Mutual Fund Research Newsletter

July 2005 Issue
Copyright 2005, 2006
Tom Madell, PhD

3rd Qtr. 2005 Moderate Risk Model Portfolio

We still think that many stock fund categories are overvalued and that there are more economic risks to the downside than to the upside over the next year or two. And, as a long-term investor, I would continue to have doubts that we will see the kind of favorable bond fund returns (like in the 5 - 10% range) that we have seen over the last five years because even if interest rates remain moderately low, there is little chance of achieving the kind of good performance that comes when rates move down significantly as they did between 2000 and now.

Allocations

===========

Stocks 52.5%

Bonds 30%

Cash 17.5%

(For more aggressive investors, you might think of limiting your exposure to 60% stocks, 30% bonds, 10% cash.)

(For more conservative investors, you might settle for 40% stocks, 35% bonds, 25% cash.)

Stock Fund Category Allocations & Specific Fund Recommendations

Category

Our recommended fund

Recommended
percent of
Stock Portfolio

Updated July 2006:
Return on Our Fund
1 Yr After We Recommended It
Compared to 8.6% for S&P 500

Foreign
Asia/Japan

Vanguard Pacific Idx

5%

31.4%

Foreign

Vanguard International Growth

20

28.3

Large Growth

Fidelity Contra

10

17.0

Small Growth

Vanguard Explorer

5

13.1

Large Value/
Equity Income

Vanguard Windsor

25

9.3

Large Blend

Vanguard Growth & Inc

20

7.6

Mid Cap Blend

Hussman Strategic Growth

15

5.1

So, 5 out of 7 of our recommendations outperformed the S&P 500 as of July 1, 2006.

Bond Fund Category Allocations & Specific Fund Recommendations

Category

Our recommended fund

Recommended
percent of
Bond Portfolio

Updated July 2006:
Return on Our Fund
1 Yr After We Recommended It
Compared to - 1.1% for Benchmark

High Yield

Vanguard High Yield

15%

3.0%

International

Amer. Cent. Intl Bond

10

0.7

Short Term Govt

PIMCO Total Return

35

- 0.9

Inflation-Protected

Vanguard Inflat Prot Sec

15

- 1.6

Long-Term

Vanguard Long Term Inv Grade

25

- 7.7

3 out of 5 of our recommendations beat the benchmark (the Vanguard Total Bond Market Index) as of 1 yr after we made them.

Since many people can't (or don't want to) use as many funds as in these portfolios, then I suggest you go with the two or three that I give above that show the highest per cent allocation. Then allocate between these two or three in rough proportion to their percentages above. Eg. For bond funds, pick the Short-Term (35%) and Long-Term categories (25%) and allocate about 60% to Short-Term and 40% for Long-Term. But for the best returns, try to use as many of the above categories as you can since some of the smaller allocations not only make your portfolio more diversified, but are especially chosen to try to add to your portfolio's ability to outperform the market averages. Accesses: