Mutual Funds Research Newsletter
Copyright 2010 Tom Madell, PhD, Publisher
May 2010

"Alerts" Have Foretold the Gains and Likely Still Do

By Tom Madell, PhD

Regular readers of my Newsletter are aware that over the last few years I have published, and will continue to publish, a small number of Alerts. The purpose of these Alerts is to present investment recommendations that I feel are of particular importance and timeliness, sometimes between my monthly Newsletters. I started these Alerts nearly 3 years ago as part of my website renovations.

While our emphasis has always been on recommending portfolios for moderately long-term investors, our Alerts reflect the fact that there are occasional times when investment category prices may become sufficiently misaligned that some changes are likely to be worthwhile in spite of all the uncertainties that such predictions, and acting upon them, might entail. With this end in mind, beginning nearly two years ago, we did a considerable amount of quantitative, empirical research to identify when categories of funds might have transitioned into being strong BUYs or SELLs, vs. those that were still solid enough to be considered HOLDs. We reported in detail on this research in several of our Newsletters.

We have restored the most recent copy of our Alerts page to our website. (Note: None of the links you will see on the Alerts page are currently accessible.) It briefly shows the five Alerts that were posted on our site, with the last posted on Nov. 12, 2009 (and emailed to those who were signed up as subscribers to the site). These Alerts can now be regarded the "meat and potatoes" of our investment advice, at least with regard to stock funds.

We do not advocate constantly trading in and out of funds, and so we do not post these Alert calls very frequently. However, we do think that one or two strategic investment moves executed as infrequently as every 6 months or even perhaps just once a year or so can make a big difference - that of achieving average investment results through a "hold through thick and thin approach" vs. the significant possibility of achieving significantly better ones.

Of course, it is one thing to merely predict good results vs. presenting evidence, once some time has elapsed, that the prior predictions have indeed been substantiated. So, with that in mind, we present the results shown below which provide further confirmation that our ongoing research, which started around 1999 when our site began, can provide good guideposts as to when it makes sense to buy or sell funds as opposed to merely holding. But beyond just showing past results, the data below will hopefully help provide further guidance for what one might still consider doing going forward.

Overview of How Our Alerts Have Done

The following table summarizes how all 9 "basic" categories of US stock funds have performed during the last nearly two and a half years by looking at fund prices (Net Asset Values) at the time we issued our Alerts. The fund prices shown are for Vanguard Index funds which are often used as a benchmark or proxy for average performance of a fund category.

More specific data on each of our Alerts will follow.

US Fund Category Net Asset Values
Using Vanguard Index Fund Prices
At SELL, HOLD, and BUY Dates We Recommended
Fund Category
(Vanguard Fund Symbol)
i.e. SELL
Large Growth (VIGRX) None 19.37 25.61 29.54
Large Blend (VLACX) 23.98 15.08 19.99 22.25
Large Value (VIVAX) 23.52 14.22 18.35 20.36
Midcap Growth (VMGIX) 22.15 12.79 18.05 21.59
Midcap Blend (VIMSX) 18.21 10.95 15.61 18.77
Midcap Value (VMVIX) 18.68 11.67 16.78 20.25
Small Growth (VISGX) 17.48 (See
11.08 19.76
Small Blend (NAESX) 28.58 18.45 25.92 32.69
Small Value (VISVX) 13.65 8.96 12.46 15.72

The most important thing to take away from this table is that when we labeled a category as unattractive, all prices turned out to have been relatively high. As you look from left to right, you see that in every case, once we alerted a category as attractive enough to HOLD, prices proceeded to go up; likewise, when we alerted as to a BUY.

For greater perspective, it should be recalled that back at the beginning of 2008, when we issued our "unattractive" alerts, the devastating bear market that lay ahead was not yet on most peoples' radar screens. But soon stocks were tumbling big time. And by late Jan. '09, stocks seemed to be in a free fall - there was talk of a "second great depression." Many people were selling their stocks in early 2009, something our research had suggested might have been done far earlier.

Note: We formally introduced our BUY, SELL, and HOLD classifications in our Aug. 2008 Newsletter. Had the classification system been in existence as of Jan. '08 or earlier, it would have labeled the majority these categories as SELLs even going back to the beginning of Nov. 2007. (In Nov. '07, all the above fund prices were considerably higher than by the latter part of Jan. '08; selling at that earlier date would have been an excellent strategic move.)

