In our last issue, I requested feedback to help define the future directions of this
Newsletter. Although I can't reply directly to each of the many readers who sent comments, I would
like to thank each of you who responded: All of your comments were highly
appreciated. (Note: It is not too late to send in any new feedback for those who
haven't done so yet, or even additional comments for those who have, using our above email address.)
Some common threads were apparent, confirming their importance to readers. So, then, what
I have learned that can be applied to our future directions? Here is a brief summary:
Overall, people who answered overwhelmingly like the information we provide. They
seem to particularly like our asset allocation guidance and recommendations of specific
funds and the reasons for these choices.
Not many negative comments were received although there were numerous suggestions
as to additional areas we could cover, or at least present in more depth. Here are some of each:
Should the small investor make your portfolio changes, or, just someone with lots of investments? And
what are the tax implications of making portfolio changes?
Perhaps using target maturity or balanced funds could simplify things and achieve similar results.
Include more ETFs and sector analysis.
Don't spend so much time on discussing your past performance.
More on issues for retired investors such as protecting capital/managing risks.
bottom of page 4)
-When You Should Consider Making Changes to Your Portfolio (below)
-Are Bond Funds Likely to See Negative Returns for the Remainder of the Year? (page 5, top)
-A Disappointing Note About
Morningstar.com (page 5, bottom)
When You Should Consider Making Changes to Your Portfolio
By Tom Madell
While some investors rarely make changes to their portfolio, it appears that most readers of this
Newsletter continue to look for opportunities to either improve their returns, or perhaps, to shift out
of one or more funds if it appears that trouble may lie ahead or simply because their own objectives for the
fund have been achieved.
In my quarterly Model Portfolios, I try to emphasize such opportunities and potential potholes.
My recommendations are regularly adjusted reflecting such considerations. But how do I
arrive at these occasional decisions, and who, if anybody, might consider following my lead?
In this article, I will try to summarize eight general considerations, starting on the next page, I use in arriving at these
kind of decisions. Perhaps some of these ideas will help others in making their own decisions.
A Little Background
Down through the 15+ years that I have been publishing my Model Portfolios and Newsletter articles, I have usually
tried to explain some of the reasoning that has gone into my thinking, granted though not always explicitly enough.
But, for sure, even when my reasons were clearly spelled out, I likely failed to convince a sizeable proportion
of readers. I don't believe it was probably because my arguments weren't persuasive. Rather, it was
more likely because of some other reasons.
(continued on page 2
(When You Should Consider Making Changes to Your Portfolio,
continued from page 1)
In reality, convincing people of anything is hard to do. And, in my opinion, when it's
about investing, it's about as hard as it gets.
When venturing into a realm that tends to be short on hard facts and rife with opinions often firmly held in place
by our predispositions regarding money, it's little wonder it's hard to find a common ground. In my own case,
I must admit I personally read many articles almost on a daily basis telling me to do X, Y, or Z
with my investments. How often do I follow such suggestions? Honestly, very infrequently.
So perhaps there has to
be some kind of "special vibe" or "meeting of the minds" between someone such as myself and a reader for any such carry over to take
place. Certainly, not everyone will agree with either my overall perspective, or with any specific recommendation
and thus feel it necessary to consider following it. Of course, this will always
be true whoever makes any recommendation and whatever is recommended.
Some Guiding Principles for Managing One's Investments
Since virtually no one will be familiar with over 15 years of posts to my site, it seems to make sense
to try to present simply, and even "de-mystify" if you will,
some of the main portfolio management principles that have previously
been advocated here. Certainly one of my goals over these years
has not been to suggest that anyone needs to rely on me, but rather, to provide insights into how anyone can apply
learned over more than 30 years of studying, investing, and researching funds, if they care to do so.
The best way to do this is to summarize some of the considerations I deem the most important in
dealing with your investments over time in order to get the best results. These suggestions are designed to help
enable you to achieve your long-term objectives while still allowing you to sleep at night knowing you
are not going too far out on a limb with any one "surefire," but perhaps, ultimately unwise investment idea.
Hopefully, you will not find most of these guiding principles obvious. Frankly, I hate to rehash investment
ideas that you can find all the time in any number of widely available articles, books, or investment blogs.
1. "Buy and Hold" is a great option, but not necessarily the best option, for long-term investors.
