Copyright 2016 Tom Madell, PhD, Publisher
July 2016. Published June 18, 2016

Third Quarter 2016 Model Portfolios

By Tom Madell

General Comments

As I read through the news, whether it be national, international, or just that focused on financial goings-on, there might appear to be much to suggest the need for a change of investing strategy in the weeks and months ahead. It seems that the world may have become a far more uncertain and even risk-laden place, which might imply to some that investors should perhaps pull out of some of their investments.

Without listing all of these potential pitfalls, it might therefore look prudent at this point to reduce investments in the riskiest of assets, at least until some of these unknowns are closer to some sort of closure, or perhaps fully resolved.

So should one respond to these uncertainties in this way, that is, by selling off some of their stock funds? For example, many have predicted a big downdraft in stocks in the event that Great Britain votes to drop out of the European Union on June 23.

Unfortunately, the future is inherently unknowable. No one knows what the outcome of the British vote will be (nor, for that matter, who will win the presidential election here this November). Further, even if one could confidently assert that they "know" the outcome in advance, it is not at all clear what the investment ramifications for that particular outcome would be. Finally, even if, say, the British electorate do decide to exit the E.U., and some of the dire predictions about a big negative impact on many of the economies and markets of the world, including our own, do happen, how long would that sell off last?

If one knew the answers to these questions, perhaps then a case could be made for investors "doing something," presumably in advance of the outcome. So, if there is going to be a "no" E.U. vote, and a sell off, one could sell stock pre-June 23. And, additionally, if one could know that this would just be a quick knee jerk reaction to the vote, they could buy back once the sell off had abated if they could correctly anticipate that the sell off was destined to be merely a great buying opportunity.

It is nearly always the case that either panicky investors or, at the other extreme, aggressive ones, think that they can figure out these nearly impossible to anticipate outcomes, or at least protect themselves from the worst types of ensuing scenarios. So, in this example then (but many others like it as well), such investors would be apt press the sell button.

My recommendation, however, is not to let these seemingly high impact events affect your investment resolve. Because we cannot know exactly how these future events will evolve as well as their long-range impact, if any, most investors should sit tight even as seemingly crucial events start to play out.

Time and again, it appears to me that decisions to exit stocks based on fear, or at least anticipation of one outcome over another, usually turn out to be a mistake (unless, perhaps, for true "traders" who happen to make a lucky guess). We saw this in the aftermath of Sept. 11 attacks, the grinding 2007-2009 recession, the so-called "fiscal cliff," and countless other perhaps somewhat less dramatic times.

What might appear rational at the time, in the often times upside down world of investing, more often than not is not the way things actually turn out. While there may indeed be genuine times to lighten up on stocks, some of the scariest times usually wind up being the best time to hold on to them. But such cases may not resolve quickly - you may likely have to be a long-term investor to get from low point A to considerably higher point B.

All this leads into a related issue: Should my recommendations made in monthly Newsletters include recommendations to "sell," along with my rather frequent recommendations to "hold" (as you will see quite a bit of below), and of course, my recommendations to "buy" (which appear less frequently)?

Of course, most advisors, newsletters, etc. would naturally be expected to include all three. But if you are truly a long-term fund/ETF investor, once you have landed in some well-regarded funds, outright selling should be a relatively rare activity. Why?

First of all, you should not invest any money in a stock mutual fund or ETF, or keep it there, that you know for sure you will need to withdraw at least at its current value in less than three years from now, or even, five. Stocks are simply too volatile so that if you need to get that money back within a shorter period, you don't really have any business investing that money (or keeping it invested there) in stocks in the first place. Accepting that somewhat long time horizon, you won't need to sweat out most situations that arise in fear that you won't have that money on the known day it is needed.

There are obviously certain times that you must sell, such as for example, when you must finance a big unplanned expenditure or have simply reached the point you are ready to spend that money to maintain or enhance your lifestyle.

But other than for such real needs, going as far as selling completely out of a fund may not be your best choice, especially if it is because you are reacting to an event you regard as "scary," as alluded to above. Rather than overt selling in an attempt to reduce risk in a scary world, you might want to only consider selling for a very different reason: once an investment has given you a good profit. And even then, you might not want to completely sell that investment, just reduce it.

No one can know for sure when, strategically, it is the best time to sell an investment. As suggested above, what often appears to be a rational time to sell turns out to be one of the worst times to sell. Therefore, rather than implying that I, even with all my years of investment experience and research data to help in the process, know the absolute best time to sell, I now prefer to use the word "reduce" as applied to a given investment, rather than "sell."