Our HOLD signals in the early part of '09, only about one month ahead of the start of the Mar. '09 upturn, proved to be extremely well timed as reflected in the very large price increases shown.

Likewise, our BUY Alerts, issued on several different dates (see below), have turned out to also have been at attractively low prices, especially our earliest one for Small Growth, which has proven to be extremely successful. All 9 categories prices are up since we issued our BUY signals.

In sum, during last two and a half years that we have issued our Alerts, the signals have clearly proven to their worth. That is, they recommended avoiding or SELLing a fund category when the price appeared likely to drop, BUYing when the price was low and likely to rise considerably going forward, and HOLDing when category is still likely to do reasonably well on a relatively long-term basis.

Our Overall BUY Alert from Nov. 12, 2009

This Alert covered all the above 9 US fund categories plus the diversified International Stock funds category (that is, excluding region-specific international funds or emerging market funds). It should be noted that for two of the categories, Small Growth and Large Growth, BUY signals were already in effect as of earlier dates (see below). Thus, for these latter categories, the BUY signals were re-affirmations of previous Alerts.

This BUY signal might be thought of as having sounding an "all clear" to investors who were considering adding to their stock investments, but were perhaps reticent to do so, worrying that the stock market and the global economic recovery might be too tenuous to risk it.

Importantly, this BUY signal for each of the 10 categories remains in effect. While we are only approaching 6 mos. since the 8 new BUY signals were given, the table shown above presents very good news for those who did add to their stock position beginning that date. And since, historically, BUY signals occur only relatively rarely using our classification system (for example, no BUY signals at all were generated for the 8 yrs. between Apr. 1995 and Mar. 2003), the fact that BUY signals are so "plentiful" now suggest that good times still lie ahead for long-term investors.

While our signals are intended for predicting relatively long-term category performance, and there are obviously no guarantees that the markets won't undo the current gains at a later date, putting more money to work in stocks from Nov 12th on appears to have been a pretty good re-entry point. Except for a 3 week period beginning around mid-January '10, all but one of the ten basic fund categories we recommended then have been moving continuously up.

The one exception has been diversified international funds which are up, but only modestly. (Worldwide, while stock gains have still continued since Nov. 12, these gains have been neutralized by a weakening Euro vs. the dollar, at least partially a result of the continuing European debt crisis. The resulting currency loss for US investors has seriously dented the performance of diversified international funds, which usually hold a considerable amount of European equities.)

Our Large Cap Growth BUY Alert from Oct. 8, 2009

Just a little more than a month before our overall stock BUY signal (above), our data showed that the Large Cap Growth category (which we had already thought was a pretty good place to be and therefore a HOLD) was now in an exceptionally good position for future gains.

This Oct. 8th date has thus far proved to be a good entry point: Between that date and now (4-29), not quite 7 mos. later, the approximate total return for the Vanguard Growth Index has been about 16%.

Our Small Cap Growth BUY Alert from Jan. 31, 2009

This BUY Alert at the time the overall stock market was deeply mired in red ink has, thus far, been one of our most successful recommendations in the history of our Newsletter. Here is how we did by investing in Small Growth over the subsequent 15 months (thru 4-29):

Vanguard Small Cap Growth Index (VISGX): Up 79%

This gain has been, for the most part, significantly better than available than investing in the remaining 9 categories.

Our High Yield Bond Sell/Reduce Holdings Alert from July, 2007

Our only Alert for bond funds was issued on July 27, 2007 for the High Yield Bond category. In the year and a half that followed, this category suffered extreme losses.

For example, Net Asset Values in the Vanguard High Yield Corporate Fund (VWEHX), a more conservative high yield fund than most, went from 5.82 on that date to as low as 3.90 in Dec., 2008. While the dividends generated during this period were quite high, they made up for only a fraction of the losses suffered as a result of the price drop.

While we never issued any more favorable Alerts regarding this category, our Jan. 2010 Newsletter suggested taking a small position in High Yield, which we subsequently raised in April. Thus far this year, the price of the Vanguard fund has gone from 5.47 to 5.62, accompanied by a dividend of over 7%.

For those interested in more details on how our BUY, SELL, and HOLD classifications were formulated, you may want to read our Aug. 2008 article on Also see our Dec. 2009 article for further data.

To receive email notification of future Alerts, as well as sign up as a subscriber to our site, email me at, using "free subscription" as the Subject.

Note: Steve Shefler and his column are on vacation this month. They will return next month.