Last month our Aggressive Powerfund Portfolio, which debuted on March 31st, 2002, moved past the 300% since-inception return mark (recent weakness in bonds and stocks currently put us just below that level).  In the warm glow of the rearview mirror, that 300% (or just over 11% annualized) seems pretty grand. But it’s important to look at what actually happened to generate that return and consider how repeatable it is. “Past performance is no indication of future results” is as true for us as anyone else.

We’ve learned something in 2014. Commodity investing is dead. Long live the information economy. Oh, real assets, we hardly knew ye!

Although this latest slide, which started about a month ago in mid-September, isn’t that big of a deal in percentage terms for the U.S. market, both the speed of the drop as well as bigger drops in hot growth stocks are scaring investors lulled into a false sense of security by a market with few down interruptions in recent years.

As the market continues to erase every pullback in short order, investors are focusing less on downside risk and more on  upside potential. Controlling losses is no longer a priority.  As the markets heat up, investors want a piece of the action. As contrarians, that isn’t our approach, and it shouldn’t be yours, either. Ideally, concern for downside should rise along with the market, just as ensuring you’re positioned for the rebound should be your objective during a long bear market. 

It's not clear where the next significant slide will come from. We don’t have a broad tech and growth stock bubble like we had in 2000. We don’t have a real estate bubble propping up the economy. Not that you need a reason for the stock market to slide. There's still no consensus as to what caused the crash of 1987, and experts differ on the reasons for the 1929 crash as well as the depth of the economic problems following the slide.

 Flash Boys isn't about a devastating Madoff-esque Ponzi scheme. It's more about how Wall Street as an industry can maim a portfolio with a thousand cuts, the razor of focus this time being sophisticated front running computer schemes.

Some part of us sort of root for a pullback. Here are some reasons nearly any investor (not just Bobby McFerrin) should stop worrying and even be happy about a drop in stocks.

After years of separation, investors have finally rekindled their love affair with stocks. That on-again, off-again romance is definitely back on again, with billions going back into stock funds each month. Investors' infatuation with bond funds is also ending. Nearly $100 billion have come out of bond funds in 2013. They're just not that enticing anymore. Does this mean we should expect trouble down the road for the stock market, and if so, what sort?

The economy and markets are heavily influenced by purely psychological factors. People spend or invest based on fear, optimism, and expectations for the future. Consumers and investors make decisions based on tangible factors like wage growth and tax rate changes, but they're also surprisingly motivated by fluctuating optimism. It's entirely possible that most booms and busts are largely caused by swinging collective expectations.

Stocks have been going great guns since we hit the bottom of the financial meltdown in March 2009. We generally try to increase our stock allocation on the way down and cut back on stocks as they climb and investors grow more optimistic.

Predictions about rates having nowhere to go but up might have looked equally correct half a dozen times in recent years – yet been wrong.

I reckon we’ve been talking about this here gold bubble in them thar hills for quite some time. Thankfully, the market gods have finally deigned to demonstrate exactly why we shouldn't be worshiping this particular golden calf. As of this writing, gold is down 27% from the highs it reached in September 2011. It fell 8% on Monday alone.

Someone once said that the only perfect hedge is in a Japanese garden. Here are a few typical strategies for minimizing downside (and upside…) in a portfolio, with some brief notes on the imperfections of each, especially in light of an ever-shifting landscape.

The so-called fiscal cliff is just a couple of weeks away, and while the fiscal cliff is certainly real, the ultimate size of the drop-off is unknown. There are many complex financial happenings at the end of 2012. Some have to do with estate taxes, some with ordinary income, and some with investment income. We can’t speak to all of the strategies available to those with different financial issues; moreover, non-investment tax issues would require the advice of estate attorneys and accountants. That doesn't mean, however, that everyone needs to seek such professionals or make any changes.

In celebration of the 10th year of Powerfund Portfolios, we're introducing a new  “Stats” page for both the Conservative and the Aggressive Portfolios. Here’s a quick tour.

Baby Boomers are following the age-old advice to shift from stocks to bonds as they grow older, despite the fact that this general recommendation might not apply in a world in which bonds yield less than stocks. But two 50%+ haircuts in the stock market since 2000 (with a "flash crash" thrown in for good measure) certainly aren't inspiring confidence in the stock market. Fear of another global catastrophe is keeping some money in seemingly low-risk places, but that doesn’t explain the shift within stock funds.

There 's good deal of concern in the markets that Europe's slow collapse will turn into something a little more 2008-ish. Remember 2008? The year Lehman, along with most of the financial services industrial complex, imploded? At least until governments near and far propped up the poor pinstriped saps and halted the panic. Free markets until markets free fall. The worry this time around centers on the governments themselves – governments that have increased spending to support weakening  economies while simultaneously moving the debts of a global real estate bubble to their own tattered balance sheet The buck has to stop somewhere. 

It’s tax time, everyone’s least favorite time of year. Even those receiving refunds are pretty grumpy about the whole endeavor. But since the average tax rate Americans pay  will be one of the lowest in the last fifty-plus years, we should be celebrating.

The biggest long-term problem facing investors right now isn't U.S. debt, or even European debt. It’s the likely near-indefinite future of very low returns on the lowest risk investments: CDs, money market funds, Treasury bills and notes, savings bonds, and even shorter-term corporate and municipal bonds. Any assets with a maximum downside of 5% or less probably have a likely upside of less than 2% per year for the foreseeable future. 

Gold is set to deliver an astonishing 11th straight calendar year gain in 2011, a dramatic reversal of an equally astonishing 20-year slide that began in 1980 when the gold bubble collapsed. For 13 of the calendar years between 1981 and 2000, gold was a loser, in contrast to the S&P 500, which rose during 17 of those same 20 years. This stark comparison doesn’t do justice to the real money implications of sharply diverting ways. A thousand dollars invested into the Vanguard 500 Index Fund at the end of 1980 (even without 1980's 30%+ gain) grew to $17,524 by the end of 2000. The same investment in gold crumbled to $465.

After this long plateau, inflation fears abound, oil prices remain uncomfortably high after skyrocketing a few years before. A global superpower is stuck in a war in Afghanistan, and Iraq is a war zone putting global oil supplies at risk. We have no idea where economic growth will come from, or when it will kick in. The government is a mess. Tax and regulatory uncertainty has business leaders scratching their heads. The unemployment rate, no longer stable at around 5%, seems to be heading toward 10%, and investing in precious metals or the far east appears to be the only way to make any money.

If you believe  the brilliant minds at Standard & Poor’s, the U.S. must be mere months from collapse. After all, this is the same agency that continued to confer "Triple A" status on Enron debt until just a few months before its downfall. Standard & Poor's also waited too long to downgrade highly-rated debt created by Wall Street that contained sliced and diced home equity loan super tranches on bubble-inflated Vegas and Miami properties. We continue to believe U.S. government debt is safer from actual default risk than any debt in the world –though our debt probably is ever-so-slightly more at risk of a temporary default as politicians seem to think choosing default is a legitimate strategy.

The market’s recent weakness is causing a lot of anxiety. Since the last S&P 500 peak on April 29th, the actual decline has been a relatively mild 7.2% (as of June 15th). Yet the consistency of the slide is generating a lot of "worst decline since X" and "market down six weeks in a row" stories, stories that make investors nervous. Now we’re seeing people pull money from stock mutual funds a few months after big inflows.

When bubbles mature, investors begin considering even more speculative areas with supposedly more upside, believing "all the money has been made" in the things that have already taken off. This second wave takes what was learned in the bubble, and applies it to an investment with questionable upside, often jolting the price even faster and higher than the original bubble.

Although getting between you and your investments continues to deliver spoils in the tens of billions a year to the middle men, from the lowliest broker/salesman to the highest-flying billion(s)-dollar-a-year-plus salaried hedge fund manager, the only thing shrinking is the actual return from owning stocks and bonds, particularly if you follow many of the "experts'" wisdom and guidance.

You know it’s bad when the fund companies warn you about dismal future returns in the bond market. Yet there it is – splashed on the home page of Vanguard’s personal investors site – "Vanguard’s Investment Chief Cautions Bond Investors” – a road sign that says “RISK AHEAD.”

The stock and bond market have been strong lately, boosting returns of the funds in both Powerfund portfolios. If bonds were sinking and rates were climbing, we’d likely be shifting money from stocks to bonds at this time. In most cases, stocks, even at these levels, are still a better deal than bonds (although stocks remain the riskier asset class, bond bubble or no bond bubble).

