Copyright 2014 Tom Madell, PhD, Publisher
Oct./Nov. 2014 Update. Published Oct 25, 2014
By Tom Madell
Either for those who are first coming across my Newsletter, or for regular subscribers, this brief update gives information on how the main recommendations in my Newsletter, my quarterly Stock and Bond Model Portfolios, have been doing.
These Portfolios are selected to try to give investors an updated snapshot of a diversified mix of "best bet" funds and/or ETFs. We believe each Portfolio should have the best chance of coming out ahead of benchmarks while limiting possible risks which can lead to lagging Portfolio performance.
While Portfolios are adjusted every quarter, our intent is to recommend funds that should outperform over longer-term periods of at a minimum one year, but more likely, over several years.
I am happy to report that as of the end of the 3rd Quarter (Sept 2014), all of our recommended Portfolios from 1, 3, and 5 years ago did outperform their benchmarks and therefore produced very good results. A summary of these results is shown below.
The Oct. '13 Model Stock Portfolio returned 12.6% when held over an entire year. (Click here to see the Portfolio.) This contrasts to the 12.2% return for our diversified benchmark consisting of a weighting of 65% DJ U.S. Total Stock index, 30% MSCI EAFE Index (developed non-US international markets), plus 5% of the average return of Emerging Markets funds (from Wall Street Journal data). At that time, we recommended that Moderate Risk Investors have 55% of their portfolio in stocks; figures for Aggressive Risk Investors were 70% and 25% for Conservative Investors.
Note: We compute our Model Portfolio returns by including all funds' total returns using the percent allocation to each fund in the Portfolio we recommended. If we recommended more than one fund in a given fund category (such as, for example, Vanguard Growth Index and Fidelity Contra under the Large Growth category for 10% percent of the Portfolio), we counted each fund as contributing 5% to the computed result.
Comments: Our Large Value fund, Vanguard US Value (VUVLX), was our best performing fund and also our highest single fund allocation. Our restrained 10% position in the Mid/Small-Cap area was beneficial since this category, on average, underperformed Large Cap funds. Our long-time favorite international funds, Tweedy Brown Global Value (TBGVX) and Vanguard Internat. Growth (VWIGX), did better than the average international fund, and in fact, TBGVX was at or near the top vs. other international funds.
The Oct. '11 Model Stock Portfolio would have returned 20.1% per year (annualized) when held over the 3 year period. This compares to the 18.5% return for our internationally diversified benchmark. We recommended that Moderate Risk Investors have 60% of their portfolio in stocks; figures for Aggressive Risk Investors were 75% and 30% for Conservative Investors.
Comments: Three years ago we were still quite bullish on stocks prospects. In fact, we specifically alerted BUYing 8 funds. Of these 6 out of 8 had annualized returns of 20% or more over the period while 2 had returns between 16 and 20%. While the average U.S. diversified stock fund returned 19.9% annualized (data from the Wall Street Journal), our 11 US stock funds returned an average 21.5% annualized. While the average international stock fund returned 12.1% annualized, our 3 international stock funds returned an average 14.4% annualized.
The Oct. '09 Model Stock Portfolio would have returned 12.6% per year (annualized) when held over the entire 5 year period. This contrasts to the 11.5% return for our internationally diversified benchmark. Five years ago, with many people still hesistant to hold on to stocks, we recommended a 50% allocation to stocks for Moderate Risk investors, 65% for Aggressive Risk investors, and 20% for Conservative Investors.
Comments: Our most highly favored domestic categories were Large Growth followed by Large Blend. Five years later, our two recommended funds in those categories, Vanguard Growth Idx (VIGRX) and Vang. Large-Cap Idx (VLACX), returned 16.5% and 15.6% annualized, respectively. This compares to 14.7% and 14.2% for the average fund in these categories respectively. Our only recommended international fund at that time, Vanguard Internat. Growth (VWIGX), did well relative to others in its category (8.4% annualized vs. an average of 6.5% for all international funds), but still was a drag on overall Portfolio performance. Note: International stock funds were severe underperformers vs. US stocks for the above one and three year periods as well.
The Oct. '13 Model Bond Portfolio returned 5.4% when held over an entire year using the percent allocation to each fund in the Portfolio we recommended. This compares to the 4.0% return for the typically used benchmark, the Barclays Aggregate Bond Index which is available as the ETF symbolized AGG.
Comments: We did not expect particularly good performance from bonds and we were essentially correct, with the average taxable bond fund returning only 3.6%. However, our choices did better than the Barclays benchmark, except for our "Pimco" funds and their Harbor fund substitutes. Our muni bond fund, Vanguard Intermed. Term Tax-Ex. (VWITX) and our international bond fund, PIMCO Foreign Bond (USD-Hedged) Adm (PRFAX), were standouts returning 9.2% and 8.8%, respectively. (Note: We adjusted the muni fund's return assuming an investor is in the 28% Federal tax bracket since a given return is worth more when no taxes reduce it.)
The Oct. '11 Model Bond Portfolio would have returned 4.6% per year (annualized) when held over the 3 year period. This was close to double the 2.4% return on the bond benchmark.
Comments: At the time, we were moderately positive on bonds, but with some reservations. Our best portfolio return contributions came from investing in high-yield bonds (Vang. High Yield, VWEHX) and the multisector fund, Loomis Sayles, Bond Retail (LSBRX), and from our large commitment to PIMCO Total Return Instit (PTTRX) and its Harbor substitute, Harbor Bond Fund (HABDX).
The Oct. '09 Model Bond Portfolio would have returned 4.3% per year (annualized) when held over the entire 5 year period. This managed to slightly beat out the bond benchmark which returned 4.1%.
Comments: Once again, we were helped by our large allocations to Pimco Total Return and to muni bonds (VWITX). We did not benefit from our International Bond fund choice, T. Rowe Price Intl. Bond (RPIBX) which return only 1.7% annualized. (We have since found what we believe is a much better choice, PIMCO Foreign Bond (USD-Hedged) Adm (PRFAX) ).
To summarize: Results from proportionally holding the stock and bond funds we recommended (or close substitutes if our exact fund recommendation is not available to you) over the last five years have beaten the returns of diversified benchmarks. Very long-term readers will find that this has typically been true throughout our 15 year Portfolio history.
We publish this Newsletter free as a public service to help you attempt to achieve these better results. (Of course, better results can never be guaranteed since the financial markets tend to inherently confound even the best of predictions).
We do not profit financially in any way from providing this Newsletter, although I, myself, as someone who compiles and publishes this material, have found my own investment performance does better the more closely I follow the recommendations I provide.
Subscribers are reminded that aside from this update, there will be no new full Newsletter published in November, but rather in December.
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