Copyright 2015 Tom Madell, PhD, Publisher
Oct 2015 Update. Published Oct 13, 2015

Hold Our Model Portfolios Long-Term for Best Results

By Tom Madell

Each calendar quarter, I report on how followers of my prior Model Stock and Bond Portfolios would have done if they continuously held each Portfolio I recommended from one, three, and five years ago.

To get data on this, I look at published short-term returns over the prior 12 months, and longer- term returns over the prior 3 and 5 years. I then look at how an overall stock or portfolio made up of these funds in the allocated proportions I recommended actually performed.

Invariably, what I find is that while the recommendations do not always show good results for short periods of up to one year, most of the time, they turn out to significantly have helped investors over longer periods of several years.

This pattern holds true for the most recent returns ended Sept. 30, 2015. Below are the results along with some comments. At the conclusion, we give our takeaway on what these results should indicate to investors.

How well our recommendations did need to be measured against the returns a) that might have been achieve through an appropriately weighted combination of selected index funds, or, b) how well the fund investors did investing in the average domestic or International stock funds, or a domestic bond index as well as the average taxable bond fund, all as reported for the same periods by the Wall Street Journal.

Note: It should be remembered that getting an "average" portfolio return isn't necessarily bad since average returns, such as realized together in a portfolio over the last 5 years, were so outstanding. What is unfortunate is getting a poor portfolio return that is significantly below average. But, obviously, getting a better than average return is even better. Most experts would agree this is extremely hard to do, especially on a consistent basis.

Recommendations Made One Year Ago (viewable here)

For Moderate Risk investors, we recommended a 50% overall allocation to stocks, 25% to bonds, and 25% to cash. As you will see below, the relatively low allocation to stocks, and relatively high ones to bonds and cash, would have helped the typical investor since typical returns for stocks were unpleasantly negative which was less likely for bonds and cash.

Stock Portfolio

By most measures, our Model Stock Portfolio performed poorly. If one computes each of our recommended fund's contribution to the Portfolio using the percent allocation of the Portfolio we recommended, the end result all together is a minus 6.7% return.

The return one would have gotten using the three index funds that serve as benchmarks for our Portfolio, namely VTSMX, VTMGX, and VEIEX, in the percents of 65, 30, and 5% that we estimate closely approximates a typical moderate risk index portfolio of stocks respectively, was minus 3.7%.

It should be noted that both our Portfolio and the benchmark result suffered the greatest damage at the hands of International funds. In the case of our Portfolio, 3 of the 5 International funds we recommended were identified as mainly for Aggressive investors. Had one chosen not to invest in these but only in the two we denoted as for Moderate (or Conservative) investors, their results would have nearly equaled the benchmark results.

Our sector fund selections also did extremely poorly, except for utilities. As we have been pointing out lately, investors who are not especially Aggressive may want to minimize or even eliminate such investments.

Bond Portfolio

Our Model Bond Portfolio returned a slightly positive 0.8% over the period. We customarily compare that return to that of the AGG ETF which returned +3.0%. But, according to the the Wall Street Journal, the average taxable bond fund returned a much worse minus 1.7%.

Our poorest performing fund was LSBRX; we advised it could do poorly if stocks performed poorly, which is what actually happened.

Recommendations Made Three Years Ago (viewable here)

At the time of these recommendations, we were quite bullish. For Moderate Risk investors, we recommended a 67.5% overall allocation to stocks, 27.5% to bonds, and only 5% to cash. We recommended an extremely bullish stance for Aggressive Risk investors with comparable allocations of 85%, 10%, and 5%. Since stocks did quite well over the following three years, such a high allocation would have been highly advantageous to investors. Bonds, as you will see below, returned only a small amount.

Stock Portfolio

The Oct. 2012 Model Portfolio, when held over the following 3 years, performed extremely well for the first two years with some erosion for funds during the 3rd year. However, in spite of that, the Portfolio still return an average annualized return of 10.9%. This can be compared to the performance of our benchmark index fund portfolio that returned 9.6%.

Once again, international funds, for which we had a relatively low allocation of 22.5%, dragged down returns. Fortunately, all three of our International stock fund recommendations did better than the average International stock fund which returned just 4.7% annualized. Within the ongoing bull market environment, our Aggressive designated funds, including sector funds, outperformed our Moderate and Conservative designated funds.

Bond Portfolio

Our Model Bond Portfolio returned a somewhat positive 1.7%, the same as our bond benchmark AGG. These results were slightly better than the average bond fund which returned 1.4%.

Our two poorest performing funds, both Inflation protected accounting for 15% of the Portfolio, were the only funds with negative returns out of 11 funds we recommended.

Recommendations Made Five Years Ago (viewable here)

Five years ago, we were moderately bullish (62.5% in stocks), although extremely bullish for Aggressive investors (85% in stocks). As you know, the last 5 years have been one of the most bullish periods ever for stocks, except for the last 12 months of the period.

At the same time, we were moderately bullish for bonds at 35% for Moderate Risk Investors, with only 2.5% recommended for cash. As you will see below, bonds did somewhat well over the period and certainly much better than cash.

Stock Portfolio

Had an investor held our recommended Portfolio, with the percentages we suggested, the annualized return over the last 5 years would have been 11.1%. This compares to a return of 9.6% for our benchmark index portfolio.

Identically to the above two Portfolios, International funds trailed badly. According to the Wall Street Journal, the average International fund returned 3.5% ann. while the average diversified US stock fund returned 10.7%. Six out of 7 of our US stock funds beat this latter return. Our largest non-International fund allocation at 22.5%, VIGRX, had the best return at 14.2% ann.

Bond Portfolio

Our Model Bond Portfolio returned 3.4% annualized. This return was better than for AGG at 3.0% and for the average taxable bond fund at 3.1.

Our best performing funds were a long-term corporate bond fund and a high yield fund. Our only negative return came from an international bond fund; the returns on all other 9 funds were above 2% annualized.


The Takeaway

The frequently recurring message that is imparted by these follow-up reports on the subsequent performance of prior Model Portfolios is this:

Who hasn't bought into a recommended or promising fund only to be disappointed by its initial performance. It happens to me quite a bit. But that, in most cases, shouldn't be what investing is all about.

While some funds, especially bond funds it seems, are capable of being slow, steady risers (or at least able to pull in the dividends you expect), many stock funds are highly unpredictable in the short-term. And if you invested in a fund because it had a seemingly low price with the potential to grow considerably, we all are often too early in making that assessment.

Even after a year's time, one should usually not be discouraged that such a fund hasn't risen. If the fund is truly worth its designation as a good, and usually, an undervalued holding, one must give it time. The reason: Perhaps the majority of investors are mainly focusing on hot stocks/funds that have already moved. So they continue to pump up past winners, all but ignoring the stocks/funds with the most forward-looking potential.

But, in most cases, your best prospects lie with these latter funds. I usually recommend giving a fund a minimum of two to three years to make its move. If you own a handful of funds, it makes it easier to tolerate the one or two funds that are underachieving as of yet.

I hope that you find that very few of my recommendations turn out to be true lemons. Based on past Model Portfolios, it would appear that most of my recommendations do well eventually. They all won't do better than the main index funds, but on the other hand, quite a few will, and in addition, will give you even more diversification.


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