All investors should also consider that stocks, held long-term, are probably the best single way to increase wealth, and that, at least in this country, the long-term "bias" of stocks has always been up, rather than down. Perhaps as I have just seen elsewhere, but have modified to emphasize the long-term, the main thing stock investors have to fear is fear itself, since fear can rob you of the long-term opportunity to participate in that overarching growth process. (Incidentally, bonds too can help in that process although obviously nowhere near as robustly, but too many investors seem not to value bonds very much, fearful that at times like now with potentially rising rates in the US, returns will not be good at all, if not negative. In fact, many bonds, including US ones, are currently showing some of their best year-to-date performances through mid-June in quite some time.)

All my recommendations, whether buy, reduce, or hold, must be regarded as a form of probability statement which suggest that by following the gist of the recommendation, you will be likely to come out ahead of not doing so. But, rather than promoting the view that by following these recommendations, you will be able to see a favorable outcome quickly, my research has shown you mainly have a good chance of earning better returns if you stick with most of these recommendations over the next several years. More specifically, that period will tend to be about three years for stock funds, and about two years for bond funds.

Overall Allocations to Stocks, Bonds, and Cash

For Moderate Risk Investors

Asset Current (Last Qtr.)
Stocks 52.5% (52.5%)
Bonds 35 (35)
Cash 12.5 (12.5)

For Aggressive Risk Investors

Asset Current (Last Qtr.)
Stocks 67.5% (67.5%)
Bonds 27.5 (25)
Cash 5 (7.5)

For Conservative Risk Investors

Asset Current (Last Qtr.)
Stocks 17.5% (20%)
Bonds 52.5 (50)
Cash 30 (30)

Note: All allocations cited in this Newsletter will become effective July 1, 2016.

Specific Stock Fund/ETF Recommendations

While I do value the usefulness of holding funds/ETFs for the long term in most cases, changes to one's degree of commitment to a given fund often do make sense. It is unrealistic to assume that all funds will perform equally going forward, so when I can bring my own research as well as economic knowledge to bear on which funds will likely do better, I find it helpful to alter either the fund rating or its percent allocation.

My current reading shows that the majority of our specific stock fund/ETF recommendations are currently "Weak Holds." While these funds may perform adequately over the next several years, their upside potential may be limited. Under current market conditions where my research suggests there are very few excellent opportunities ("Buys"), any fund or ETF or fund category that is a Hold of any sort ("Weak Hold," ordinary "Hold," or "Strong Hold") would likely be among the best possibilities out there for now. Obviously, as the descriptions imply, "strong" may be a better bet than "weak" or ordinary.

We have marked in bold type those funds which seem to have the best prospects.

Our Specific Fund and Allocation
Recommendations Now (vs Last Qtr.) /
 Fund Rating


(vs Last Qtr.)
-Vanguard Small Cap Value Index Fund (VISVX) (New!)  10% (0%) / 
  Weak Hold

   Small Cap

    10% (10%)

-Fidelity Overseas (FOSFX) 5 (5) (A) / Weak Hold
-Vanguard Europe Index (VEURX) 5 (5) (M) / Weak Hold
-Vanguard Pacific Index (VPACX) 5 (10) (A) / Weak Hold
-Tweedy Brown Global Val (TBGVX) 7.5 (5) (C & M) / Weak Hold
-Vang. Emerging Markets Idx (VEIEX) 10 (10) (A) / Strong Hold
-DFA Internat Small Cap Val I (DISVX) 5 (5) (A) / Weak Hold
   (See Notes 1, 2 and 3.)


    37.5 (40)

-Vanguard Dividend Growth (VDIGX) 7.5 (7.5) / Hold
-Vanguard 500 Index (VFINX) 7.5 (7.5) / Weak Hold
-AMG Yacktman Fund Service Class (YACKX) 2.5 (0) / Weak Hold (New!) 

  Large Blend 

    17.5 (15)

-Vanguard Growth Index (VIGRX) 7.5 (7.5) / Weak Hold
-Fidelity Contra (FCNTX) 5 (7.5) / Weak Hold
 Large Growth 
    12.5 (15)

-Vanguard Equity Inc (VEIPX) 10 (10) (M) / Hold
-Vanguard US Value (VUVLX) 7.5 (7.5) (A) / Weak Hold


    17.5 (17.5)

-Vanguard Energy (VGENX) 5 (2.5) / Strong Hold (A)


     5 (2.5)

  1. A stock or bond fund shown with (C), (M), or (A) indicates it is most suited for Conservative, Moderate, or Aggressive investors, respectively.
  2. Vanguard ETFs (exchange traded funds) are often practically identical to similarly named Vanguard "Investor" index funds with even lower expense ratios and without the higher minimums required for the "Admiral" funds. Therefore, these ETFs can be substituted for any Vanguard stock or bond index fund shown in tables. E.g. Vanguard FTSE Europe ETF (VGK) can be substituted for VEURX.
  3. Although not included in the Model Portfolio, you may want to consider two other (or additional) international ETFs: WisdomTree Europe Hedged Equity ETF (HEDJ) and WisdomTree Japan Hedged Equity ETF (DXJ). These ETFs, unlike the recommended Vanguard Europe and Pacific funds, tend to do better when the US dollar is strong, as it has been since roughly mid-2011.

