Mutual Fund Research Newsletter
http://funds-newsletter.com
Copyright 2009 Tom Madell, PhD, Publisher
Oct. 2009
Published Sept. 30, 2009. Updated: Oct. 5, 2009

Contents:

-New Model Portfolios
-How Our Recommendations From 1, 3, and 5 Years Ago Have Been Doing

---------------------------

New Model Portfolios

By Tom Madell, PhD

To us, little appears to have changed since our last allocations were made in July. While stocks may appear riskier on a short-term basis as a result of the huge gains since March, our mission has nothing to do with steering you out or into the market based on short-term considerations. So, when we suggest keeping your portfolio allocations nearly the same as where you were in July, it is because our longer term outlook remains nearly the same. We still slightly favor stock funds over bond funds looking out over the next several years and we still would keep the amount allocated to cash as pretty minimal. (The main advantage of any money kept in cash would be to use any 10 to 15% correction in stocks as a buying opportunity.) However, acknowledging the wariness out there for stocks, we have recommended moving a small amount away from stocks, but only for conservative investors.

That said, for those investors who are willing to adjust their portfolios on a regular quarterly basis, you may need to reduce your stock holdings somewhat from last quarter in order to maintain the percentages in each asset class we recommend. This is because since stocks have done so well over the last quarter, you will have incurred an increase in your stock position vs bonds and cash since July even if you have not made any new stock purchases.

Overall Asset Class Allocations

For Moderate Risk Investors

Asset

Current (Last Qtr.)

Stocks

50% (50%)

Bonds

45 (45)

Cash

5 (5)

For Aggressive Risk Investors

Asset

Current (Last Qtr.)

Stocks

65% (65%)

Bonds

30 (30)

Cash

5 (5)

For Conservative Investors

Asset

Current (Last Qtr.)

Stocks

20% (25%)

Bonds

65 (65)

Cash

15 (10)

Specific Category Allocations

Even with regard to which types of funds we think will be best to own over the next few years, we are not recommending major changes. However, we do have a few new ideas to suggest.

Stocks

We continue to favor the entire realm of growth-oriented funds over Value-oriented ones. Therefore, we are adding a small position in the Mid-Cap Growth area, along with our existing Large and Small Growth positions

Favored Categories

Recommended % of
Stock Portfolio
(last qtr's %)

Our Current
Recommended Fund

Large Growth

27.5% (27.5%)

Vanguard Growth Idx

Large Blend

22.5 (25)

Vang. Large-Cap Idx

Mid-Cap Growth

5 (0)

Vang. Mid-Cap Growth (VMGRX)

Small Growth

7.5 (7.5)

Vanguard Small Cap
Growth Index

Small Blend

5 (5)

Vanguard Small Cap Index

International Large Blend

25 (25)

Vanguard Internat. Gr.

Long-Short

7.5 (10)

Hussman Strategic Growth

Bonds

Which category of bond funds you own, as well as the specific fund you are able to choose (eg., perhaps some of our recommendations are not available within your 401(k) program), remain crucial factors in how likely you will do well.

Like in our July Bond Portfolio, and going back to our earliest Portfolio in Jan. 2000) we continue to recommend getting your hands on the Pimco Total Return Fund (or one of its several variants, including the Harbor Institutional Bond Fund with the fund symbol HABDX, as mentioned recently in our site's "get an answer" section). But choosing this fund really means that you will be selecting a diversified portfolio of bonds since the fund is free to cross category lines to search for the best opportunities within the fixed-income sphere. (Another good, but likely little less rewarding fund is the Vang. Tot. Bond Market Idx, which we use as our bond benchmark.) We think that which areas of the bond market will be a good investment can change fairly rapidly; therefore, if you invest in a fund specializing in only one type of bond, you can easily miss out, or worse, get hurt. Being invested in either of these funds will help prevent that from happening.

We are now recommending a position in Intermediate Term Treasuries. This is a change from July when we favored GNMA funds for the government bond category. You will still get exposure to GNMAs in the above two diversified funds. The rest of our choices remain similar.

Finally, we suggest waiting a little further before investing more than a percent or two of a bond portfolio in High Yield bond category.

Favored Categories

Recommended % of
Bond Portfolio
(last qtr's %)

Our Current
Recommended Fund

Interm Term Govt

20% (25%)

Vang. Interm Treas

Diversified

35 (30)

PIMCO Total Return

Intermediate Term Muni Bonds

17.5 (17.5)

Vang. Interm. Term Tax-Exempt

Inflation

7.5 (10)

Vang. Infl Protected

International

10 (7.5)

T Rowe Price Intl Bond

Short-Term Non-Govt

10 (10)

Vang. ST Investment Gr.

How Our Recommendations From 1, 3, and 5 Years Ago Have Been Doing

Our web site data will be updated within the next week to give precise information on how our Model Stock Portfolios have been doing since we began publishing them in Jan. 2000. However, we are pleased to report that, once again, over the last 1, 3, and 5 years, a buy-and-hold investment in each of these Portfolios would have beaten the S&P 500 Index.

--One year ago, in our Oct. 2008 Newsletter, we recommended a portfolio for Moderate Risk investors that was only 42.5% in stock funds. Almost an equal amount was allocated to our Bond Portfolio, while the remaining 17.5% was in cash.

Since the S&P 500 Index returned -6.9% over the following 12 mos., while our bond benchmark, the Vanguard Total Bond Market Index, returned +10.5%, you can see that while most people with larger allocations to stocks did relatively poorly over the following 12 mos., our overall portfolio performance remained in positive territory. Our cash position was also helpful in preventing overall Portfolio losses.

Six out of 7 of our specific choices of stock fund categories beat the S&P 500 Index, with the greatest degree of outperformance coming from our relatively large International Stock position.

--Three years ago, we recommended a 52.5% position in stocks, with the remainder in bonds (27.5%) and cash (20%). Once again the positive returns for the latter two classes came close to cancelling out the negative returns of stocks. As a result, long-term holders of our Portfolio would have had hardly any losses as compared to the annualized 5.4% losses (per year) for the S&P 500 Index. Five out of 6 of our recommended stock categories beat the Index.

--Finally, 5 years ago we recommended an allocation of 60% stocks, 35% bonds, and 5% cash. Over the entire period, the results for the S&P 500 Index have been only +1.0% annualized. But 6 out of 7 of our then recommended stock categories have done better, roughly by a few percentage points per year each. During this period, our 35% bond recommendation benchmark did approximately 4% per year better than stocks. Thus, while our overall Portfolio 5 year results are only tepid at best for Moderate Risk investors, we got through the period in decent shape, far better than many investors.

Our bond fund category recommendations have been somewhat disappointing, tending to underperform our benchmark to a small degree. But, our specific, recommended choices of which funds within bond fund categories to invest in have generally outperformed, so that if you were able to choose them, you would have frequently outperformed the benchmark. For example, our selection of the PIMCO Total Return funds over the years, as well as mainly Vanguard bond funds, have shown, we believe, that you need some of the best bond fund managers and low fund fees in order to really do well as a bond investor. If you do not have these funds available within a given investment account, then it might make sense to try to invest in them in an outside account, eg., if not available within your retirement plan, invest in them by opening a taxable account.