July 2011 Model Portfolios

As discussed in our lead article, there are many highly troubling things one could find to possibly build a case that the stock market has already, and will continue to, lose its footing. Among some of the things we watch, which are not necessarily those things mentioned by others, we see that:

• the major indices are in danger of showing negative returns over the last 6 mos - that is, positive momentum is threatening to break down. (For this July Newsletter, I don't have the luxury, due to prior commitments of time, of waiting until the end of June to see if stocks end the first half of the year in negative territory. If they do, I would take that indeed as a reason for caution. However, our guess is that this will not happen.)
• the S&P 500 is up around 95% (thru 6-16) from its intraday low on March 6, 2009 (other indexes are up well over 100%) - such a huge move suggests caution if for no other reason than to be sure of locking in some profits.
• far more individual stocks are at 52 week lows vs 52 week highs. Before the stock market's current slide, the highs were well ahead of the lows. This suggests that stock investors are bailing out of these stocks, or at least taking profits, to a significant degree. Additionally, stocks are showing a relatively big degree of volatility both intraday and from one day to the next, often a sign that there is no longer a continuation of the previous trend which in this case was positive.
• there appears to be more uncertainty than usual with many major concerns that could easily affect the stock market going on and on with no apparent resolution. Stock market investors are said to hate nothing more than they hate uncertainty.

However, my fund category tracking research still shows virtually all categories as either HOLDs or BUYs (see the chart below). The S&P 500 Index itself has a price/earnings (PE) ratio of about 14 which shows that if anything, it is slightly undervalued (average PE down through the years is about 15).

Stocks vs. Bonds vs. Cash

While our positive long-term outlook for stocks remains unchanged, with long term defined as one year or greater, we feel that over relatively shorter periods, the economic backdrop has created a greater risk of not as smooth sailing ahead as compared to existing conditions at the time of our last Model Portfolios in April. We plan on using any 5-10% correction(s) in stocks to bolster stock holdings by a few percent. (Note: As of 6-16, the S&P 500 is down approximately 7% from its Apr. 29, '11 high; by adding a relatively small investment into stocks, one still might see a reduced overall allocation to stocks as a result of the 7% fall.)

For Moderate Risk Investors

For Aggressive Risk Investors

For Conservative Investors

Specific Fund Category Allocations and Current BUY Signals

Stocks

Bonds

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Prior Model Portfolio Performance Updates (New as of July 15, 2011)

Over the Last 12 Months

Stock Portfolio

Last July (2010), we recommended a 60% position in stocks for Moderate Risk investors and 80% for Aggressive Risk investors. Such stock heavy allocations would have proved highly rewarding for investors since the S&P 500 Index, what we consider a benchmark for stock investors, returned 30.7% over the following year. Our benchmark for bonds, the Vanguard Total Bond Market Fund, by contrast, returned a mere 3.6%. And any money held in a money market fund would have returned hardly more than 0%; eg. Vanguard's Prime Money Market Fund returned less than 0.10%, or 1/10th of 1%.

If one had allocated their stock portfolio to the specific categories and percentages we recommended and held the portfolio unchanged, they would have a gain of 32%, outperforming the Index by 1.3%.

Better still, had one selected our specifically recommended funds, the portfolio would have returned 34.4%, beating the S&P by 3.7%.

Bond Portfolio

Our recommended Model Bond Portfolio did far better than our benchmark. An investor who held our recommended categories in the proportions we allocated would have earned a return of 7.0%. This nearly double the benchmark return of 3.6%.

Our specific bond fund picks were somewhat lower than the performance of the category averages. This was due to the rare underperformance of both the Pimco Total Return Fund and Vanguard Total Bond Market Fund, which comprised 60% of our specific fund choices.

Three and Five Year Stock Portfolio Performances

Had one held on to our Stock Model Portfolio issued July '08 without making any of our recommended allocation changes since then, they would have earned an annualized +1.5%, underperforming the S&P 500 Index which returned an annualized 3.3% by -1.8%. This would have been largely due to the fact that our 32.5% allocation to international stock funds at that time would have pulled down performance. On the positive side, we called for only a relatively small overall 45% allocation to stocks for Moderate Risk investors vs. a relatively high 35% allocation to bonds. Since bonds proved the better investment over the last 3 years with our bond benchmark returning 6.3% annualized, this would have helped to improve overall portfolio return.

Had one held our Stock Model Portfolio unchanged since July '06, our portfolio would have underperformed slightly. The S&P itself returned an apathetic 2.9% annualized while our portfolio would have returned 2.5.

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