PTTRX) (High minimum investm. outside 401k),
-Harbor Bond Fund (HABDX) (1K min.) or
-PIMCO Total Return ETF (BOND)
-Metropolitan West Total Return Bond M (MWTRX) (new)
-PIMCO Real Return (PRRIX) (High minimum investm. outside 401k), or
-Harbor Real Return (HARRX) (1K min.)
-Vanguard Intermed. Term Tax-Ex. (VWITX) (see Note 1)
Intermed. Term Muni.
-Vanguard Sh. Term Inv. Grade (VFSTX)
-Loomis Sayles Retail (LSBRX) (A)
-Vanguard High Yield (VWEHX) (new) (See Note 2)
-PIMCO Foreign Bond (USD-Hedged) Adm (PFRAX)
Select a fund, if available, that has your own state's bonds for double-tax exemption, such as, for example, the California
Intermediate-Term Tax-Exempt Fund (VCAIX) if you live in California.
Recent Model Portfolios recommended several other High Yield funds since VWEHX was closed although we continued to prefer it.
We try not to recommend closed funds, necessitating our move away from the fund. The fund is now open so we can again recommend it.
Comments on Changes Since the Oct. '14 Bond Portfolio
We are adding the Metropolitan West Total Return Bond M (MWTRX) which has become one of the leading bond funds around. We still
have confidence though that the PIMCO and Harbor funds are one's best choices.
We are increasing our allocation to muni bonds whose generally tax-free returns often make them superior in non-retirement accounts.
We are reducing exposure to the Multisector and High Yield categories which can tend to invest aggressively.
We are significantly increasing exposure to our International Bond fund (PFRAX). Weak economies overseas are good for these countries' bonds
as compared to a stronger economy
in the US which may hurt US bonds. However, US bonds may profit from increased buying by overseas investors seeking higher yields.
Prior Model Portfolio Recommendations:
Outperformance Is Most Likely Beyond One Year
Earlier, I suggested that my recommendations have a better chance of coming out ahead of their benchmarks if held beyond a
single year. In other words, acting on a recommendation and then assuming outperformance within a year or less, akin to a rather
short-term orientation, may be expecting too much from these Model Portfolios.
With that in mind, let's look at how Portfolios from 1, 3, and 5 year ago did.
Model Portfolios From One Year Ago
You can view our January 2014 recommendations here.
Here is a summary of how our recommendations did when held
for the entire year in the percentage allocations we recommended, including what helped the portfolio and what hurt it:
Important note: When more than one fund was recommended for a given fund
category, we have always divided the allocation equally between each of the funds when calculating Portfolio performance.
Note however, that, as stated above,
when more than one fund is listed for a given
category, the first one shown has always been our own preference. Therefore, performance of these "equally-weighted" categories often
understates how one would have done if one had emphasized our first choice within a category,
since quite typically, our first choice has been a better performer than the average return of any remaining funds shown within the category.
Our Stock Model Portfolio, which includes both domestic and international stock funds, returned 6.64%;
our benchmark portfolio returned 6.76%. Thus, we trailed the benchmark
by a miniscule -0.12%. On the other hand, our 9 US stock funds returned an average of 10.03%;
the average diversified US stock fund returned 7.56% as reported in the Wall Street Journal.
While we were not able to outperform
the benchmark, it must be realized that the benchmark consists of broad indices, which are not available to investors and
which do not reflect expense ratios that must be encountered in funds or ETFs.
The benchmark is made up of 65% US stocks (DJ Total Stock Market index) and
35% developed country and emerging market stocks (Spliced International Index).
-Eight out of 9 of our U.S. stock funds beat US benchmark
-Keeping only a small weighting of underperforming US Small/Mid-caps
-Overweighting Large Value fund
-Vanguard Consumer Staples ETF
-Two of our 4 International stock funds did worse than our International benchmark.
-Fidelity Contra Fund
-Vanguard Energy ETF's negative return, but it performed much better than the average Energy fund.
Our recommendations slightly underperformed the benchmark, Barclays Aggregate Bond (AGG), 5.74 to 6.00%, or by -0.26%.
However, the average of all taxable US bond funds returned 2.77% as reported in the Wall Street Journal.
-International and Muni bond recommendations had double digit performance.
(Note: the Muni fund performance was adjusted to reflect the after-tax
return for investors in the 28% Fed. tax bracket.)
-Little emphasis given to Inflation Protection
-Large weighting of PIMCO Total Return Instit and Harbor Bond
-The specific High Yield fund from Fidelity we recommended did poorly. (As noted above, we recommended
the Fidelity fund because our prior choice, Vanguard High Yield, was closed to new investors;
we do not knowingly include closed funds in our Portfolios.)
Model Portfolios From Three Years Ago
You can view our January 2012 recommendations here.
The following is a summary of how these recommendations did when held
for the entire year in the proportions we recommended.
Our Stock Model Portfolio, including International funds,
returned 17.35% on an annualized basis; the benchmark portfolio returned 15.92%
for a net outperformance of 1.43% annualized. Our 10 US stock funds returned an average of 18.36%;
the average diversified US stock fund returned 17.49% as reported in the Wall Street Journal.