Buy and Hold is pretty much the antithesis of managing your portfolio. It can be highly effective
but is best implemented under the following circumstances:
a. You truly don't have the time, nor the interest, in making new decisions about your investments, nor
do you want to give your portfolio over to someone else to manage for you; or, maybe you are just very convinced
that Buy and Hold has been proven to be better than making changes midstream.
b. Your portfolio, as currently constructed, includes good, well-researched funds that are not
dependent on only one type of market environment to be worth sticking to; otherwise, you may regret merely holding on
when that environment inevitably changes.
c. In the midst of the time span you intend to remain constant, you can fully accept the fact that your investments
may not do as well as you had expected, or could even cause you to "lose" money. (Successful Buy and Hold investors
realize that such "losses" are not necessarily losses at all if one sticks it out since most fund investments
recover upon further holding.)
d. Even if c. is true, you should also be the type of person that can be absolutely resolute in your conviction
to stick with your prior choices
no matter what befalls the markets. If you cannot do this, you may wind up "buckling under" and getting out of some or
all of your investments in the midst of a severe drop, locking in lowered returns.
And even if a. is true, if conditions b., c., and d., are not true,
you might have been better off making some at least occasional strategic changes.
2. It is important to recognize that, in virtually all cases, there are limits to how well a given fund investment,
or asset category
will do over periods of time, and how it will do relative to other possible choices.
In managing a portfolio, no investment, or class of investments,
will be the leader indefinitely. While some types of
investment returns, such as, for example, for stocks in general right now, may appear likely to continue to excel,
be expected to remain this way forever. In fact, it is far more likely that extremely high returns will return to more "normal,"
What this means is this: Observed excessively high returns will eventually return to a normal value
by subsequently performing poorly, typically until a more
"average" return is restored (or even lower as performance tends to "overcorrect").
Expressed as a simple formula, past great returns plus upcoming poor returns
should average out to long-term normal returns. The formula should also work to eventually help restore currently poorly
returning assets to their prior long-term averages.
The implication is that, while the timing is admittedly extremely difficult to get correct, investors can benefit
from pro-actively moving from excessively high returning investments to underperforming ones, and vice versa.
3. Related to 2., I believe it important to be willing to settle for sustained good returns when they become
This is another way of saying investors should try to avoid becoming greedy. Sure, possible returns of 10 to 15% or more a year would seem to
be hard to pass up. But, usually, investors should be willing to do just that.
I define "good returns" as
anything above average. And how would I define "average?" Average returns for stocks should be considered in the 10%
range. Average for bonds would be highly dependent on whether interest rates have been trending up or down, since falling
rates are good for bonds, and rising rates are bad; if rates
are trending down, it might be 6% or so; if trending up, it might be as little as 3%.
Upon earning above average returns
for a number of years running, it makes sense to capture some of those returns by seeking out either less
currently above average performing categories of funds, or, less risk in cash. By "settling" for good returns, you are
reducing your risk, essential for prudently managing your portfolio.
4. Look for performance trends as well as potential reversals.
Many people might think that investments are totally unpredictable from year to
year. Therefore, they tend to accept staying put in most or all of their investments. However, such a belief seems
to me to be clearly only a partial truth. Although true that sometimes almost anything can happen comparing one year to the next,
when one looks at multi-year periods, it is most often the case that a given investment class keeps on performing in
the same way, either above average, below average, or close to average ("average" defined as above).
But friendly long-lived trends can, and often do, become the investor's enemy. Can anyone know when this will happen?
Although literally thousands of articles are written on this subject
every year, accurately forecasting when a severe change of
direction is close at hand is next to impossible. However, by prudently taking some of one's profits (see 3.), one can
guarantee coming out ahead for a portion of one's investments no matter what happens next.
By following performance trends, you can see when a given category of investments has started to reverse its prior performance,
although you can never be sure this change of direction will last significantly long enough to justify making a portfolio
change. Some good rules of thumb might be a drop of 5 to 10%, or better yet, an extended period of subpar performance lasting at least
6 months, but more reliably, lasting for 12 months or more.
5. Unfortunately, there are very few economic indicators, if any, that are consistently useful in helping
you decide when to alter your investments.
Although typically used as the basis for making portfolio decisions,
in reality, many closely watched measures of the economy are difficult to predict, or even to interpret as to
their ramifications, and turn out to be not
as closely related to investment performance as one might expect. Further,
many of these releases are reported "too late." This means that once they are reported and confirmed by subsequent
reports, your investments may have already moved
considerably, down or up, preventing you from getting much benefit if you haven't already adjusted your portfolio ahead
of the data.
might be the evolving direction of interest rates. As suggested above, as rates trend up, more and more, you should be
let go of some of your bond funds, even if it means exchanging into cash and getting very little or no return as a result.
Rising interest rates do not appear to have as immediate an effect on overall stock market performance as they do with bonds, especially
when rates are starting from a low base, such as would be the case now.
Eventually, however, rising rates will cause most stock funds to suffer.
But it is also
important to be aware of the particular kinds of bond and stock funds that will be hurt less by rising rates. For bond funds,
corporate bond funds should stand up better than government bond funds, and short-term funds better than long-term ones.
