Investment Newsletter #11 (Oct. 29, 1999)

Tom Madell. Copyright 1999

How Effective Has This Newsletter Been?
When Will the Underperformers Come Back?

It might be useful to see how specific investment ideas that have been put forth in previous editions of this newsletter are panning out thus far.

The objective of these newsletters has been, and continues to be, to help you with your long-term planning and investment results. If so, then why present any short-term data at all, as we have sometimes done (along with a whole lot of long-term data)? Because most people, including myself, are interested in the short-term mileposts along the way, even if they, also like myself, are truly long-term investors. And besides, the thing that makes investing truly fun and interesting is seeing regularly how your investments are doing, as opposed to what makes investing truly profitable, which usually involves many years of not so fun or interesting (and often counter-intuitive) efforts to resist the temptation to take inappropriate action. (See Newsletter #9 for more on this latter point.)

The first issue of this Newsletter appeared on May 13, 1999, or not quite 6 months ago. Although 5 1/2 months is not a long enough period to really judge how well we are doing, it may be useful and informative anyway to see which, if any, of our views seem to have been substantiated thus far.

In the very first Newsletter on May 13 and in subsequent issues, I suggested that interest rates appeared to be headed higher. On that day, the 30 year US Treasury bond rate closed at 5.75. I speculated that rates would continue to head higher reaching into the 6.25 to 6.50 range in the not too distant future. Since bonds prices fall when interest rates rise, that is why I suggested that bond funds would not perform particularly well until an interest rate peak had occurred. Even for those not interested in bonds, such a rise in interest rates, if persistent, could certainly have a dampering effect on stock prices as well.

Interest rates did indeed rise fairly substanitally during the period. After rates had equalled or slightly exceeded 6.25 this summer and dropped back down to closer to 6.00, I again urged caution stating that rates had probably still not reached a peak. Then rates began climbing again. Earlier this past week, they reached a high of 6.40% before falling again a few days ago to a yield of 6.16 as of Oct. 29. The table below shows the impact of this increase in rates over the 5 1/2 month period on the performance of a long-term bond fund investment:

Anyone who followed my suggestions to either avoid purchasing bonds or to reduce their current holdings/purchases somewhat during this period would have kept themselves from negative returns.

In spite of some strong down drafts in the stock market, I advocated that long-term investors sell stock investments only for very specific reasons, and not attempt to flee the market in an effort to time or outguess it. However, beginning in the first newsletter, I also suggested rebalancing a portfolio that consisted almost exclusively of large growth-oriented funds such as Magellan, or S & P 500 index-type funds. Although these funds have had a pop in the last few days, they are currently almost exactly where they were on 5-13-99, that is, they have basically gone nowhere. (The Dow was at 11,107 on that date; today it is at 10,730)

I also strongly advocated increased allocations to international funds. As you will see in the data presented below, this suggestion would have resulted, in many cases, in excellent positive returns as some of these funds have continued to outpace the averages for domestic funds during the entire period. However, funds with large allocations to the European region have made only small positive movement thus far.

Finally, I suggested that people consider adding to their positions in the small and mid cap areas as well as in value stocks. While these categories of funds did outperform during the first three months following May 13th, as summarized in Newsletter #6, the overall results since May have been largely still disappointing, especially for the value category.

Tables of Fund Performance

Let's look at the total returns for the 5 1/2 month period since I began suggesting these approaches for some of the funds I did cover specifically in previous issues. I've also included their year to date results. These funds are fairly popular and should be considered as being representive of other funds in their overall categories in the event that you do not own them in particular.

One of the most interesting pieces of information to emerge from these tables is that almost all the positive results for most domestic funds thus far this year, regardless of category, were achieved in the first part of the year. Since we started this publication in May, most funds have not done very well, with the exception of many in the international category whose typical fund has had either small positive gains in the period or, as the table on International Funds below shows, very large gains in some cases. Thus far, this has substantiated the large 40% allocation of my total stock portfolio that I described in Newsletter #5.

Results for three other funds that I covered in earlier newsletters that have done extremely well during this period are presented below. Although Janus Venture is not open to new investors, you may want to check out other comparable funds within the Janus Group.

What to Do Next?

For the truly long-term investor, more time needs to go by before the underperforming categories of smaller capitalization and value funds have their day. But I still believe that these types of funds are a good choice for any new investments and should represent a significant percentage of your stock portfolio. In the meantime, as before, I continue to advocate a highly diversified portfolio containing all categories of funds, not just focused on the one or two categories that have done the best in the last few years.

As far as bonds are concerned, this is still a tough call. If not already having peaked, interest rates are certainly nearer to one and represent a much better buy than 6 months ago. I still favor municipal bonds over corporates or Treasuries and think they will do reasonably well over the next 12 mos.

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