Mutual Fund Trends & Research Newsletter

This Downturn Is Starting to Hurt!

In many of our newsletters throughout this year, we have presented data to support our view of currently following a somewhat more cautious approach than usual. Although the present downturn has taken some time to clearly manifest itself, it is now becoming apparent that people who have maintained a highly aggressive approach to their investing, regardless of what is going on in the economy, are now probably beginning to feel some pain.

The following table presents an ordered listing of the fund categories that we have been covering, starting with those that have done the poorest year to date and ending with those doing the best so far this year (Data as of 9-29-00; source: Morningstar).

Fund Category	Return So Far in '00	Return for 3rd Qtr. '00
Foreign	-11.3%	-6.6%
Large Blend	-0.4	0.2
Large Growth	1.1	0.4
Large Value	2.2	4.3
Long Term Gen. Bonds	5.9	2.9
Interm. Term Gen. Bonds	6.0	2.9
Municipal Bonds Long	6.4	2.3
Mid Cap Blend	6.7	3.9
Mid Cap Value	9.5	6.6
Long Term Govt Bonds	9.5	2.7
Small Growth	10.6	1.8
Small Blend	11.8	3.2
Small Value	13.1	6.4
Mid Cap Growth	15.1	6.6
Real Estate	23.6	5.4

Not only have we been advising overall caution, but we have particularly emphasized placing at least some of your investments, especially newly invested funds, in one or more of the following categories based on our current reading of the data we carefully monitor: small/mid cap funds, real estate funds, value funds, bond funds, foreign funds, and money market funds.

Looking at the above data based on the average performance for fund categories, you can see that our suggested approach would have led one to handily beat the S&P 500 and the Nasdaq indexes as well the typical large cap fund, for each such allocation within your portfolio with the sole exception of foreign funds. (The S&P 500 is -2.3% YTD while the Nasdaq is -9.7%. Even a good money market fund such as the Vanguard Money Market Prime Fund is up 4.6% YTD.)

But we all should be aware by now that attempting to accurately predict the differential performance of the various fund categories in the short-term is notoriously difficult. It is for this reason that we have urged identifying a core of solid investments through research and then primarily sticking with that core. As can be seen in the last column of the performance table shown below, all except one of our model stock funds have earned highly respectible returns by doing nothing more than holding them over the last 5 years. (Data as of 9-29-00. The table also includes our real estate fund recommendation, the Vanguard REIT Index, which has been in existence less than 5 yrs.)

Fund	Style	3rd Qtr. Return	YTD Return	5 Yr. Return
Janus Fund	Large Growth	2.6	3.8	26.3
Vanguard Index 500	Large Blend	-0.1	-1.4	21.7
Vanguard Growth and Income	Large Value	2.1	-0.4	22.1
Vanguard Windsor	Large Value	6.2	6.9	13.1
Vanguard Small Cap Index	Small Cap Blend	0.2	4.4	13.5
Vanguard Extended Market Index	Mid Cap Blend	4.1	4.0	18.6
T. Rowe Price Value	Mid Cap Value	4.3	5.0	16.3
Fidelity Low Priced Stock	Small Cap Value	6.4	12.4	14.0
Vanguard REIT Index	Small Cap Value	4.5	21.8	NA
American Century International Growth	Foreign	-5.2%	-11.0%	19.9%
Vanguard International Growth	Foreign	-8.9	-7.6	10.7
Vanguard Index Pacific	Foreign	-10.2	-14.8	-0.4
Vanguard Index Europe	Foreign	-5.8	-9.9	16.0

In spite of the short-term ups and downs that makes forecasting so difficult, we have been considerably successful in many cases in identifying those broad categories of funds that have showed above average long-term potential. With this in mind, here are our new suggestions for the final 3 mos. of this year.

Stocks	50%
Bonds	30
"Other"	20

Note: Naturally, the amount you allocate to stocks vs. the other categories depends upon many factors. My allocations are based on what we see as a pruduent course of action over the next 3 months given the still overall high valuations of stocks and the performance potential of the non-stock categories. When our real estate exposure is added to the above stock percentage, our total allocation to stocks becomes 60, not 50%.

Large Cap (US)	45%
Small/Mid Cap (US)	25
International	30

Note: (The following is for those who want a more "in-depth" analysis; if not, skip down to Our Model Portfolio)

We too are hurting in that our foreign funds, always more of a risk than domestic funds, have underperformed US stock funds. However, even with our previously rather large allocation to foreign funds (35%), they fortunately only account for about 20% of our overall portfolio (35% times the 55% of our portfolio currently in stocks, or about 19% of our total portfolio) plus any other foreign holdings within our non-foreign funds. (For example, even a "domestic" fund like Fidelity Low Price Stock surprisingly has about 20% foreign holdings).

And our large cap funds, of which we have been recommending for 45% of your total stock portfolio, have not done very well either so far this year. But, again, 45% times 55% of our recommended portfolio means a "real" weighting of about 25%.

However, these smaller than apparent percentages of foreign and large caps are only the case if your total portfolio is invested less than say 90% in stocks. If, you are 90% or greater in stocks, a 45% holding of large cap stocks, for example, represents a real weighting of at least 40% (45% times 90% equals 40.5%).

The remaining non-large/non-foreign funds in our portfolio has been our 25% in bonds and approximately 10% each in small/mid cap, real estate, and money market funds, or about 55%. Because these latter groups have been the best performing ones so far this year, we have avoided some of the more severe losses suffered by people investing only in what have been the two most poorly performing sectors of the market, that is, large cap and foreign funds.

Our Model Portfolio

So far this year, our model portfolio recommendations are now +3.4% for the first 9 mos. This is 5.7% ahead of the S&P 500 and 13.1% ahead of the Nasdaq Composite! Here are our specific model portfolio recommendations.

Stocks

Bonds

Other Categories

Please let me know if you have any comments/feedback on this or previous issues.

Tom Madell, PhD

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