Copyright 2013 Tom Madell, PhD, Publisher
Oct. 2013. Published Sept. 13, 2013

Model Portfolios for October 2013

By Tom Madell

The recommendations contained in this Newsletter will become effective beginning Oct. 1. Prior to then, the recommendations made in the July 2013 Newsletter remain in effect.

Overall Allocations to Stocks, Bonds, and Cash

For Moderate Risk Investors

Asset Current (Last Qtr.)
Stocks 55% (65%)
Bonds 25 (25)
Cash 20 (10)

For Aggressive Risk Investors

Asset Current (Last Qtr.)
Stocks 70% (80%)
Bonds 10 (10)
Cash 20 (10)

For Conservative Investors

Asset Current (Last Qtr.)
Stocks 25% (37.5%)
Bonds 35 (32.5)
Cash 40 (30)

In the Sept. Newsletter, I pointed out that my research indicated that most categories of stock funds seemed on the verge of becoming overvalued. While this hasn't happened yet (as of Sept. 13), it appears a near certainty over the next month or two. While funds can remain overvalued for quite a while, perhaps even a year or so, the odds favor that overvalued funds will underperform investor expectations on a longer-term basis, perhaps even for periods approximating five years.

In keeping with that analysis, I feel it makes sense to now recommend that investors consider reducing their equity exposure. Our friends at recently reported that US stocks are currently experiencing one of their best 4 and a half years ever. While some investors might view this as almost a no-brainer time to be invested, we, on the other hand, would emphasize that the stock market isn't a perpetual cash machine. Rather, the market acts like a living, breathing organism (which, in a sense, it is since it is merely a reflection of the behavior of many people pooled together); like all beings, it will experience good periods as well as bad. While no one can predict the exact "tipping points," investors sitting on big profits tend to hit the sell button more quickly than usual when their fears are aroused at what, under different circumstances, would be perceived as issues that might otherwise be considered relatively surmountable. (Note: If this is the first issue of this Newsletter that you have ever read, or if you just happened to have missed the Sept. issue, I recommend you take the time to read my admonitions to some investors against acting before making any decisions; see the above link.)

It should be remembered too that while most people you know might consider themselves as buy and hold investors, not willing to pull out at every upheaval encountered, the vast majority of the buying and selling that takes place every day in the market occurs as a result of trading by big institutional players. So, just because it might not seem worthwhile to sell from your perspective, once the "big boys" start to do so, they far outweigh the perhaps more sensible non-action of the typical "average" investor. As a result, they can pull the market down (or up) a great deal ahead of any action by the typical investor.

The 10% reduction in allocation to stocks I am recommending on average might seem relatively small, but could amount to a significant amount the larger one's portfolio. Suppose your portfolio is currently 50K and you have my prior 65% recommended amount of that in stocks, or $32,500. Then to get to my newly recommended level of 55% stocks, you would have to move about 5K out of stocks. If your portfolio is considerably larger, say 500K, it would require moving about 50K out.

Since my recommendations are made with multi-year results in mind, while you might miss out on some continued gains in stocks after selling, I believe that in the longer run, say over the next 3 to 5 years, you should be better off as a result of selling than not having done so. But since the recommendations you will see in this Newsletter are designed for taking advantage of everchanging opportunities, our lower recommended allocation to stocks may not last as long as that implies; we will reevaluate at the time that stocks no longer appear overvalued.

Of course, it is not out of the question that upcoming Model Portfolios will recommend trimming one's stock allocation even more. But, hopefully, although not guaranteed, this will avoid coming after stocks have already dropped abruptly, resulting in selling at considerably lower prices. Rather, we may mainly recommend lower allocations if stocks do not "correct" to more reasonable levels, or in fact, keep going higher.

As you can see above, we do not have much confidence that over the next several years, bonds will provide much in the way of rewards for investors. In fact, things have already turned so sour for bond investors that over the last 3 years, in spite of all the buying of bonds by the Federal Reserve, most bond funds have only averaged returns in the area of about 3% annualized. Since interest rates are unlikely to go down, and a lot more likely to go up, this means that the drought on bond fund returns will likely continue. And of course, it is highly unlikely that cash will return anything worthwhile in the foreseeable future either. Therefore, a focus on careful selection of stock funds may still make more sense than a wholesale retreat to the sidelines, even though we feel we could be on the precipice of a hefty correction that could easily hurt all types of stock funds.

Investors can also possibly moderate the chance of suffering as much as the overall market might drop by focusing more than usual on managed funds as opposed to index funds or ETFs. Managed funds can maintain or even raise their cash position in response to market conditions while indexes or EFTs tend to always be nearly fully invested. While this is no guarantee of coming out ahead, since the manager may choose to go to cash at the wrong times, it is more likely to prove to be a superior approach in an overvalued market. Percent currently allocated to cash for a given fund can viewed at the site.

Selling some stock while we are still immersed in one of the best periods for stocks ever may be an extremely hard pill to swallow, as there could be considerably more gains yet to follow. Given this, I realize that many investors will choose not to act at this time. Rather than selling down a full 10% in the weeks ahead, many investors also might want to consider a more gradual approach, such as selling in steps of perhaps 2 to 3% each of your stock position over the course of the next several months. It is also usually wise to restrict most or all of one's selling to tax-deferred accounts so as to eliminate the adverse impact of capital gains taxes. As always, only time will tell what will have proven to have been the wisest course of action.

Model Stock Fund Portfolio

Model Stock Fund Portfolio

Our Specific
Fund Recommendations

Fund Category

 Recommended Category
Weighting Now 
(vs Last Qtr.)
-Fidelity Low Priced Stock (FLPSX)
 (See Note 1)


    10% (12.5%)

-Tweedy Brown Global Value (TBGVX) (C & M)
-Vanguard Internat. Growth (VWIGX) (M)
-Vanguard Pacific Index (VPACX) (A)
-Oakmark International I (OAKIX) (A)
 (See Notes 2, 3, 4, and 5)


    32.5 (27.5)

-Vanguard 500 Index (VFINX)

 Large Blend 

    15 (15)

-Vanguard Growth  Index (VIGRX)
-Fidelity Contra  (FCNTX)
  Large Growth
    10 (10)

-Vanguard US Value


    17.5 (20)

 Financials ETF (VFH)


    5 (10)

-Vanguard Energy ETF (VDE)


      5 (0)

-Vanguard Consumer Staples ETF (VDC)


      5 (0)


  1. FLPSX currently has a 35% international position; we think this should pay off as international stocks are not as overpriced as US stocks. If you want a fund that avoids such exposure, substitute Vanguard Extended Mkt. Idx. (VEXMX).
  2. Stock or bond funds with (C) are recommended for Conservative investors; (M) Moderate; (A) Aggressive.
  3. ETFs (exchange traded funds) of the same category can be substituted for any of the above 3 index funds; e.g. Vanguard MSCI Pacific ETF (VPL) can be substituted for VPACX.
  4. We favor TBGVX over VWIGX right now because TBGVX hedges currency exposure, eliminating loses due to the stronger trending dollar since mid-2011 which can be expected to continue, especially as quantitative easing is phased out and US interest rates outpace those from Germany, Britain, and Japan.
  5. OAKIX is a new recommendation with an outstanding track record; it should continue to do well especially if Europe and Japan turn out to be the two best performing international regions, which we expect, since it currently has about 89% of its assets in those 2 regions; it also avoids exposure to underperforming emerging markets.

Model Bond Fund Portfolio

There are no recommended changes from the July portfolio.

Model Bond Fund Portfolio

Our Specific
Fund Recommendations
Fund Category Recommended Weighting
Now (vs Last Qtr.)
-PIMCO Total Return Instit (PTTRX)
 (High minimum investm. outside 401k), or
-Harbor Bond Fund (HABDX) (1K min.)


    37.5% (37.5%)

-PIMCO Real Return (PRRIX)
 (High minimum investm. outside 401k), or
-Harbor Real Return (HARRX) (1K min.)


    7.5 (10)

-Vanguard Intermed. Term Tax-Ex. (VWITX)
 (see Note)

    12.5 (12.5)

-Loomis Sayles Retail


    12.5 (12.5)

-Fidelity High Income (SPHIX)

  High Yield 

    15 (15)

-PIMCO For Bond (USD-Hedged) Adm (PFRAX)
-T Rowe Price Emerging Mkts Bond (PREMX) (A)


    15 (12.5)

Note: Select a fund, if available, that has your own state's bonds for double-tax exemption.

Performance Update Coming

Our Model Portfolios from 1, 3, and 5 years ago have been performing quite well. We will publish an update to this Newsletter that includes performance data around the middle of Oct.


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