Mutual Fund Research Newsletter
Copyright 2011 Tom Madell, PhD, Publisher
June 2011


-We Care About Our Readers' Needs. By Tom Madell

-Inflation – The Big Three: Housing, Transport and Food. By Steve Shefler
   (on separate page - to view, click here)


We Care About Our Readers' Needs

In response to our request for feedback in our May Newsletter, we received many encouraging (and, I might add, entirely favorable) e-mails. But, more importantly, we also learned a lot about issues important to our readers.

Since we felt it likely that many of these issues concerned not just the person writing to us but many other people, we decided to publish some of these e-mails, along with our response to the actual sender. (Only first names of senders are shown to protect anonymity.) Our responses should help readers better understand our Newsletter's investment philosophy as well as provide some on-going advice on how to deal with your portfolio.

As always, we personally respond to every content-laden e-mail we receive as we aim toward providing a service geared to our readership's needs. That is why your feedback is so important. We try to use your suggestions, whenever possible, to shape the direction of our future Newsletters.

Here then are the issues of concern we heard about from readers such as yourself; some, as well as my responses, are edited for brevity and emphasis. (Note: We plan to publish the July issue earlier than usual, around June 19 or 20; it will update our Model Portfolios.)

When to Pull Out of Stocks

Since I discovered your web site, I have been following it monthly for the last year or two. Unfortunately, I didn't start following your newsletter until after the stock market dropped in 2008. I do look forward to reading it monthly as I would like to know when I need to pull out or add money to my investment.


Reply: Due to my commitment to long-term investing, I will never advocate pulling all money out of stocks (or bonds). In other words, even when we enter a bear market, I will still likely suggest a fair amt. (eg 35-40% at a minimum) remain invested in stocks. (Note: This applies for investors with at least Moderate Risk tolerance. If you are a conservative investor, you may not want to keep your allocation to stocks at this level.)

Investing in ETFs Instead of Mutual Funds

Why are the model portfolios comprised of mutual funds and not ETFs? Just asking because of the higher fees associated with mutual funds versus ETFs, at least that's the case with Canadian mutual funds. I would think the same with some US mutual funds. Have you looked into replicating the model portfolios with ETFs? If so, what were your findings?

Reply: Our Model Portfolios emphasize categories of funds (or ETFs) where we believe the best opportunities lie for at least the next year or two. We also recommend our specific fund choices, which are almost always funds. But one's personal choices could differ.

You are correct that ETFs may have lower fees, but usually the amt. of difference is tiny. For ex., Vanguard has a REIT ETF with an expense ratio of 0.13, while their similar fund (VGSIX) has a ratio of 0.26. However, many brokerages where you buy ETFs charge a commission each time you buy or sell an ETF. This could easily make the ETF more expensive if you make many purchase/trades. Even Vanguard, which doesn't charge these commissions, levies a $20 service fee per yr. if your acct. is less than 50K. So, owning ETFs may not always be less expensive.

Also, ETFs tend to be mainly index funds. Since many of our recommendations are for managed funds, it would be hard to find equivalent ETFs.

Owning ETFs vs. funds are a personal decision for each investor. I do not feel any preference one way or another for anyone's choices so long as the investments chosen match the individual's own investment criteria. I do not suspect there would be any difference in performance outcomes.

Using Advisors at Large Brokerages

We currently have funds at Morgan Stanley/Smith Barney under the care of an adviser who has made many bad choices for us. It used to be that when he would call and make a suggestion I would feel like God had spoken but no more! Now when he calls I just hate it and try to make a decision for myself. Unfortunately a couple of times I have passed something by I should have agreed to because I just can't trust him to be looking out for us. I console myself with the belief that he would have sold it way early anyway, like he did Apple.

Lately he has been trying to sell me all these Morgan Stanley bonds. I bought some and then he called some time later trying to sell some more. I kind of feel like Morgan Stanley must be in trouble if they are so desperately trying to unload all these bonds.

I keep hoping to get the knowledge and courage to try this on my own. Do you invest online? What online brokerage do you prefer? I've been reading about them on websites that air complaints, trying to figure out which ones to avoid and which ones are the best.


Reply: My wife (& I, at times) have been in the position you describe with your advisor. If you can't trust an advisor, I think it's time to leave! Of course, if you don't feel you know enough to invest on your own, that puts you in a tough position. I have found that many advisors at large institutions such as Morgan Stanley/Smith Barney don't really know any more than anyone else. Most of the products they push would seem to come from within their co. hierarchy and are being recommended because of the profit they will generate to that co. So they do not necessarily place your interests first, but rather their own.