For stock funds, there is no hard and fast rule, but eventually, you want to be light on particularly aggressive funds, the
ones that have gone up the most prior to this point.
6. There are very few actual occasions which offer above average, or even exceptional, opportunities for investors, so
when these do occur, one who acts may be able to achieve exceptional results.
Consistent, regularly occurring investing, such as through scheduled payroll
deductions to a retirement account, is as good a way to
add to your investments as any. However, perhaps once every 5 to 10 years, stocks (or bonds) go completely out of favor
due to severe underperformance, or even gut wrenching bear markets. Investors should recognize that these times are
indeed likely the best times to add extra amounts to affected investments, but only in moderation with a long-term perspective.
Why the best? For the same reason that, if you have a choice, it is best to buy a house when overall prices are low.
But as you should be aware, more people buy
an investment when prices are high because it gives them the reassurance they are buying a winning, uptrending asset. But when an
asset is prone to highly changeable prices (plus or minus 50%, for example), unlike say purchasing an automobile which
might only show much smaller variations year over year, it makes the most
sense to aim to buy when prices are at the lower end of the spectrum, rather than the high end.
While this might seem obvious, years
of strong investment performance (much like we have with stocks right now) are typically hard to resist. Likewise, investing
after an asset has been severely battered is not something that most investors, other than perhaps some traders,
are going to feel comfortable with. But patient investors who are able to shake off this adverse psychology are likely to come out well ahead.
7. Avoid negatively "pre-judging" any investment category.
Some people have a strong "bias" against bond funds, while others the
same regarding stocks. (The same applies to particular types of bonds or stock funds, such as high yield bonds or certain sector
stock funds.) Some of their reasons might
be: "This type of investment has never worked out well for me when I tried it," or, "bond
returns will never do as well as stock returns." (However, in some cases, people may correctly size up their
risk tolerance causing them to rule out certain investments as appropriate for them.)
In truth, each type of investment does well some of the time, besting
other categories of investments. Pre-judgments tend to
preclude the possibility of taking advantage of these winning periods which
often last for years at a time. And, since not all categories of either stocks or bonds are always going to perform
equally well, one should not be quick to rule out a particular type of stock or bond fund just because they may be unfamiliar with it,
so long as its expense cost is reasonable and it has not exhibited (or has the potential) for extreme price movements.
8. Be aware of which funds are highly volatile and only invest in such funds with your "eyes wide open."
A fund that can go
up 40-50% in a single year can easily go down an equal amount in a subsequent year. Unless you consider yourself
an aggressive investor willing to take big chances in order to earn occasional big rewards,
most of your fund choices should be steady Eddies, not funds that tend to top the charts.
In conclusion, I would urge investors to weigh their position on each of the above
propositions. Being mostly a passive, Buy and Hold investor can certainly have its advantages. But if you agree with me
that at least some, if not all, of the above principles have validity, you will want to manage your portfolio
with them in mind.
Perhaps most importantly, I urge investors not accept the cynical and now prevailing view that monkeys throwing darts at a list of funds
(or anyone by just investing
in index funds) can usually do as
well as a disciplined and knowledgeable investor when it comes to picking stocks and/or funds. Various strategies can
enhance performance, and on the other side of the coin, cushion losses.
If you do decide mainly to come down on the side I have outlined above but
don't have the inclination to manage all this yourself, how can you recognize the necessary expertise when seeking out help? The
best indicator is a consistent (although not nearly a 100% perfect) track record that is not a matter of conjecture,
but is readily apparent by looking at verifiable prior results.
(Feedback from Our Readers and What It Reveals,
continued from page 1)
Why such a large allocation to cash, and specific recommendations as to where to put cash.
What to do if a recommendation tanks, such as happened for Energy recently? Sell, hold, or perhaps buy more?
Send out more Alerts.
I can now say as a result of the extremely positive feedback regarding what we have been aiming to accomplish,
I can give every assurance that we will definitely continue publishing these Newsletters well into the future.
Starting with this issue, and continuing in subsequent
Newsletters, I will attempt to focus on what readers indicated they like most. Further, I hope to comment on,
and more completely address, the various suggestions made.
Tom Madell, Publisher
Are Bond Funds Likely to See Negative Returns for the Remainder of the Year?
In our Jan. Model Bond Portfolio
for Moderate Risk investors, we recommended maintaining a 25%
position of one's overall stock/bond portfolio in bonds, the same percentage we recommended for cash.
Since cash held in money markets or perhaps CDs promises to return hardly anything
(let's estimate from 1/4%, to say, 1% after interest rates likely increase this year), this equality
of bonds and cash allocations means we are not currently (nor were we last year) highly positively predisposed toward bonds.
