January 2015 was a weak period for the stock market in general.
The S&P 500 was down 3.0%, as measured by the Vanguard 500 Index fund 
(VFINX), the Model Fund portfolio was down 2.4% and the alternative All-ETF portfolio was down 3.6%.
While small and mid-cap stocks have always outperformed the general market over the long run, 2014 was a strong exception, and the relative weakness of smaller-cap stocks has continued into 2015. There is some support for the belief that an upturn in small-cap stocks will be the signal that the overall market has resumed a bullish stance. But it hasn’t happened as yet; the small and mid-cap exchange-traded funds Guggenheim S&P SmallCap 600 Pure Value (RZV) and Guggenheim S&P MidCap 400 Pure Value (RFV) continue to weigh on the model portfolios.
There are no changes in either the Model Fund Portfolio or the All-ETF Portfolio.
Dramatic changes in economic factors have impacts far and wide and can be positive and negative. The dramatic change in the price of oil is an example of this. The immediate favorable impact for most of us is lower prices at the gasoline pump.
Oil-producing nations, on the other hand, have less revenue. A large number of the nations in the iShares MSCI Frontier 100 ETF (FM) are oil producers and have had their stocks hit in anticipation of reduced revenue and profit margins. As a result, the fund has fallen quickly from the high levels it had achieved before the oil price decrease.
I believe that the impact from reduced oil profits has been exaggerated and that these pre-emerging countries are where the greatest long-term growth will occur. We will continue holding the iShares MSCI Frontier 100 fund, even though the strengthening dollar creates problems for most foreign corporations.
Our other smaller holding (10%) has also acted dramatically different than the overall market last year and this year to date, but in a positive direction. Vanguard REIT Index ETF (VNQ) has far outpaced the market.
Real estate often performs differently than the general market on a year-by-year basis, but has almost the same long-term return. This helps reduce the volatility of a portfolio and makes REITs (real estate investment trusts) an important part of any portfolio.
Many individuals avoid real estate because the value of their home seems like a sufficient real estate investment. A single home in a specific area is not a real estate investment and is bought for many reasons that have little to do with the general real estate market, which is mainly commercial. Real estate is the rare investment that lets you reduce risk without sacrificing long-term return.
Last year the market return was above-average at 13.5%. This year it is negative for the month of January. Every time the market weakens, investors seem to take it as a buying opportunity; every time the market starts to move up, other investors want to take profits.
One of these times the market will continue in one direction for a significant run, but no one knows in which direction. I have a bullish bias because the economy looks promising to me, but things can change quickly and the Federal Reserve seems to enjoy keeping us all in suspense.
The problems with the euro and the possibility of expanded military action against ISIS have not seemed to impact our markets significantly as yet, but major changes in either of these scenarios could affect our economy and our financial markets.
The next column about the Mutual Fund Portfolio and All-ETF Portfolio will be in May; in the interim, you can follow any updates here.
Get updates about the portfolio that has outperformed the market by 211.9%
since inception!