Mostly, I avoid all such advisors and just invest in funds, or rarely, in stocks, without their advice. Recently, I did transfer over my old 401k to the Vanguard online/phone brokerage. So far, I have been very satisfied, but once again, this is only for people who want to do things on their own - no decision-making help (or advisors cold-calling or pitching things) will be available.

Perhaps with the help of my Newsletter, or other online resources, you will eventually be able to manage your own investments. My wife now does it and she has no regrets she left those type of institutional advisors behind.

Passive Vs. More Active Investing

I am a rather passive investor, only been doing it for 12 years (since I inherited a little), with just a small IRA before that. Often what you write is not all that new to me, but confirms what I have managed to figure out from filtering the overload from elsewhere. I can't say that I actually follow your advice closely, but it helps inform me when I do make minor moves--what to cash out when I make withdrawals, or where to shift to or from when I do that, that last of which is fairly rare.


Reply: Obviously, there is a lot of advice out there. I almost always choose to try to write about topics that aren't covered elsewhere. For example, I devised an approach to selecting outperforming fund categories that examined something like 15 years of prior fund returns and then followed thru over subsequent yrs. to see if the findings held up. (So far, they have.) Most of my approach is counterintuitive so while it may wind up matching what some others say, it is more likely to be quite opposite as what most people, including experts, think.

The newsletter probably isn't highly useful to people who hardly make any changes to their portfolio. Perhaps that is the case for many fund investors, such as yourself. But I believe that if one does a minimum of rebalancing once a yr., they will find that they can do better than if they just tend to leave things as is. Whether that extra little effort should be taken obviously depends on how important earning some extra is, and whether one has the time or interest in doing it.

Diversification With Bonds

I also am retired, about 12 years now, and have been reading your newsletters for about 8 years. I also follow most of your recommendations. I am mostly invested in Vanguard Funds and PIMCO based on your advice. I, like your wife, used to feel I would do better with a diversified stock fund portfolio without bonds. After getting hurt badly after the tech bubble, I am a firm believer in asset diversification. Your articles helped me make the change. You did all the heavy lifting with your specific picks and recommended asset allocation recommendations based on risk tolerance. I have recommended your newsletter to friends who also follow your advice.


Reply: Fortunately, I learned about the advantages of Vanguard bond funds even before I started writing my Newsletters, and then PIMCO funds a little later, and have stuck with them for many years. Vanguard funds have extremely low expenses and with bond funds, expenses are probably the most important determinant of long-term success. I believe that PIMCO probably has among the best managers available, and my sense is that the various mgrs. work as a team to try to best exploit available opportunities within the bond markets.

Discussing Past Performance Vs. Forward-Looking Analysis

I cannot speak for what others like to see or would like to see more of, but personally, the bond section in this May's newsletter is exactly what I am interested in: which categories are changing in your allocation and why. Since I invest in individual stocks and bond ETFs, the explanations are especially important so I can find stocks and ETFs that fit the criteria.

I do think that at times the ratio of past-performance to new information swings heavy to the past performance side. It might be useful to split the newsletter further, into retrospective analysis and prospective analysis. As a long(ish)-term reader, it's not all that necessary for me to see much print space devoted to how the portfolios have done over the past few years. This type of information is more useful in convincing non-readers to start reading. By giving each its own section, it would allow you to better balance the content and let your readers to focus on what they get the most from in your newsletter.


Reply: I do weight the past vs. present heavily in deciding what to write. You are probably right that the emphasis may at times have favored the past vs. what may lie ahead, and that in the future, I should attempt to keep such discussions under separate headers.

I am not at all an ego-manic but I have long felt that the only way to succeed in making my site particularly appealing is to convince people that there is indeed a reason to continue to visit my site. (Note: The reason is that the advice I have given in the past has had, what most would consider, a remarkably good track record in making forecasts that turned out to be correct. Without that knowledge, current Newsletters can easily be dismissed.)

Another reason: I view myself as a researcher, setting out to show through data that the approaches presented in my Newsletter can be analyzed rigorously, and will continue to prove to be a highly useful way of investing. Perhaps someday I may write an entended piece, or even a book, showing how I evolved my 'empirical' approach to investing and its successes over the last 10-12 yrs. But, I agree, that shouldn't be the main focus of my current site.

I'm glad I did the May article mainly as a forward look and that it is more in line with your needs - will try to keep that in mind for future articles.

Alternate Fund Portfolios & Helping Others Find Site

One comment is regarding portfolios. My personal funds/IRA are at Vanguard and 401K funds at TR Price so my interest is in funds from them rather than the whole universe. If you could provide alternate equivalent fund portfolios (Vang, Price, Fidelity) there would be more followers.

Site is not easy to find. It would be good if your site came up by a casual Google search such as 'mutual fund help', 'mutual fund advice', and 'mutual fund investing'. Casual info searchers who do not know about your newsletter and may never come across it if it doesn't pop up on Google. Those people are missing good advice; they could become regular readers. You may be able to add/change keywords to get more search engine " hits" and more future readers.


Reply: The main emphasis on portfolios has always been on fund categories, rather than specific funds or fund families. Obviously, I include quite a few Vanguard funds because these are the ones I myself most frequently invest in. (Note: Also, Vanguard funds have about the lowest expenses.)

To find equivalent funds at T. Rowe Price or Vanguard, you should go to their websites and look for funds in the same category. If you see a fund there and are still not sure of its category, go to and enter the 5 letter fund symbol to check the fund category listed there. I generally need to limit suggested funds due to time and space limits.

In the past, I spent a lot of time trying to improve search engine visibility. It worked to some extent as most new readers do seem to find us doing searches such as mutual fund model portfolios, mutual fund recommendations, and mutual fund research.

An even bigger issue is that far too few other sites provide a link to my site. I have repeatedly tried, but thus far haven't been very successful, in getting other sites to help their readers discover our totally free site. Some of them might be willing to show a link to my site if readers contacted other sites that show mutual fund site links and recommended that their site's readers would benefit from such a link.

Create a Discussion Board

I would suggest that you create a moderated forum for your users so that your readers can post information, ask questions, and have financial topics started by the members. Perhaps you could even participate in some of the strings if your time permits.


Reply: In fact, I tried to do something like that a few yrs ago; problem was that hardly anyone contributed anything. There are already several good sites available for people who want to discuss issues, such as at (which supercedes the now defunct and by clicking on the Discuss tab at

Using Behavioral Finance and an "Unfair" Critique

I am 61 years old and a few years away from retirement. I have an MBA in applied economics from UC Berkeley. I work for a major bank.

I read your articles each month and consider them very valuable. I recommended your newsletter to a colleague of mine.

I used to think that some of the articles were not specific enough in language to be useful, but it seems to me that you have improved the specificity of your advice in recent years.

I read the critique of your newsletter on their website. But I thought their critique was rather unfair. I was not convinced by the CXO critique. (Editors's Note: This site has some useful articles for those who are particularly interested in investment research and how the author rates some of the leading stock market forecasters at his "Gurus" tab; see the following link to read his critique of my site.)

I am skeptical of the ability of the majority of investment advisors to truly help clients. I believe the market is so efficient in terms of fundamental analysis, etc., that behavioral finance (anti-herd investing) is the last bastion for the investor trying to ‘beat the market’.

It seems to me that you have applied, in a practical way, many of the findings from ‘behavioral finance’.


Reply: It is interesting that you mention the CXO site. I recently wrote Steve LeCompte who runs it providing him with my April '11 Newsletter which presents new data that updates and supercedes his analysis. As you may know, I disagreed not with what he found, but in the way he interpreted it. (He insists that because I change my portfolios every 3 mos., that he should judge my success on how the market does over these short periods. But my goal is to help investors on a longer-term basis, not to predict what will happen every 3 mos.!) I am forced to conclude that he is apparently a stubborn person who can't see the forest thru the trees. Perhaps if readers contacted him, he might listen with a little more objectivity and, at least, update his presentation to include my April data. (His email is ). I believe my April results, which clearly show the value of my longer-term stock vs. bond allocations going back to July 2005, speak for themselves,

I do apply findings from psychology and behavioral finance as an important part of my advice. I very much agree that most investors are trying to analyze the same economic data with little room for investors to find "market inefficiencies" to be able to outperform. Besides, trying to correctly predict both upcoming economic data and how it will be reacted to by the markets is, I believe, almost impossible.

Calculating Portfolio Performance & A Different Investment Perspective

Over the years I have been a faithful reader. No, I have not invested as you have suggested but your monthly letter has served as a benchmark for judging my portfolio.

Sometimes though, I have to read your newsletter several times to understand what you're sharing. It's probably a matter of my understanding your perspective.