While it is still likely to be the case that some types of bond funds will do significantly
better than cash, overall, it appears we have already seen a topping out of bonds in early February.
From comments gleaned recently from Fed officials, including Fed Chairwoman Yellen, it
appeared likely in January that the balance was tipping more and more toward the beginning of a period of slowly
increasing rates starting this summer. Then, on Feb. 18th, the Fed released a statement perhaps designed to confuse
everyone, or perhaps just reflecting their own indecision. But the message seems clear: Higher interest rates are coming, although
the Fed doesn't want to pre-commit to exactly which month this will happen: early summer, late summer, or perhaps
early this Fall.
It should be realized, however, that the bond market (as well as the stock market) typically moves ahead
of actual events in anticipation of what is perceived as highly likely. Therefore, it should really make
little difference when "liftoff" comes, only that it is coming quite soon.
Nearly all signs point to a US economy that is showing enough strength that rates hovering
just about 0% are no longer justified. True, conditions elsewhere in the world are anything
but strong with even some whiffs of deflation, which is just the opposite of where central
banks want things to go. But that shouldn't mean that the US is on the doorstep of the same
kind of trouble.
While the rest of the world should gradually outgrow its problems, the US economy should easily remain
ahead of the pack. This means that while, low, or even actually negative, interest can prevail elsewhere,
we are perhaps a year or two ahead in the so-called interest rate cycle in which interest rates begin
to rise as the economy strengthens.
As many readers will recognize, the US has also led the world in keeping interest rates
artificially low after the economic crisis of more than a half decade ago. The purpose of
the Fed's actions was to ensure growth, presumably during an extended period when the economy needed all the
help it could get. Such extreme stimulation likely did help the economy pull out of its doldrums to some degree
and proved particularly a boom to stocks which thrive on low interest rates. It also helped move investors into bonds given hardly any return on
money markets/CDs and
assurance there was little chance of any surprise rate increases to hurt bond prices.
But Fed officials are now seeing that the need for such extreme stimulation of the economy has
clearly past. While they are still a little worried about low inflation, Yellen has made clear that
the majority view is it likely will be short-term in nature. While no one can be sure, even gas prices, one of the
currently most visible signs of low inflation, appear to have reached bottom recently and are again starting to rise.
Assuming market-determined interest rates do start rising in the months ahead and bond prices fall in anticipation, bond fund investors could be in for
some rough sledding. Already returns have been lackluster over the past few months and we expect
that trend to continue.
Investors should be best served by favoring shorter maturity bonds or even cash in the event
that bond fund returns possibly go negative. Of course, another advantage of holding cash instead
of bonds is that it gives one a pool of assets available to begin investing again more aggressively
in bonds (or stocks) once conditions become more favorable. In the case of bonds, we do not
expect that to be the case for quite a while.
A Disappointing Note About Morningstar.com
At least some of my current subscribers have indicated they discovered my site from my Newsletter articles I previously published
on morningstar.com. My articles there have been numerous, covering a multitude of investment topics, and always accepted going back nearly 3 years.
And my articles were frequently listed as among the most popular out of dozens published each week on
Morningstar's site among those submitted by contributors outside of Morningstar. (Morningstar themselves list the 5 most popular such
articles each week).
Recently, a Morningstar editor indicated that although they appreciated my articles, they won't be publishing "these types of pieces"
any more. Although they claim they will be publishing from a smaller number of outside contributors, there
appears to be no noticeable difference in this number since. (For example, on Feb. 12th alone, they published 13 such articles.)
(continued next page)
While one can only guess the real reason, it appears that they may have figured that my articles were siphoning off
potential readers from their own mutual fund newsletter. That newsletter charges its subscribers $125 a year.
We continue to
reach readers on several other highly popular sites, including seekingalpha.com, and regularly at www.mutualfundobserver.com
as its readers there typically call attention to
my latest articles by sharing a link for their readers to my site.
We harbor no resentment towards Morningstar and appreciate the recognition they have given our articles over the last several
years. In fact, my articles are still available at the site by entering "Madell" in the search area on any of their pages. But by
precluding future articles, they are, in our opinion, depriving their site readers of using the contributor portion
of their site to get "well-argued views on the market, the economy, and investment strategies" (their words).
But, apparently in this case, their business interest seems to have come ahead of providing useful perspectives to their readers.
I will continue to try to find
ways to reach investors such as you because I believe wholeheartedly in the value of the information I am providing,
all without the need or desire to inject making a profit into the picture. And many readers seem to agree.
We now have nearly 2000 regular subscribers and many
more who drop by on occasion.
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but crucial, investment Alerts,
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