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January 2016 Model Stock and Bond Portfolios

Stocks May Be a Slightly Better Bet in 2016

In spite of the perils of forecasting, I am raising my quarterly overall allocation to stocks, but just a tad. The main reason is merely because, although I don't anticipate much better returns for stocks in 2016 than in 2015, using a 3 to 5 year horizon (our target range), stocks present a more favorable outlook than for bonds, and certainly, than for cash.

The ongoing trend one-year trend for stocks, something I watch carefully, is now negative. While one year's returns likely don't show much of relationship to the following year's performance, the high returns observed between 2009 and 2014 have led to a highly priced market. As a result, future returns are more likely, in my opinion, to be somewhat subdued.

Here are my overall allocation recommendations, as subdivided into 3 rough categories based on one's self-estimated tolerance for risk.

For Moderate Risk Investors

Asset Current (Last Qtr.)
Stocks 52.5% (50%)
Bonds 35 (35)
Cash 12.5 (15)

For Aggressive Risk Investors

Asset Current (Last Qtr.)
Stocks 67.5% (65%)
Bonds 22.5 (22.5)
Cash 10 (12.5)

For Conservative Investors

Asset Current (Last Qtr.)
Stocks 20% (15%)
Bonds 50 (50)
Cash 30 (35)

January 2016 Model Stock Fund Portfolio

Value vs. Growth Categories

Okay, fans of Large Growth funds, you've been consistently beating Large Value funds when looking at annualized past five year returns every January going all the back to Jan. 2010. That's quite a string. This means if you over weighted the average Large Growth fund as early as Jan. 2005 and held that over weighted position throughout, your returns would have exceeded the average Large Value fund by about 2% each year, and the average of all U.S. diversified categories of funds by about 1% a year. What gives, and can the streak continue?

wth funds tend to contain heavy doses of Technology stocks as well as Consumer Cyclical stocks. Large Value funds are particularly attracted to Financial Services stocks, with more of a commitment toward Energy and Utility stocks.

Both Technology and Consumer Cyclical have done quite well over the last 10 years, Utilities, Energy, and especially Financials, have not. As you probably are aware, Energy stocks have done particularly poorly over the last two years, while Financials took a particularly severe beating during the 2007-08 financial crisis and have been much slower to recover strongly since then compared to stocks as a whole.

I have been overweighing Large Value over Large Growth for several years now which, up to now, hasn't paid off. While both categories have done well, the average Large Growth fund has beaten the average Large Value fund by about 4% annually over the last 3 years.

But, according to my proprietary research, while both categories should do adequately in the years ahead, Large Growth still comes out a little better on my list of most recommended US stock categories.

The biggest question mark for value funds appears to be whether financial stocks, often their biggest component, can bounce off a relatively underperforming 2015, not to mention whether energy and utility stocks held in lesser amounts, can get back to anywhere near positive returns. In light of the continuing somewhat iffy prospects for Large Value funds, I am dropping my recommended allocation to 17.5% from 20%. Instead, I recommend putting the freed-up money into Fidelity Contra Fund (FCNTX).

I am also dropping my allocation to Vanguard Financials since our Large Value holdings already cover this sector.

International Stock Funds

Given the stronger prospects for most international funds as compared to U.S. stocks (described in my Jan. 2016 article "Most and Least Promising Stock Funds Categories" on my website), I suggest a bumped up allocation to the former.

U.S. stock funds, on average, have performed considerably better than international ones going back as far as 10 years. So, it might appear that I am running the risk of acting "prematurely" by going to an even higher international recommendation than before.

This is always the chance one takes when one starts to favor underperforming categories under the assumption that they are "due" to turn things around. But my research suggests that more frequently than not, it is usually more important to recognize potential undervaluation in a category than to always wait for strong positive momentum trends before investing. Thus, while emerging market stocks currently have strong negative momentum, my research suggests that they offer among the best prospects for longer-term investors (along with some badly beaten up sector funds), but both mainly for Aggressive investors.

It is interesting to note that stock markets in the Euro zone had a much better year in 2015 than US stock markets with a main index of European stocks up about 8%. However, for US investors, the increase in the value of the dollar vs. the Euro resulted in much of those gains being wiped away, unless you were invested in a European fund that hedges its currency exposure, such as the HEDJ ETF mentioned below.

Our Specific Fund and Allocation
Recommendations Now (vs Last Qtr.)
Recommended Category
Weighting Now (vs Last Qtr.)
-Fidelity Low Priced Stock (FLPSX) 10% (12.5%) Mid-Cap/
Small Cap
10% (12.5%)
-Fidelity Overseas (FOSFX) 5 (0) (A) (New!)
-Vanguard Europe Index (VEURX) 5 (10) (M)
-Vanguard Pacific Index (VPACX) 10 (10) (A)
-Tweedy Brown Global Val (TBGVX) 5 (5) (C & M)
-Vang. Emerging Markets Idx (VEIEX) 10 (7.5) (A)
-DFA Internat Small Cap Val I (DISVX) 5 (2.5) (A)
(See Notes 1, 2 and 3.)
International 40 (35)
-Fidelity Large Cap Stock (FLCSX) 7.5 (7.5)
-Vanguard 500 Index (VFINX) 7.5 (7.5)
Large Blend 15 (15)
-Vanguard Growth Index (VIGRX) 7.5 (7.5)
-Fidelity Contra (FCNTX) 7.5 (5)
Large Growth 15 (12.5)
-T Rowe Price Value (TRVLX) 5 (7.5) (M)
-Vanguard Equity Inc (VEIPX) 7.5 (0) (M) (New!)
-Vanguard US Value (VUVLX) 5 (5) (A)
Large Value 17.5 (20)
-Vanguard Energy (VGENX) 2.5 (2.5) (A) Sector 2.5 (5)


  1. Any stock or bond funds shown with (C), (M), or (A) are most suited for Conservative, Moderate, or Aggressive investors, respectively.
  2. ETFs (exchange traded funds) of the same category can be substituted for any of the above Vanguard index funds; e.g. Vanguard FTSE Europe ETF (VGK) can be substituted for VEURX.
  3. Although not included in the Model Portfolio, you may want to consider two other (or additional) international ETFs: WisdomTree Europe Hedged Equity ETF (HEDJ) and WisdomTree Japan Hedged Equity ETF (DXJ). These ETFs, unlike the Vanguard Europe and Pacific funds, tend to do better when the US dollar is strong, as it has been since roughly mid-2011.

January 2016 Model Bond Fund Portfolio

Comments on Our Updated Bond Recommendations

Our bond fund recommendations remain highly similar to last quarter's recommendations.

We are increasing our allocation to the Vanguard Intermediate-Term Tax-Exempt Fund as muni bonds seem to be one of the best options for both safe and decent after-tax yields. Since gradually rising interest rates could potentially hurt bond fund prices, we are sticking with short and intermediate term maturity funds. (Long-term bond funds have generally done a little worse in 2015 than short and intermediate term funds.)

We are dropping Metropolitan West Total Return Bond Fund, included in the last Portfolio, because its performance has not exceeded that of the major bond benchmark, the Barclays US Aggregate Bond Index (AGG).

Our Specific Fund and Allocation
Recommendations Now (vs Last Qtr.)
Recommended Category
Weighting Now (vs Last Qtr.)
-PIMCO Total Return Instit (PTTRX) 25% (25%)
-Harbor Bond Fund (HABDX) 0 (0) (See Note 1.)
-PIMCO Total Return ETF (BOND) 5 (5)
Diversified 30% (35%)
-DoubleLine Tot Ret Bond I (DBLTX) 7.5 (7.5), or
DoubleLine Tot Ret Bond N (DLTNX)
(See Note 2.)
7.5 (7.5)
-Vang. Intermed.-Tm Tax-Ex (VWITX) 17.5 (15) Interm. Term
17.5 (15)
-Vanguard Sh. Term Inv. Grade (VFSTX) 10 (7.5) Short-Term
10 (7.5)
-Vanguard High Yield (VWEHX) 10 (10) High Yield 10 (10)
-PIMCO For. Bd (USD-Hdged) Adm (PFRAX) 25 (25) International 25 (25)


  1. When possible, select PTTRX; HABDX is only recommended if you cannot met PTTRX's minimum.
  2. The two funds are the same but have different minimums; select DBLTX if possible because of lower expense ratio.


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