-Inclusion of our S&P 500 index fund
-Our Growth fund choices
-Once again, international funds underperformed US funds. However, both of our International choices easily beat the benchmark.
Also, our underweighting of this category at 20% prevented further Portfolio underperformance.
-Real Estate sector funds lagged US benchmark
Our recommendations handily outperformed the benchmark (AGG), 3.96 to 2.54% annualized, or by 1.42% annualized.
The average of all taxable US bond funds returned 3.37% as reported in the Wall Street Journal.
-PIMCO Total Return Instit and Harbor Bond
-Allocations to munis, long-term corporate and High Yield bonds
-International bonds, although T Rowe Price fund was our only negative performer in the entire Portfolio.
-Allocation to Inflation funds
-US government bond funds
Model Portfolios From Five Years Ago
You can view our January 2010 recommendations here.
Our Stock Model Portfolio returned 13.74% on an annualized basis; the benchmark portfolio returned 11.57%
for a net outperformance of 2.17% annualized. Our 6 US stock funds returned an average of 16.21%;
the average diversified US stock fund returned 13.25% as reported in the Wall Street Journal.
-5 out of 6 of our US funds beat the S&P 500, with the 6th just a hair behind, with annualized performance in
the 15.5 to 16.5% range annualized.
-International funds still drastically underperformed US funds so our 25% weighting hurt performance.
However, once again, our International fund did much better than the benchmark.
Our recommendations outperformed the benchmark (AGG), 4.60 to 4.31% annualized, or by 0.29% annualized.
The average of all taxable US bond funds returned 4.54% as reported in the Wall Street Journal.
-15% allocation to muni bonds
-Heavy weighting (40% combined) of PIMCO Total Return Instit and Harbor Bond
-High Yield bond choice
-Poor choice of T Rowe Price International bond fund
-Inclusion of short-term corporate bond fund
To summarize: The above data show that this Newsletter's Model Portfolios from the beginning of a calendar year cannot
always be expected to do better than comparable indices over this relatively short time period.
But the true value of the Portfolios tends to be realized when nearly all of our funds within the Portfolios are held for
more than just one year. This has been especially true for our stock fund recommendations. So, for example, when holding
our Model Stock Portfolio from one year ago, you would have almost exactly equaled our benchmark. But, by holding the
Jan. 2012 Stock Portfolio, you would have beaten the benchmark by 1.43% annualized. And, by holding the
Jan. 2010 Stock Portfolio, you would have beaten the benchmark by 2.17% ann.
These results are highly consistent with previous data we have collected on our Model Portfolio performance down through
15 years of tracking these results and publishing them here. You can examine these results for yourself by finding past
quarterly Model Portfolios performance reports using the links on our site.
The implications for readers should be clear: While holding our Portfolio recommendations will typically lead to as
good (or better) outcomes as investing in a portfolio constructed of diversified index funds, you will tend to do better than the
benchmarks if you hold our recommended funds for periods ranging from 3 to 5 years.
---------- Comments on the Investing World as We Enter 2015 (continued from page 1) -------
Why did they make that change? Because they were concerned investors might assume "considerable time" locked in
a guaranteed, extended period of holding off. "Patient," on the other hand implies a somewhat more flexible time period which depends
on intervening events to maintain the patience.
Since the majority of Fed members believe that interest rates need to start rising,
they did not want to give investors the false impression that near zero rates have that much further to go.
So, rather than giving investors a new reason for near zero interest rate
optimism, they were actually taking a step to prepare investors for raising rates. But, likely to even the Fed's own surprise, investors
didn't seem to get the message.
As some, including me see it, the Fed is caught in a bind. They worry about keeping rates low for too long, but are seemingly
afraid of what might happen if investors don't react well to an increase. As usual, and this is strictly my own opinion, they
are catering to (or perhaps, "cratering to") the power of the country's most influential investors to possibly send the stock market down,
and the economic expansion along with it. They are also afraid that inflation is "too low," somehow putting the Fed's ability to
do their job in the event of another downturn at risk. So they are being as slow as molasses in raising rates.
Yes, indeed, the Fed should be regarded as
the ally of big investors, and not average savers who count on money market, CD, and bond interest rates
to help them make ends meet. But, of course,
you and I have had the option of aligning ourselves with big investors, by participating, and thus enjoying
the big rally over the last 5+ years.
Just don't get the idea that the Fed's "timidity" and "benevolence" to big investors is going to last forever. I would guess that
it will last just a little longer. Then the Fed will likely be forced to take more action other than just changing the wording
on what they tell these big investors.
Of course, the first rise or two in interest rates from near zero to 0.50 or even 0.75% shouldn't make a big difference in the overall
economy. And it may even stimulate the economy, such as if people who take out loans to make large purchases rush to make purchases
before they anticipate rates will go even higher.
But, psychologically, many investors, especially the big investors referred to above,
will recognize that one of the biggest props to higher stock prices is beginning to be withdrawn. Therefore, it is reasonable to
expect at least a temporary long-awaited correction in stock prices, if not a longer-term leveling out.
Tom Madell, Publisher
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