Mutual Fund Research Newsletter http://funds-newsletter.com Feb. 2008 Tom Madell, PhD, Publisher Copyright 2008 =================================================================================== Feedback from readers leads us to realize that at least some people, if not many, are often left unsure what to do after we publish a new Model Portfolio at the beginning of each calendar quarter. Does this mean, for instance, we are urging unloading up everything we recommended in the last or subsequent Portfolios in favor of the latest Portfolio? The answer is a resounding no! To the contrary, we believe that in most instances, no action may be required. We issue new Model Portfolios to reflect what we currently feel are the optimum mix of investments. These will be of most use for people either just starting a portfolio or those who were planning to rebalance in the near future. It would go against our view of investing for the longer term to suggest that investors should continually change their initial investments without having held their funds for at least a year, and usually better still, for multi-year periods. We hope that no one has the impression that unless one is a trader, he/she can't profit from the advice that our Newsletter provides! We've said it time and again: Our Newsletters are for people who choose to focus on doing well over the long term. It follows that whenever we make a recommendation for either a category or a specific fund within that category in our Model Portfolios, we do so with the expectation of good performance as measured a few years hence. We are not suggesting that any given category or fund we recommend is necessarily going to excel immediately, that is, within less than a year, although in the past they certainly have, on average, outperformed the market averages after one year. In fact, our data show that the BEST results for a given quarterly Portfolio, on average, occur for holding periods of at least 3 to 5 years, as opposed to holding for shorter periods. Thus, irrespective of changes we might make in our Model Portfolios on a quarterly basis, one can usually expect it to outperform the most when a given Model is held over these 3 to 5 year periods. In practical terms then, you should not feel it necessary to sell anything just because we issue a new Model Portfolio with new allocations or newly recommended funds in order to continue to profit from our advice. The previous Portfolio, and in fact, any Portfolio issued within the last few years continues as highly likely to be a very good Portfolio for you to own for at least 5 years from the date of its publication. But for those investors who choose to try to profit even more from our research, here is the way we recommend: When we specifically elaborate on our view that a given category or fund is likely to underperform, is overvalued, or is otherwise dangerous, you may want to gradually change to the new allocation or specific fund our research now favors. Making such changes gradually is usually, in our view, a much safer way to procede then making big, sudden moves into or out of a fund or category. Here are some examples illustrating both the long-term usefulness of two seemingly "out-of date" Model Portfolios as well as how an investor might do even better by making adjustments to the Portfolio once we specifically elaborate our view that a category (or fund) is no longer likely to outperform. As you will see, most of what we said THREE yrs ago still remains valid, and therefore, much of the Portfolio, especially on the stock side, can be safely retained. The picture is somewhat different for the recommendations we gave our readers FIVE years ago. Lots of things have significantly changed since then, things which our Newsletters specifically discussed. A brief summary of the changed conditions is shown. =================================================================================== 3 Years Ago (Jan 2005) see at http://home.att.net/~funds-newsletter/1st_qtr_05.txt NOTE: The 3 yr annualized return for the stock funds in this Portfolio was +10.91% vs 8.6 for the S&P 500 Index =================================================================================== What "Although STOCKS have been doing well since March 2003, we feel it We Said potentially dangerous to assume that the approximate 45% increase in the S&P 500 since then will continue. The same can be especially said for the even more outsized gains in small-cap blend and value, mid-cap value, Energy, and REIT funds." Were We Right? Since then, the S&P 500 has returned only approximately 7%; small-cap blend about 5.25; small-cap value about 4; mid-cap value about 7.5; REITs about 9.25. Energy has been the exception at about 24% (all figures mentioned are 3 yr. annualized returns thru 1-30-08 unless otherwise indicated). Current Analysis: We haven't changed our opinion on any of these categories. We still consider the Energy category a hold for a small portion of your portfolio. --- What We Said: "There are few areas within the US market that are undervalued ... (The current exception appears to be the GROWTH category.)" Were We Of the 9 major categories, the range of performance has been Right? from about 4 to about 8.65%, with the highest performer being mid-cap GROWTH. Current Analysis: We still believe that the growth category, mainly Large Cap, is the best place to be. --- What We said: "Are now expecting CASH to outperform most segments of the BOND market." Were We Right? 3 yr return on Vanguard Prime MM 4.4%; for all taxable bond funds about 3.75 (data thru 12-31-07). Current Analysis: We recently became much more favorable toward high quality short-term and intermediate term bonds as opposed to cash while telling our readers to completely avoid high yield bonds. --- What We Said: "One category of bond funds we are still thinking will yield potentially good returns is INTERNATIONAL BONDS." Were We Right? Returned 4.29 vs. 3.75 for all taxable bond funds. Current Analysis: Still pretty positive on this category. ============================================================================= 5 Years Ago (Jan 2003) See http://home.att.net/~funds-newsletter/letter72.htm NOTE: The 5 yr ann. return for the stock funds in this Portfolio was 18.75% vs 12.8 for the S&P 500 Index ============================================================================= What We said: CASH allocation for most investors 0% Were We Right? 5 year return on Vanguard Prime Money Market 2.99% (thru 12-31-07). Current Analysis: We suggest a bigger cash position, mainly in the event there may be upcoming buying opportunities in stocks and/or bonds. --- What We said: "SMALL caps currently remain somewhat better positioned than LARGE caps Were We Right? Returns for Small Blend 14.53; Returns for Large Blend 11.69 Current Analysis: A complete reversal; that is, for quite a while we have been much more favorable about large caps than small caps. --- What We Said: "We continue to recommend the ... categories of EMERGING markets and PACIFIC/Asia minus Japan. Were We Right? Returns for Emerging markets 32.32; Returns for Pacific/Asia minus Japan 29.16 Current Analysis: While still positive, we are much more cautious about these 2 categories. --- What We said: "[We recommend} INTERNATIONAL BONDS and some categories of corporate bonds, especially HIGH YIELD bonds. If however your bond investments do NOT include one or both of these categories, we would recommend a smaller allocation to bonds since we do not expect particularly good results outside of these categories. Were We Right? Returns for international Bonds 6.59; Returns for High Yield 8.63; Returns for most other categories roughly ranging between 3 and 6% Current Analysis: As stated above, we recently became much more favorable toward high quality SHORT-TERM and INTERMEDIATE-TERM BONDS while telling our readers to completely avoid high yield bonds. In summary, while you may be able to enhance your results by changing your investments every quarter to exactly follow our new Model Portfolios, you should not feel that you need to in order to get good results. (See http://http://funds-newsletter.home.att.net/performance.htm to review our performance for the above 2 Portfolios, and all other Model Portfolios.) But there are limits on just how long an unchanged Portfolio can continue to outperform. We will continue to menton when a certain category or specific fund appears likely to underperform or outperform. And we now post an "Alerts" link on our site. In fact, some of our own best multi-year outperformances have come as a result of just such Newsletter discussions. For example, we first recommended the REIT (real estate) category over 8 years ago and thus helped readers who followed our advice to achieve some really outstanding returns. But, in more recent years, we correctly advised of the reduced and now even negative returns that were to follow.