Copyright 2013 Tom Madell, PhD, Publisher
Mid-Oct. 2013 Update. Published Oct. 12, 2013
By Tom Madell
Perhaps only very long-term readers of my Newsletters are aware of the fact that I have maintained a bullish, and sometimes a very bullish, stance with regard to stock funds since mid-2009. I do not change my recommended allocations a whole lot very often and when I do, the changes are almost always gradual.
But after nearly 4 1/2 years of being quite bullish, I am now looking at data that suggest I should view things somewhat differently. I have already alluded to the reasons for this in my Sept. and Oct. Newsletters. Readers who are new to my articles can go to these articles for detailed explanations.
Since I wrote these articles 4 to 6 weeks ago, the overall stock market has become even more overvalued, in my opinion. In fact, every category of domestic stock fund, from Large Growth thru Small Value, and about half of all sector fund categories appear highly susceptible to a reversal of fortunes in the period ahead. International funds too are overvalued although funds mainly invested in Europe and Japan are less so. (See complete list of overvalued funds below)
Although I can't state with any preciseness when such reversals of strong, positive results over the last 5 years will happen, my research suggests that it is likely to happen some time within the next 12 months, and probably more likely to be sooner than later.
Therefore, in accordance with the suggestions I made in the Sept. and Oct. articles, I am issuing an "Alert." (Our last Alert was made on July 20th 2011 and recommended that investors BUY almost all categories of stock funds; investors who acted on this Alert would have enjoyed the huge run-up in most stock fund prices since then.)
The current Alert is not intended to urge investors to throw caution to the wind and dump most or all of their stock funds. Rather, it's more of a "heads up" to caution investors that stocks cannot continue rising at their current pace indefinitely. Of course, it would be great if I am wrong in that no one would have to suffer from a period of extended mediocre or even zero or negative returns. But my research suggests that now might be the time to move some of your invested allocation to stocks elsewhere, perhaps to cash or into bonds (except High Yield Bonds, and only if you are drastically underallocated to bonds as compared to my Oct. recommendations.)
My recommended allocations remain as presented in the Oct. Newsletter, which again suggests this is not a recommendation for a wholesale exiting from stocks. Rather, it suggests that investors consider reducing their allocations to the levels shown in the October Model Portfolios, if they haven't done so already. In fact, the 55% allocation to stocks for Moderate Risk investors recommended there (but much less for Conservative Risk Investors) still is hardly bearish. And investors too should remember that this Alert suggests that there will likely be much better buying opportunities down the road.
I have come to realize that successful management of one's investments is never going to entail being able to get the absolute best results by acting in accordance with somebody's (or your own) prescriptions. Rather, successful management is merely a matter of degree in reaching a more realistic objective as judged by your eventual answer to the following question: Were some of your actions helpful and enable you to either avoid losses or, on the other hand, achieve better gains than you otherwise would have? Here, then, are the details of the Alert:
REDUCE (or SELL) Investments from the Following Fund Categories:
International (with the exception of funds primarily invested in Europe and/or Japan)
The Following Bond Fund Category Is Also Overvalued
High Yield Bonds
How would an investor have done if they followed the recommendations from our prior Model Portfolios?
Long-time readers are probably aware that our stock recommendations have on average, going back to 2000, beaten the S&P 500 index when one looks at how they did 1, 3, and 5 years following their publication. Over the last half decade or so, however, we have not had as good results as we did prior to 2008. As previously explained in the July '13 Newsletter, having an allocation to the underperforming international stock fund category accounted for the shortfall.
The following tables show how the shown Model Portfolios would have performed if merely held over the following 1, 3, and 5 years. Of course, these results actually put us at a disadvantage because we rarely merely hold a portfolio without making some changes. But as a point of comparison, and for buy and hold investors, they illustrate that our fund choices would have done quite well even if held unchanged for long periods.
The returns shown in the following tables assume that the investor included all of the funds we recommended; if we recommended several funds from the same category, the percentage allocated to each was divided up equally between the funds in that category.
Our Portfolio's Return: 22.1%
S&P 500 Index's Return: 19.3%
Portfolio Outperformance: +2.8%
Note: The S&P 500 Index is not available to investors; index funds that attempt to replicate it come with charges that reduce its return.
Our Portfolio's Return: -1.0%
Benchmark Idx (AGG): -1.7%
Portfolio Outperformance: +0.7%
Our Portfolio's Return: 15.0%
S&P 500 Index's Return: 16.3%
Portfolio Outperformance: -1.3%
Our Portfolio's Return: 3.9%
Benchmark Idx (AGG): 2.9%
Portfolio Outperformance: +1.0%
Our Portfolio's Return: 9.6%
S&P 500 Index's Return: 10.0%
Portfolio Outperformance: -0.4%
Our Portfolio's Return: 5.6%
Benchmark Idx (AGG): 5.4%
Portfolio Outperformance: +0.2%
The next Newsletter will be available by the beginning of Nov. It will be a combined Nov./Dec edition.
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