I do try to track the overall performance of your portfolio and compare it with my approach but, I usually have to extrapolate because I've yet to find a web site that calculates total watch portfolio performance.


Reply: I calculate my model portfolio's performance by hand although one might do it with a spreadsheet program. I just multiply the percentage allocation to each fund by the category's or fund's total return as reported, do that for each fund in the stock portfolio, and then add up the component pieces to get the total return for the portfolio. It takes about 10-15 minutes.

Sorry if you find my articles are not always easy to understand. Is it perhaps because the ideas I'm suggesting are not usually the way people have come to think about investing?

Factors in Setting One's Allocations & 'Unflashy' Website Design

I use several sources of information to aid me in formulating my bond/equity asset allocation. Along with your newsletter, I receive another by David Van Knapp, The Sensible Newsletter, and also follow Jeff Miller on Seeking for his market timing insights. I value all three of these sources and have been increasing my equity exposure over the past couple of years until I am now at about 57% equities and 43% bonds and cash. This ratio is near my upper level of comfort as I'm retiring in less than one year and having more or less reached my financial goals, I do not need to be aggressive. That said, I really enjoy investing and will continue trying to increase my portfolio with a keen eye on risk as I believe one cannot be too well prepared for the future.

Please note that when I use the term "market timing" I am not referring to short-term trading. I am neither a trader nor a by-and-hold-forever investor although my "core" investments are mutual funds and some of them I have held upwards to 20 years. Market timing to me is used as a guide for determining equity exposure with my "normal" bias being 50/50, equity/bond-cash. With a positive timing bias, I'll increase equity exposure in terms of both risk and amount and do the opposite with a negative bias.

Although my investments are across multiple fund families as well as ETFs and individual stocks, my largest concentration is in Vanguard Funds. I like your coverage of Vanguard Funds in your recommended portfolios which again makes your newsletter important to me.

The fact that your newsletter and web page are not the latest web design is of no importance to me. I see no need to spend additional resources to add bells and whistles. I like it as is.


Reply: I think you are quite wise to adjust your asset allocations between stocks and bonds/cash regularly, using several sources to help you in your decision making.

Of course, when I make my newsletter's allocations for "Moderate Risk" investors, the allocation figures I provide might be considerated as being for the "average" investor. Obviously, there are numerous factors that any person should take into consideration when they decide upon their own breakdown, such as what their needs are, age, etc. I totally agree that once an investor feels they already have enough assets to meet their future needs, they thus have little reason to take on the larger risks associated with a relatively high concentration of stocks in their portfolio. The opposite might be true for an investor who might be at least 5 or 10 yrs. from retirement but who has amassed only a fraction of what they likely will need going forward.

Interestingly enough, my own personal portfolio sounds nearly exactly the same as yours. While I still think stocks are mainly the place to be for at least the next year or two, I don't have to shoot for the best likely gains in the years ahead, just relatively moderate ones. If the stock market corrects in the months ahead, I may increase my own exposure to stocks a little more. (This is one of the first times since I began publishing my newsletter that my own portfolio did not totally mesh with my Moderate Risk allocations.)

I'm not sure how many readers care that my site is not as well designed as it was back in late 2007 and '08. Due to a mishap, the good features were wiped out. But since not a single reader has complained about the "unfancy" appearance, I have to conclude that most must share your view that this is not important to them.

I plan to continue publishing the Newsletter so long as a) I enjoy doing it and b) feedback suggests that it is valuable to readers.

Advanced Warning Ahead of a Bear Market

What I like about your letter and research is that you try to give a heads up on trends and recommend particular funds that can help us who are less knowledgeable to monitor our investments and perhaps not ride a market down with out warning.


Reply: Yes, I do try to help investors find the best spots within the market, and in a rising market, it is easy to be satisfied.

A few words, though, about bear markets. Most attempts to predict their onset are usually unsuccessful. I can't say I will be able to do so in the future either. That said, if you have never done so, you might be interested in reading my article from early 2008 where I warned of the one that was to follow. It also contains important advice as to how to prepare for one. (Note: At the present time, we do not see any similarities between the current situation and how stocks acted prior to the two bear markets of the last decade. While unanticipated events, both domestic and international, can always crop up that might be severe enough to lead to a new bear market, we think such a scenario is currently highly unlikely.)

Being at least somewhat prepared for when bad markets might lay ahead is something I agree most investors should try to do, in advance, rather than selling after a bear market is already established.