Until May came along, it looked like the Model Mutual Fund Portfolio might have an exceptionally good year.
But the May and June weakness hit hard, and the Model Mutual Fund Portfolio is down 5.0% year–to-date (as of June 30, 2010). While it is small comfort, we are outperforming our benchmark, the Vanguard Total Stock Market Index Fund (VTSMX), which is down 6.0%.
All of the funds except one are up over the last year, but they are all down significantly over the past quarter.The funds pretty much reflect the direction of the general stock market as well as its volatility.
Accounting for Higher Risk
We are still searching for variations on our previous rules that would reflect the greater risk that seems inherent in the stock market of the last 20 years but not commit us to funds that shine only in bear markets. In choosing funds, our criteria generally compare funds to other funds, but Rule 4 (as shown in the Model Fund Selection Rules) is an absolute: The fund cannot have had a three-year period with negative returns. Virtually all funds now have a three-year period with negative returns and the market as a whole has had five-year and 10-year periods of negative returns as well. A bad bear market, particularly one that crosses virtually every market sector, is very difficult to protect against in a fully invested portfolio. That’s why it’s important that the Mutual Fund Portfolio and equities in general are not 100% of your portfolio.
We anticipate making some rule changes and changing some funds in our next review, which will appear in the March 2011 column. The portfolio has now been in existence for about seven years and has faced the worst bear market since the 1930s. While returns are below the long-term averages, the portfolio has positive returns and has outperformed the overall stock market since inception.
Fund Closed to New Investors
The FMI Common Stock Fund (FMIMX) has closed to new investors. Those of you who own shares in the fund can continue to buy more shares when you choose. We are not adding a substitute fund for new investors because we feel nine funds provide sufficient diversification and we will be making changes next March based on new criteria.
Maintain Allocations
There seems little to say about the market’s direction for the rest of the year that has not been said already. In general, I think individual investors are best off maintaining their long-term allocations.
The next article on the Model Fund Portfolio will be in the March 2011 AAII Journal. We will review performance and report any changes to the portfolio. In the meantime, you can keep up with all the Model Portfolios here.
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since inception!
