Mutual Funds Research Newsletter
Apr. 2006 Issue
Copyright 2006 Tom Madell, PhD

Welcome to our Newsletter which provides recommendations and commentary on what we believe are your best current choices for your portfolio.

Each quarter's recommendations are made, using the latest data, to forecast which categories and allocations our research shows have a good chance of outperforming a stock portfolio based on the S&P 500 index and a bond portfolio based on the major bond index. The recommendations are expressly selected to achieve that outperformance over the next year or two and have proven to be highly successful in achieving that goal. However, of even greater value to long-term investors, most of the quarterly recommendations I have made to subscribers over the last 6 years have actually outperformed the S&P 500 and bond fund indexes continuously, even after 5 years from when they were first sent out!

Thanks again for your interest in what has proven to be a profitable source of mutual funds advice for those who subscribed to our site and put our suggestions to use.

Regards,

Tom Madell, Ph.D.
Publisher
Mutual Fund Research Newsletter
http://funds-newsletter.com
e-mail: funds-newsletter@att.net

"Your source for proven mutual fund advice"

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http://funds-newsletter.com 's Most Recent Results

Our most recent quarter, 1 yr., and 3 yr. annualized performance results for our Stock Model Portfolios are shown below:

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This rest of this Newsletter presents our current 2nd Qtr 2006 Model Portfolios with some changed recommendations. But first:

Thanks to the numerous new subscribers over the last 3 months, and of course, to the hundreds of others who have continued to be our long-term subscribers. Over more than 6 years, long-term subscribers have continued to have been steered toward funds that were generally excellent during the holding periods we prescribed, namely, over the following several years. And thanks too to the many readers who have emailed me that my advice has made a significance difference in their financial well-being! Although I sometimes wonder whether I should continue providing this free Newsletter, knowing that I am making a difference to many people is certainly highly gratifying.

Whenever I cite how outstanding our recommendations have been (although far from 100%), I know I risk alienating some readers who think I am perhaps being unnecessarily self-promoting. But, honestly, what other means do I have to try to convince the average person that maybe, just maybe, my free advice might be worth checking out, and perhaps, being followed (with necessary modifications to accommodate your own investment style and circumstances).

As far as I know, there is no other source of free investment advice like it on the Web, not only with regard to its content, but certainly, when considering our consistent, market-beating results. Obviously, while some newsletters have shown huge quarterly returns that any investor might "die for", the investor following these usually very non- diversified and risky approaches has to be prepared for equally large negative results when things don't go as planned (as, for example, happened during the 2000 -2002 bear market). Most people who are successful as investors haven't become so because of large, but merely occasional outsized gains, but rather as a result of continuously good long-term performance.

So, to the great majority of people who might come to my web site looking for that one or two outstanding "home run" picks that they hope will rather quickly led them to excess returns, my site will surely leave them disappointed. Such readers are not at all likely to sign up for, or, to appreciate my Newsletter. But, if the prospect of a steady increase in your wealth sounds appealing, as "slow" as it may sound, then perhaps you are the kind of person my Newsletter can truly help. (Is the prospect of doubling your money within say 6 or 7 years "slow"? In order to double an investment in a tax-free account within 6 years, you will need to earn an average return of about 12%. To do so in about 7 years, you will need to earn an average return of about 10%.). Such returns seem quite feasible to anyone who follows my recommendations although you will likely have to focus the majority of your investments in stock funds, rather than bond funds. (And, even if your overall portfo lio returns only about 7%, your account will double in about 10 years.)

These are the magnitude of long-term returns I have in in mind when constructing my Model Portfolios. I do not expect that my Model Portfolios will continue to show the high absolute level of returns shown at the top. When the markets return to more normal levels of annualized performance, which I anticipate will happen sooner rather than later, our returns will have to be lower too. My main objective is to help investors do better than just by just sticking to one or two fund categories such as when one invests mainly in large cap U.S. stocks, such as those that compromise the S & P 500 Index.

Our Updated Model Portfolios

Overall Allocations

At the beginning of the year, we felt that stocks were vulnerable to a potentially subpar year. While the year is only one-quarter over, so far, stocks have held up well. But as interest rates continue to grind upward, these positive results could easily fall off into mediocrity, or worse. Certainly, though, we have had our negative outlook on bonds proven correct thus far. And for those who have been listening to our advice for some time now that money market funds should outperform bonds, you have generally seen our predictions confirmed.

Right now, we are sticking with a suggested 52.5% allocation to stocks for moderate risk investors who plan to maintain their investments over the next year or two and who don't generally make any portfolio changes. However, we are raising our cash allocation to 20% and lowering our bond allocation to 27.5%. (These are identical to what we recommended for moderate risk investors 6 months ago.) Our recommended allocations for more aggressive investors lean toward a higher stock allocation - 60% - and a lower bond allocation - 10%, with the rest in cash. For conservative investors, we recommend 40% stocks, 30% bonds, and 30% cash, also identical to our 4th Qtr '05 portfolio.

I admit it must appear that I have been missing the boat on a few of the best performing specialized categories - namely, real estate and natural resource funds. But the majority of investors usually limit their stock portfolios to perhaps 5 or 6 funds at most. I believe such specialized categories should represent only perhaps 5 or 10% each of your portfolio, at most. Therefore, if I routinely included them in my recommendations, it would likely mean that you would have to have at least 7 or 8 stock funds to follow my model. (Our Model Portfolio already currently recommends one such highly concentrated category - Japan.)

I previously highly recommended both real estate and natural resource funds as early as 2000 thru 2003 when their prices were but a fraction of what they are today. I still personally have about 3% of my stock portfolio in Vanguard Energy after selling about 1/2 my position, although Vanguard has recently made the minimum investment too high for most investors. I have also gradually sold the majority of my recommended real estate fund, Vanguard REIT. In spite of the latter's recent surge, I remain doubtful that it will continue to outperform for much longer.

Stock Fund Recommendations

Keep in mind, then, that my Model Portfolios are not aimed at trying to hit "home runs" with the bases loaded, while exposing you, my teammates, to the risk of my striking out. Rather, given the importance of being at least moderately successful, and the longer odds against homering, I aim to get a mere single or double, driving in perhaps a few runs for our cause each time I am at bat. After presenting my diversified portfolios, I will give you an investment idea if you remain interested in trying for that investment home run for your own portfolio.

Bond Fund Recommendations

Notes: We highly recommend GNMAs right now; we do not think they will suffer as much as treasury bonds in this rising interest rate environment. We are also not currently recommending Inflation Protected bonds - these bonds appear to be overvalued. Overweigh muni bonds if you are in a moderate or higher tax bracket.

Money Market Fund Recommendation

Vanguard Prime Portfolio

A Possible Investment Home Run

If you are able and willing to take on bigger risks to try to get bigger returns, here is a thought:

Consider investing in an additional fund that includes a large percentage of stocks from the Asia/Pacific region, not including Japan. Choices might be T. Rowe Price New Asia or Janus Overseas. If you are particularly brave, you might check out the Matthews India Fund or another fund that invests heavily in India. I myself am waiting for a significant correction in these regions before venturing further. But the long term potential, especially for India, appears to be outstanding. Incidentally, if you are interested in possibly investing in India, let me know and I will keep you informed of when it might be a good time to consider entering into funds that have exposure to that market.

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