Big money has been moving into bond funds over the last year or so. We saw a similar situation in the late 1990s, with massive flows into stock funds. Broadly speaking, this trend might lead us to favor stocks over bonds for the next few years, since we generally avoid whatever attracts fund investors. But there's a little more to this money flow than meets the eye.

We  want to be in the fund categories other investors avoid. During the market comeback's last hurrah, investors began piling back into junk bonds and foreign, small cap, natural resources, and commodities funds. We prefer investing in these areas when prices are down as investors scramble for safety. Today's investors are worried about inflation, which usually ensures inflation won't be a big problem.

Are investors who buy stocks now April fools? Stocks are definitely more expensive than they were during the financial panic, but they're cheaper than they were right before it started, back when the Dow tipped the scales at 14,000.

January was the first real down month since the market recovery began on March 9, 2009. In January, an investment in the Vanguard 500 Index Fund (VFINX), which owns the stocks in the S&P 500 and includes dividends along with (ultra low) fund expenses, would have returned a negative 3.6%. The only other interruption during the strong comeback was a 1.87% drop in October 2009.

Although bubbles appear obvious in hindsight, when you're in the midst of one, everything feels quite rational. Whether speculating in Florida real estate, Internet stocks, gold, or even tulip bulbs, most participants in the frenzy could recount their financial ruin by saying, "I guess you had to be there."

Recently, fund investors have abandoned money market funds and similar near-zero interest investments, like short-term government bonds, in search of higher returns. Of course, being overly cautious is usually a bad idea. But trying to capitalize on irrationally high returns on higher-risk investments while eschewing safer investments isn't very smart, either.

From the March low (hit just a few days after our last buy in our model portfolios), the market is up around 50% - among the greatest returns in a few months ever. Makes one wonder how much faster stocks could possibly go up in a short time period. What if the government did what everybody wanted it to do? Perhaps good and bad government policy is overrated as it pertains to stock prices.

There's been a lot of talk about American consumers and what they'll do with their money once the dust settles. Most market analysts, economists, and prognosticators are quite certain that American consumers have fallen and simply can’t get back up. But just a few days ago, the market took off following a five-day slide, inspired by nothing more than news that the "sentiment index," one of the data points published by the Conference Board Consumer Research Center measuring the psyche of the consumer, "surged by the most in six years" in May. 

They say it’s always darkest before the dawn. But then again, it’s pretty dark at 1:00 AM, too, and you still have a ways to go before the sun comes up.  Let's  consider a few basic financial factoids currently circulating: (1) stock markets typically recover before the economy does; (2) recessions rarely last more than a couple of years; and (3) compared to recent history, stocks are now cheap. 

The New Year is traditionally the time of New Year’s Resolutions, “I will eat less and exercise more” or “I will quit smoking”.  New Year’s offers everyone a time to reflect on past behaviors and decisions and commit to resolutions to fix, or prevent, bad behavior. Unfortunately, the investment community doesn’t waste much time on such resolutions. If they did, the list of resolutions  for 2009 would be extensive.

October 2008 was one for the record books. The Dow suffered two of the worst single days in its history: October 9th, closing down 7.33%, and October 15th, experiencing an even harsher 7.87% one-day drop. September wasn't much kinder, especially September 29th, when the Dow plummeted 6.98%, accounting for the nineteenth worst single-day drop in the history of the Dow.

While we’re obviously pleased to own some big gainers especially in this hot-then-not market, we always get a little worried when funds in our portfolios start to attract attention – and money. Our idea of asset allocation is to allocate into out-of-favor assets and wait until they are in favor. This applies to stocks, bonds, and cash in general, and specific sectors or fund categories.

In our commentary last month we noted how, over the last year, fund investors have been getting out of stock funds after the market slipped, then buying in after the market rose – the classic buy high/sell low cycle. A successful fund portfolio does not this behavior make, and doing the opposite is pretty much what the Powerfund Portfolios are all about. We are going to use June’s sharp pullback in stocks to increase our stock allocations and risk levels across the board.

Until recently, investors’ defined commodities as anything from "generic goods used to make more valuable items" to "a high-performing asset class that diversifies a portfolio and offers protection against a falling dollar, inflation, world calamity, and just about anything else." Can you blame them? Since 2000, commodity indexes have outpaced nearly every other asset class. While the S&P 500 continues trying to claw its way back to where it was nearly a decade ago, commodities, especially oil – the Grand Poobah of commodities – just keeps climbing. 

Over the last year, the strategy that has hurt investors (mostly large institutional ones) the most has been, for lack of a better term, the "yield reach." We'll define this strategy as buying a riskier income-oriented investment in order to attain a higher yield.

The Chinese New Year doesn't arrive until February 18th, and considering that the Chinese stock market doubled in 2007, while our own volatile yet underwhelming market has taken more than ten years to accomplish the same feat, perhaps we should focus more on other countries' goings-on.

In Alan Greenspan’s most famous market commentary, he merely hinted at the possibility of irrational investor exuberance. The ensuing far more irrationally exuberant behavior in the stock market was surprisingly ignored by Greenspan, at least publically. His second most famous market commentary centered on the 2005 bond market. Greenspan testified before Congress that the flat yield curve with low long-term interest rates around the globe was a "conundrum". 

August certainly didn’t seem like a month that would end better than it began. The S&P 500 was up just over 1% - not exactly a barnburner, but given the turmoil in July and early August, nothing short of a miracle - and certainly the result of some sort of divine intervention. That divine intervention involved no less a deity than the Chairman of the Federal Reserve himself, who in mid-August reversed what appeared to be a true stock market death spiral

You probably already know that we did a bit of trading at the end of June. The giant red trade alerts on every model portfolio page (and our recent email alerts) were probably a dead giveaway. In fact, that set of transactions represented one of our most comprehensive block trades ever.

While it’s not quite the bubble-era Promised Land of “Dow 36,000,” the recent Dow 13,000 milestone is quite exciting, nonetheless. Any day now, it looks as though the S&P 500 (a better market benchmark that more closely mimics how most investors have fared) will break the record high it set over seven years ago. 

It has been quite some time since the Dow dropped over 500 points in just a few hours. The last time it happened, the biggest terrorist attack in our nation’s history was the culprit. This time, we had only the vague notion that the Chinese government is concerned enough about stock market speculation and their economy, to rattle our stock markets.

We’re always looking for signs of overly exuberant fund investors to guide our investing decisions. When fund investors get very excited about a specific fund, a category of fund, or even investing in general, it often pays to do the opposite, or at least ease up on whatever is catching their fancy. New fund launches—their volume and relative asset-gathering success—are tops on our list of contrarian indicators.

The big story lately is the incredible earnings growth of corporate America. As earnings are the core to long-term stock market returns, this is good news – certainly a better foundation of investment than boundless revenue growth or market share growth or user growth or even that “potential future maybe revenue growth” that was driving stocks a few years ago. 

As we've noted before, early this year fund investors were plowing tens of billions into funds – right before the market caved in. Now that market is rebounding, and inflows have improved again. This sort of buy high/sell low/buy back high is exactly why fund investors typically underperform the market, and why we try to do the opposite of what most investors do.

Let’s check in with what fund investors are doing – and as usual, consider doing something else.

In case you’ve missed the nonstop media coverage, gasoline prices are again approaching $3 a gallon. Does this “crisis” situation offer any investment opportunities? Can it derail the economy and stock market? And why is gas so expensive anyway?

Jensen has spent a lot of its existence underperforming the market – so why does the fund have a couple of billion dollars under management, and why does it garnish so many accolades in the press and in the analyst community?

Flipping is more commonly known as an inverted yield curve. In such a rare event, the yield on a 10-year government bond is lower than the yield on, say, a 2-year government bond (technically a note). What’s the big deal? Maybe nothing. Maybe something. Maybe a big something.

Ben Bernanke is not an old Bush chum or just semi-qualified for the job. The stock market did not react badly to the news. Bernanke seems more than deserving of the top job in the entire world of economics. But as I dug a little deeper, I uncovered some details that are a little scary.

There are countless ways to try to profit around the world, but how much you can expect to earn investing does have limits, at least in the long haul.

In this hunt for the unloved, we look at numerous factors. One way to help determine what broad style of investing to consider going forward is to look at what the biggest funds are doing.

We've been beating the market indexes pretty handily (and with less risk) across our portfolios these past three years, in both up and down markets. As we've noted in recent commentaries (and our latest category favorites report), it's time to lighten up in some hotter areas.

One aspect that makes investing so frustrating is the unpredictable pattern stocks follows. The market is like a drunk stumbling home from a bar - you can’t expect a straight path, but you can be reasonably sure of the final destination – home.

For Powerfund Portfolio subscribers, the most efficient way to invest our model portfolios is through a so-called “fund supermarket” at a broker like Scottrade. This way an investor following our model portfolios can trade and track the funds from all the different fund families we recommend, all in one place. Unfortunately, using a brokerage platform usually adds a layer of extra costs. As expenses cut directly into your investment returns, it’s important to pay as little for trades as possible. At some brokerage platforms, these fees can be quite expensive. 

With Halloween all wrapped up, we felt now is the time to discuss our current investing fears. Here are the two biggest concerns today.

The economy and the stock market are much bigger than any one elected official, even the President. That said, the executive branch’s economic policy can move markets, particularly certain types of securities.

When a transition is complete the last great industry continues to exist in the economy, but grows at a slower pace and becomes a smaller percentage of our national product. Today’s outsourcing (or offshoring) of technology jobs is a sign that America’s current leading industry is about to be replaced by another.  What will replace it? Financing.

Each and every fund in each and every model portfolio can now be purchased on Scottrade’s no transaction fee (NTF) platform, which means that investors can buy and sell them without paying a fee of any kind. We synched our portfolios with Scottrade’s platform because Scottrade has the highest number of funds available for sale without transaction fees.

The main reason we don’t trade actively is that our fund investing strategy is reasonably long-term – when we like an area of the market or category of fund we usually like it for reasons that are anything but trendy. 

Economics is the science nobody cares about until the economy stumbles. When it does, everyone wants to know why unemployment is rising and why their stocks are falling. Humans like to hear answers to unanswerable questions. It’s why some cultures had a god of rain they would pray to during the dry seasons.

Our Powerfund Portfolio lead article from October 15th 2002 was written during what was a difficult period for investors. On October 9th of 2002 the Dow had fallen to 7,286. We laid out the case for stocks being a relatively good place to put your money at current valuations. 

Investors these days expect a lot from the companies they are buying stock in over coming years – earnings have to grow to meet current high expectations. Investor’s expectations tend to be wrong, not just about earnings and stock prices, but about Wall Street in general. Look no further then the scandals of recent years.

All of our model portfolios are up since we launched them at the beginning of April 2002 save one, the Daredevil portfolio (our most risky) which is down 1.2%. We’re satisfied with this performance as the Dow, S&P 500, and NASDAQ are still down 12.42%, 13.4%, and 12.47% respectively in the same period. 

Since the market peak of March 2000 stocks have lost money with some brief run-ups, while bonds have largely made money with some brief pullbacks. In statistical terms, the behavior of stocks and bonds over recent years is called low correlation

According to some January Effect proponents, January has predicted the year's returns over 90% of the time. This is why many investors are nervous these days. January ended down. If the January Effect is true, this means we have a 90% chance of losing money this year in the market.

If you recall from the last few issues of the Powerfund Portfolios, we talked about the panic investors felt when the Dow was in the low 7,000's, and how everyone had become severely risk averse. Much money piled into "safe" government bonds, lowering yields. Recently, as the market rallied back sharply, many of these same investors forgot all the things that made them scared in the first place - corporate scandals, a weak economy, looming war and terrorist threats, and lackluster earnings (to name just a few).

In the last issue of the Powerfund Portfolios we explained why treasury bonds may start being less of a sure thing, and might even surprise investors by their lousy returns as rates go back up sometime in the future (how's that for a prediction that can't go wrong?). This month we want to get back to the issue on everyone's mind: stocks. Namely, are stocks cheap, and can investors expect to make any money in them anytime soon?

Tabloid news headlines aside, the real trouble - as it's been for some years now - is valuations. Stocks were priced for perfection when anything but became the market environment. More troubling, stocks were richly valued assuming the numbers (earnings and revenues) were "on the level", which, sadly, they were not.

It wasn't all bad news. Small cap value indexes rose around 3 - 4%. For those keeping track, these types of stocks are now up well over 50% since the large cap indexes hit the skids. That's a pretty big move... for stocks that aren't really growing earnings, broadly speaking.