Copyright 2016 Tom Madell, PhD, Publisher
Jan 2016 Update. Published Jan 14, 2016

My Model Portfolios Continue to Beat Benchmarks When Held Long Term

This Newsletter's generally excellent record of recommending Model Portfolios of both stock and bond funds that tend to beat comparable benchmarks continued, as shown by the latest data from the just completed Quarter.

One Year Returns Somewhat Worse Than Benchmarks

In my Jan. '2015 Newsletter, I was cautious about the prospects for stocks. I recommended a 50% allocation to stocks and 25% allocations to both bonds and cash for Moderate Risk investors.

As it turned out, you actually would have done better in the Vanguard Prime Money Market Fund, that is, cash, than either the average diversified US stock fund or the average taxable bond fund which returned -2.1% and -1.7% respectively, according to the Wall Street Journal; the money market fund, as you would have guessed, returned just slightly more than 0% but at least you didn't lose money. The average International stock fund returned -1.3%

But beyond dealing with average fund returns, my recommendations try to select specific funds which, when assembled as entire stock and bond portfolios and with allocations weighted in accordance with what my research suggests are "best" funds to overweight, have what I consider a good chance of outperforming a portfolio made up of low cost index funds. But, especially in recent years, I have emphasized that investors will usually need to hold these portfolios for several years, usually at least 3, in order to do better than average.

Thus, if you had held my recommended Stock Model Portfolio from Jan. '15, you would not yet have beaten my benchmark comparison portfolio made up of 65% US stocks (Vanguard Total Stock Mkt Idx Inv (VTSMX)), 30% developed country stocks (Vanguard Developed Markets Idx Admiral (VTMGX)), and 5% emerging market stocks (Vanguard Emerging Mkts Stock Idx Inv (VEIEX)). In fact, you would have trailed this weighted benchmark by approximately 2.5% although trailing the average US stock fund by a lesser 1%.

Likewise, my recommended Bond Model Portfolio from Jan. '15 also trailed my associated benchmark, the Barclays Aggregate Bond Index, by about 0.6%. However, it was actually ahead of the average bond fund by about 1.7%.

Note: In computing the return for each of of Bond Model Portfolios cited in this article, I used the approximate after-tax equivalent return for an investor in the 28% Federal income tax bracket. Thus, for example, a 2.8% return on a Federally tax-free muni fund, is approximately the same as getting a 3.9% return on a taxable bond fund.

Three Year Stock Model Portfolio Returns Beat Benchmark

For the 3 years ending Dec. 31, 2015, stock funds, in general, did well. In my Jan. 2013 Newsletter, I recommended a 67.5% allocation to stocks for Moderate Risk investors, and high allocations to stocks for both Aggressive and Conservative investors as well.

Over the 3 year period, the annualized return for average diversified US stock fund was 11.7% while for the average International stock fund was much less at 3.9%. Our benchmark low cost index portfolio with a constant fixed allocation between US, developed international stocks, and emerging market stocks returned 10.5% ann. However, in comparison, my Model Stock Portfolio made up of 12 stock funds, including a 27.5% allocation to International stock funds within a diversified portfolio, returned 11.5%.

Our Model Bond Portfolio slightly trailed our bond benchmark, an index that has no associated expense costs, 1.2% ann. vs 1.4%. However, we did come out ahead of the average bond fund which returned only 0.4% ann.

Both Five Year Stock and Bond Model Portfolios Beat Their Benchmarks

Five years ago in the Jan. 2011 Newsletter, we were also quite bullish, recommending a 65% allocation to stocks and 30% for bonds for Moderate Risk investors along with an 85% allocation to stocks for Aggressive Risk investors, and a 40% allocation even for Conservative investors.

For the full 5 years ending Dec. 31, 2015, the annualized return for average diversified US stock fund turned out to be 9.1% ann. as did our benchmark low cost index portfolio, while the average International stock fund was again much less at 2.8%. My Model Stock Portfolio, with 20% invested internationally, returned 9.9%.

And while the AGG bond benchmark returned 3.3%, our Model Bond Portfolio, when held for the entire 5 year period, returned 3.9% ann. Also by comparison, the average bond fund returned a mere 2.6% ann. over the period.

An Interesting Note

If you review the links shown above to my Model Portfolios, you will see that only a small percentage of my recommended funds were index funds. Instead, the great majority, especially bond funds, are managed funds where an attempt is made to do better than just replicating the performance of an index.

While so many fund investors apparently have become disillusioned with the abilities of funds with managers to do well as compared with unmanaged index funds, the above data show that well chosen managed funds, when held for typically 3 years or more, can still beat index funds. I will continue to recommend funds with the best prospects, regardless of whether they are managed or the indexed variety.


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