We continue to cover both the Model Mutual Fund Portfolio and the Model Exchange-Traded Fund (ETF) Portfolio on a quarterly basis.
They both will be covered each March, May, August and November in the AAII Journal. Of course any changes will also be reported at AAII.com.
In the August AAII Journal, we detailed the difference between the selection approach of the Model Mutual Fund Portfolio and that of the Model ETF Portfolio.
Basically, the mutual fund portfolio looks for funds within the equity category that are believed to be most likely to outperform the general stock market, regardless of their exact category. Only secondarily does it try to balance the categories (large cap vs. small cap, value vs. growth, etc.)
In the Model ETF Portfolio, the emphasis is on choosing the areas of investment that seem most likely to outperform and then choosing the best ETF in that category. In both cases, the long term is emphasized.
In August, we provided the detailed selection rules for the Model Mutual Fund Portfolio. This issue we show the rationale for the Model ETF Portfolio. The rules and rationales for both portfolios are always provided at AAII.com.
What a difference three months makes. The Model Mutual Fund Portfolio is down 12.6% year-to-date. This compares with –8.8 % for the S&P 500 as measured by the Vanguard 500 Index fund 
(VFINX). These returns are about 15% lower than those of three months ago. As these figures indicate, the recovery has stopped, and we have a significant leg down.
There are no portfolio changes at this time. All of the funds except FMIMX remain open for new investors. FMIMX should continue to be held by those who already have it.
The Model ETF Portfolio is down 14.8% year-to-date, as opposed to –10.0% for our benchmark, which is 80% SPDR S&P 500 (SPY) and 20% iShares MSCI EAFE Index (EFA).
There are no portfolio changes at this time.
The third year of the election cycle has not been a down market year since 1939. To preserve that record, the market is going to need a strong performance in the last quarter. To attain the 16.6% average return for a pre-election year, we would need one of the strongest quarters in history.
Over the longer term, smaller-cap stocks and value stocks easily outperform larger-cap and non-value (growth) stocks. However, every so often the growth and large-cap equities have a period of better performance. We are in such a period now, and it has affected the relative performance of our portfolios. This is especially true of the Model ETF Portfolio. I believe a return to the normal superiority of value and smaller capitalization will be the first sign of bull market resumption. It may require that technology stocks, which are mostly large-growth stocks, have a bit of a run first, since they are lagging the rest of the market. I will discuss this possibility again when we cover the Model Shadow Stock Portfolio in the January 2012 AAII Journal.
In August I said that I hoped we would see some progress on the Greek situation and a resolution to the U.S. Congress stalemate on the debt limit before I wrote this column. The situation in Greece seems far from settled, and while we have survived one deadline for the debt limit increase, Congress looks to be headed for a series of deadlocks. No matter how the situation in Greece is resolved, the impact on Europe will be significant and there will be some impact on the U.S. as well.
The wall of worry keeps getting higher. Will the stock market climb it? We will be covering both the Model Fund Portfolio and the Model ETF Portfolio again in the March 2012 AAII Journal; in the meantime, you can follow any updates here.
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