Issues
Old Ghosts
May 2013
From David Stockman to Reinhart and Rogoff, and the Boston Marathon bombing to a piece of wreckage from 9/11, old ghosts came back to haunt investors in April. Yet both the Dow and the S&P 500 went on to new highs during the month and closed up 1.8% since March. The rising stock market combined with falling interest rates set up an intriguing dynamic, as the top two funds represented both ends of the spectrum, with Telecom Services up 8.3%, and Extended Duration Treasury ETF up 7.3%. I wouldn't recommend either, as they're far too narrow and risky. (Check out Part II of my Bonds 101 series for more on the risks of the bond market.) And if you're looking for a store of value, I don't think you're going to find it in gold, or Precious Metals & Mining. In spite of political and financial tumult across the globe, both fell about 9% during April, and remain far below their all-time highs.
Also in this month's issue, if you missed my advice on what to do about Capital Opportunity's reopening, I've got a recap for you, along with updates on South Korea's place in Vanguard's index funds, ongoing fee waivers at its money funds, and a solution to the bond market index problem Jack Bogle's been talking about.
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Quarter(back) Run
April 2013
What a quarter! The Dow index rose 11.3%, and the S&P 500 rose 10.0%. But mid-cap and small-cap stocks were the real performers, with the S&P MidCap 400 index up 13.1% and the Russell 2000 index up 12.0%. Total Stock Market, up 11.0% this year, is at an all-time high. So are more than 30 other Vanguard equity funds.
Are we investors setting ourselves up for a fall? If you listen to the cries of those who make money mainly from scaring the unsuspecting, we’re headed for a 30% to 90% decline any day now. I don’t buy it–my philosophy runs more along the lines of Jim Barrow, the longtime manager of Windsor II and Selected Value, who asks: Wouldn’t you expect prices to be at or near highs when earnings are at or near highs? I encourage you to read the rest of our interview in this month's issue. Plus, while investors are still piling into bonds, I wonder if they really understand the risks they’re taking with interest rates at near-record lows. I've got a refresher for you in the first part of a series called Bonds 101. Meanwhile, when it comes to dealing with the closing of Intermediate-Term Tax-Exempt or whether South Korea is a “developed” market, don't take everything Vanguard says at face value. I've checked the facts, and parts of their arguments simply don't fly.
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Sequestration Defenestration
March 2013
It's time to throw the bums out—both those in Congress and those on Wall Street. In February's final week, we saw wild gyrations in stock prices that had absolutely nothing to do with whether earnings were rising or falling, nor whether interest rates were about to make a major move either up or down. Instead, worries about Italy's election, sequestration, stalemates in the halls of Congress and yes, a debate over the propriety of the First Lady getting involved in the Oscars are what dominated headlines. I was more interested in the fact that the housing market continues to move forward, and that the first-reported 0.1% decline in Q4 GDP was actually a 0.1% increase—less of a revision than expected, but a minor positive nonetheless.
Meanwhile, Vanguard had a busy month as well, with Wellington and Intermediate-Term Tax-Exempt closing to new adviser and institutional accounts (but not retail investors like you and me), two new managers at Windsor II, and word that the new international bond index funds should be launched by the end of the second quarter. More quietly, Vanguard also filed papers indicating it will be raising fees for the Guaranteed Lifetime Withdrawal Benefit (GLWB) available for a couple of its annuities, adding one more item to the case against investing in annuities. I've got a full analysis of how to tell if they make sense for you in this month's issue. Also, don't miss the exclusive interview with Don Kilbride, manager of Dividend Growth, which continues to put up smart numbers with a laser focus on battleship balance-sheet companies.
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A Spin on the Rotation
February 2013
The "great rotation" is the term being used to mark the move by investors out of bonds and into stocks. And yet, from my perspective, the rotation that seems to be on everyone's lips these days is really not happening—yet. According to ICI, the fund industry trade group, investors added almost $24 billion to stock funds in the first couple of weeks of January. But they also put nearly $20 billion into bond funds. So, the "great rotation" sounds like a lot of spin to me.
On the other hand, how about a mini rotation, or what investors commonly call “rebalancing”? Does shuffling around your stock or bond allocations to maintain a specific portfolio balance really improve your returns or slash your risk? I don’t think so, and I’ll show you why. One factor is persistence of performance, the driving force behind my Hot Hands strategy, another topic I cover in detail in this month’s issue. That said, you don’t want to overdo it when it comes to momentum. Even boring assets like money markets, despite a lousy three years, still have a place in our portfolios—for now. Proposed regulations may put them under threat, but I’ll keep you apprised. Meanwhile, if you’re wondering how the new tax rules might affect the attractiveness of tax-exempt funds for those in the higher tax brackets, I’ve adjusted the tax-equivalent yield calculations in the Performance Review to assist you.
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Hold the Confetti
January 2013
Investors typically face the turning of the calendar year with thoughts, projections and expectations about things like earnings, interest rates and maybe a resolution or two about becoming better, smarter money makers. But although the economy is growing and corporate earnings continue to ratchet higher, we come into 2013 with consumer confidence fading and Wall Street pondering the impact of the fiscal cliff and the destructive dysfunction that characterizes our policymaking bodies in Washington. The glum reality is that we enter 2013 full of uncertainty, as I note in my Outlook this month.
But there’s always some uncertainty in our lives, and right now I think it’s acting as the catalyst for investors to do things that aren’t in their best interest. I’ll show you how to avoid falling into that trap. I may not get everything right, and I fess up to that in my Report Card, but I can help keep you stay the course in the face of wild predictions that unfortunately the rest of the media rarely goes back to review. I’ve aired a few of last year’s in the issue. Whatever you do, be sure to make the most of your IRA this year, and send in any last-minute 2012 contributions before the April tax deadline. While management changes continue at Vanguard, you’ll still be in good hands with the managers of our Model Portfolio funds. Finally, if you missed it earlier today, you can find the 2013 Hot Hands fund in the issue.
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Issue Archive
Past Performance
| Models | April | YTD |
| Growth | 1.9% | 13.7% |
| Conservative Growth | 2.0% | 12.6% |
| Income | 2.0% | 8.8% |
| Growth Index | 1.9% | 12.6% |
| The average Vanguard investor |
1.7% | 7.2% |
