Stocks Are Looking Wobbly

It is at times like this that some investors begin to wonder if they shouldn't lighten up on some of their stock funds. Stocks are up considerably so far this year but surprisingly little, or even negative, over the last 12 months. Many investors are starting to worry that growth in the world economy is starting to peter out, and perhaps even a recession ahead is not out of the question.

How should an investor react to the many questions swirling about? Will the trade war with China come to a positive resolution? Will economic data turn decidedly negative? Will Donald Trump be impeached, and if so, what will be the effect on the stock market?

Perhaps some readers might expect that a Newsletter such as this can provide them with a blueprint for the future, helping them make decisions about their investments. Unfortunately, my crystal ball seems as cloudy as yours might be right now. As a result, what any given investor should do next, if anything, is impossible for me to definitely answer. So much depends on what your goals are for your investments, how dependent your finances are on their performance, how long from now you anticipate holding them, how anxious you get when stocks are falling, and a whole host of other questions. Since everyone is different, all I can do is tell you what I am doing, and answer in very general terms.

Personally, I have learned from experience that it is usually a mistake to sell when the markets are undergoing a rough period. As a long-term investor, I nearly always have seen that fund prices bounce back, usually sooner than one might expect. So, as long as you don't need your investment assets for a long while, sitting tight would seem to make the most sense. That's why I believe investors' stock market holdings should always have a future-looking time of reference of at least 3 to 5 years. If you can't honestly be committed to that, perhaps you shouldn't have money in the stock market at all.

Can Bonds Continue to Excel?

The last 12 months have been one of the best periods for bonds in a long time as you can see in the second table below. So is it reasonable to expect the same kind of returns going forward?

Such relatively high returns for bonds seem to be a result of several things: falling interest rates making older higher paying bonds more attractive than new bonds; a slowing or even recessionary world economy; investors seeking higher returns than available at banks; foreign investors seeking higher US returns than available in their home countries; and edgy investors seeking to transfer to a safer place for their money than the stock market.

While such conditions can continue, interest rates are already so low that they are unlikely to fall much further. And as interest earned on bonds becomes lower, an important component of a bond fund's return diminishes.

While bond returns may temporarily do better than stock returns during a poor period for stocks, the reverse will likely be true once stocks get their mojo back.

Therefore, while anything is possible in investing, the odds are stacked against a continuation of these great bond returns going forward. In my opinion, investors should not invest much new money in bonds at this stage of the game.

How My Recommended Funds Are Doing

Regular readers of this Newsletter will be aware that starting this past January, I replaced my "Model Portfolios" with a group of those funds that I have had the most success with over many years of investing. While past performance is no guarantee of future results, my long-standing success with these domestic and international funds has convinced me that, in a diversified portfolio, I probably won't do any better in the future by now attempting to pick new funds, nor could I recommend a model portfolio that would do any better.

Now that 2019 is three-quarters over, let's take a look at how these 13 stock funds and 7 bond funds have performed so far this year through Sept 30th, and over the long term, as shown in the tables below.

The eight domestic stock funds shown have averaged a year-to-date return of 18.0 % while the 5 international stock funds 11.4%. When considering the fund category for each of these funds and examining the average return of all other funds these categories, 8 out of the 13 of my recommendations outperformed their category averages. But consistent with my previous analyses, two Vanguard broad market index funds, namely Vanguard Total Stock Market Inv (VTSMX) and Vanguard Developed Markets Index Adm (VTMGX) would have beaten my recommendations over the majority of time periods. Their year-to-date returns are 19.9% and 12.6%, respectively.

For bond funds, my recommended funds averaged a return of 8.3% vs. the 8.6% YTD return for the broad bond market index fund, Vanguard Total Bond Market Inv. (VBMFX). (Note however that inclusion of a municipal bond fund, which should only be included in a non-retirement account, will enhance the 8.3 return shown.) Five out of 7 of the funds beat their fund category averages.

These results should be no surprise to regular readers of my Newsletters. I have been reporting that the broad market indexes for stock funds have been almost impossible to consistently beat in recent years, although not true when going further back. However, for the most part, this has not been the case regarding VBMFX which isn't always a difficult target to beat.

And since the above two stock index funds have been so hard to beat, it's no wonder investors have poured money into them over the last decade.

Given the above, until such time that I feel I can recommend alternate funds that can once again do better than these broad stock index funds, I would be doing readers a disservice to advocate investing in such alternate funds. Of course, I feel my recommendations offer me a greater degree of diversification. They also offer a chance for my portfolio to come out ahead of the indexes if and when conditions might change performance away from the broad index funds.

The logical conclusion is that if one is an investor who is satisfied to earn what the markets return, they should invest primarily in these two broad stock index funds.

But such investing to capture what the broad markets return is not without risk, particularly when the most popular stocks in these two index funds go out of favor. During such times, a portfolio such as reflected in my recommended funds may have the advantage of having more downside protection.

My Recommended Stock Funds

My Recommended Bond Funds

---

To sign up to receive notification of new Newsletter postings, click here.

---

If you find this month's Newsletter helpful, consider pasting this link to it in an email to a friend:
            http://funds-newsletter.com/oct19-newsletter/OCT19.htm