Specific Fund Ratings on Recently Removed Stock Model Portfolio Funds

Whenever we include a fund in our Stock Portfolio, we have assessed that, on both an absolute and relative basis, it should do well over at least several years. If we remove that fund from the most recent Portfolios, it signifies we think, based on new data, others funds may do better than the removed fund. The removed fund may still do well and many investors may want to hold any removed stock fund for at least a total of 3 years. An exception is when the removed fund is now explicitly classified as Reduce.

Here are the stock funds we have removed over the last several years and their current ratings. Once again, we have marked in bold type those funds which seem to have the best prospects.

Fidelity Low-Priced Stock Fund (FLPSX): Borderline Reduce

Vanguard Financials ETF (VFH): Borderline Reduce

Fidelity Large Cap Stock (FLCSX): Reduce

T Rowe Price Value (TRVLX): Weak Hold

Vanguard Utilities ETF (VPU): Strong Hold

Vanguard Energy ETF (VDE): Hold

Vanguard Precious Metals and Mining Inv (VGPMX): Strong Buy

Dodge & Cox International Stock (DODFX): Hold

Vanguard International Growth (VWIGX): Weak Hold

Vanguard Consumer Staples ETF (VDC): Hold

Oakmark International I (OAKIX): Weak Hold

Third Avenue Real Estate Value Fund (TVRVX): Reduce

Stock Fund Category Ratings

Since readers will not always own the specific stock funds we recommend, the following lists the major fund categories and how we view each, making use of our prior research as discussed in the June Newsletter.

The categories under each heading are listed beginning with those we view most favorably progressing down to those we feel are least favorable to own as of mid-June. The ratings have a time frame of the next three to five years, although as events evolve over that long period, the outlook for each category will likely change.

US Domestic Funds

Large Value: Weak Hold

Large Blend: Weak Hold

Large Growth: Weak Hold

Mid-Cap Value: Weak Hold

Small Value: Borderline Reduce

Mid-Cap Blend: Reduce

Small Blend: Reduce

Mid-Cap Growth: Reduce

Small Growth: Reduce

Note: As stated above, my research indicates we are currently under market conditions where there are a general lack of good stock investing opportunities. While there obviously may be good funds other than those in my current (or past) Model Stock Portfolios, the above stock fund category ratings, as well as those below, reflect recommendations for the average fund within each category.

International Funds

Emerging Mkts: Strong Hold

Diversified Pacific/Asia: Hold

International: Weak Hold

Europe: Weak Hold

Japan: Reduce

Sector Funds

Precious Metals: Strong Buy

Commodities: Buy

Energy: Borderline Buy

Real Estate: Hold

Utilities: Hold

Consumer Staples: Hold

Communications: Hold

Industrials: Weak Hold

Technology: Weak Hold

Consumer Discretionary: Weak Hold

Financials: Borderline Reduce

Health Care: Reduce

Specific Bond Fund/ETF Recommendations

Our Specific Fund
and Allocation
Now (vs Last Qtr.)


(vs Last Qtr.)
-PIMCO Total Return Instit (PTTRX) 15% (15%), or
-Harbor Bond Fund (HABDX) (See Note 2.)
-PIMCO Total Return Active ETF (BOND) 2.5 (2.5)
-Vanguard Total Bond Market ETF (BND) 5 (5)


    22.5% (22.5%)

-DoubleLine Tot Ret Bond I (DBLTX) 10 (10), or
-DoubleLine Tot Ret Bond N (DLTNX)
   (See Note 3.)


    10 (10)

-Vang. Intermed.-Tm Tax-Ex (VWITX) 17.5 (17.5)
-Vang, Long-Term Tax-Exempt (VWLTX) 2.5 (0) (New!) 
   (See Note 4.)


    20 (17.5)

-Vanguard Sh. Term Inv. Grade (VFSTX) 5 (10)

    5 (10)

-Vanguard Inflation Prot. Sec (VIPSX) 5 (0) (New!) 

      5 (0)

-Vanguard GNMA (VFIIX) 5 (5)

      5 (5)

-Vanguard High Yield (VWEHX) 7.5 (10)

  High Yield

    7.5 (10)

-PIMCO For. Bd (USD-Hdged) Adm (PFRAX) 25


    25 (25)


  1. We do not use Buy, Hold, Reduce ratings for bond funds. However, unlike many stock funds right now, we think that well-chosen bond funds offer interesting opportunities, especially as compared to merely holding cash.
  2. When possible, select PTTRX; HABDX is only recommended if you cannot meet PTTRX's minimum.
  3. The two funds are the same but have different minimums; select DBLTX if possible because of lower expense ratio.
  4. Muni bonds are only suitable for taxable accounts. Invest in a fund with bonds specific to your own state, if available, for the greatest tax savings.


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