Investment Newsletter #15 (Dec 31, 1999)

Tom Madell. Copyright 2000

NOTE: To see our latest allocations/fund choices, you will need to request a subscription.

In this letter, I will discuss the categories of funds that look promising in the upcoming year and create a "model portfolio". The performance of the model portfolio will be updated regularly on my home page.

Overall Allocation

Let's start with an overall allocation into stocks, bonds, and other categories of funds.

Stocks

60%

Bonds

25

"Other"

15

Naturally, as I've stressed before, no one allocation is right for everyone (see Letters 1 and 5). In my opinion, the allocations I suggest above are neither super-aggressive nor super-conservative, although I do think that today's already lofty stock prices argue against taking a super-aggressive position at this juncture.

If you are not much of a fan of bonds, then I suggest you redistribute some or all the 25% shown above to the remaining two categories.

Note: These allocations are subject to change based on changing market conditions. Our Newsletters will keep you abreast of recommended changes as they occur.

Stock Fund Categories

Now let's look at which particular categories of stock funds appear to have the most potential in the upcoming year.

Large Cap (US)

35%

International

40

Small/Mid Cap (US)

25

As you can see, we continue to recommend a higher percentage of investments in the non-US stock arena. In '99, this strategy paid off handsomely as many diversified foreign funds widely outperformed the average US-only fund.

While we are still generally positive about large cap funds, we have been seeing some very positive trends in the the mid to small cap area. Therefore, we recommend that if you only currently have a small weighting in this area, you increase your allocation significantly. We also believe that given a choice between mid and small caps, the smaller capitalizations have the greater potential.

With regard to the categorization of funds as to growth vs. value, we currently feel that the majority of one's investments should be in a mixture of the two styles. Within so-called blended funds, the selection of stocks is left to the discretion of the fund manager or is usually divided evenly if the fund is indexed. Since growth stocks have so widely outperformed value stocks over the last several years, we still believe that value funds represent exact that - good "value" - and therefore should not be neglected merely because their performance of the past few years has not measured up.

Bond Fund Categories

If you do choose to hold bond funds, here is roughly the breakdown we are recommending with regard to length of maturity:

Long Term

30%

Intermediate

60

Short Term10

Although short term bonds will do better in a raising rate environment, unless you are quick to trade, you will do better over the long run earning the higher dividend rates available with longer maturities. When we believe that interest rates are closer to a peak, we will let you know. At that point, you might consider moving more assets to long term funds.

With regard to which types of bonds to invest in the year ahead, we think that most of your funds should be in "plain vanilla" corporates, treasuries, and US agencies. If you feel particularly adventurous, you might try a small amount of high yield funds, since they tend to do well when the economy is strong. Of course, if you are concerned about high taxes, I suggest that you use municipal bond funds for your taxable accounts.

"Other" Fund Categories

In this category, I include not only cash but significantly different types of funds, even if they might be equity-based, such as real estate or natural resources. At the present time, I am highly recommending up to 10% of your total portfolio in cash given that stocks prices are already high and that interest rates are in a rising trend. (A lot of stock investors seem to be ignoring this latter, but extremely significant point.)

Our new recommendation is that at least a 5% of your total portfolio go in the area of REITs (that is, real estate investment trusts), given the apparent highly undervalued current status of these investments.

My Model Portfolio

The above allocations should give you enough guidance to enable you to make your own fund selections. However, because some people may not feel confident enough to make these selections, and also because I want to be able to show the progress of a real portfolio over the year based on these allocations, I will present below my "model portfolio" of specific funds.

If you already have chosen funds in these various categories and are satisfied with their performance, I suggest that you stick with them. And if you don't have the categories of funds I recommend and are thinking of of taking the plunge, I suggest that you do some research yourself. There are a lot of excellent funds out there, some better I'm sure than the ones I mention here.

Note: The allocation percentages shown in each of the following tables, as in the tables presented above, add up to 100%; thus, each percentage is a weighting of the total for that category (eg, 10% of your total stock funds).

Stocks

Fund

Morningstar Style

Allo-
cation

'99 Return

American Century International GrowthForeign (Large Growth)

10%

64.4%

Vanguard International Growth

Foreign (Large Blend)10

26.3

Vanguard Index PacificForeign (Large Value)10

57.1

Vanguard Index Europe

Foreign (Large Growth)

5

16.7

Janus Overseas

Foreign (Large Growth)

5

86.1

Janus Fund

Large Growth

10

47.1

Vanguard Index 500

Large Blend

10

21.1

Vanguard Growth and Income

Large Value

10

26.0

ICAP EquityLarge Value5

16.3

Vanguard Small Cap Index

Small Cap Blend

10

23.1

Vanguard Extended Market Index

Mid Cap Blend

5

36.2

T. Rowe Price ValueMid Cap Value

5

9.2

Fidelity Low Priced Stock

Small Cap Value

5

5.1

Bonds

Fund

Morningstar "Interest
Rate Sensitivity"

Allocation

'99 Return

Vanguard Long Term TreasuryHigh

10%

-8.7%

Vanguard Long Term Corporate

High15

-6.2

PIMCO Total ReturnMedium50

-0.3

Vanguard High Yield

Medium

15

2.6

Fidelity Intermediate BondMedium10

0.9

Other Categories

Fund

Allocation

'99 Return

Vanguard Prime Money Market

67%

5.2%

Vanguard REIT Index

33%

-4.0

If the next 10 years is anywhere near as good as the last 10 (unlikely, I guess), then we'll all probably be a lot better off than we are now.

Happy New Year to all!

Home