Just when taking risks starts to look smart, here comes our Conservative. April was similar to March in that conservative investments outperformed growth. This again played well into our Conservative portfolio, which posted a 1.28% return in April. The portfolio beat the stock and bond markets and most conservative, balanced, and total portfolio funds out there this year at any risk level. The Conservative portfolio is now up 4.28% YTD, pushed along by longer-term investment grade bonds and utilities. Our Aggressive portfolio was up 0.36% in April.

Benchmark Vanguard funds for April 2014: 500 Index (VFINX) up 0.72%; Total Bond Market Index (VBMFX) up 0.77%; International Index (VTMGX) up 1.51%; Emerging Markets Stock Index (VEIEX) up 0.51%; Vanguard STAR (VGSTX), a total balanced portfolio, up 0.25%.

The spread between strong and weak fund category performance was wide again, with smaller cap growth stocks underperforming larger value stocks by about 5%. We've been warning about the excess in small cap growth but a few more spreads this wide between small and larger cap performance will clear up the over-valuation issue pretty quickly.

Latin American stocks were at the top of the international heap, while China was at the bottom. In general, safer, larger foreign markets outperformed emerging markets and smaller cap stocks abroad. Our Vanguard European ETF (VGK) the portfolios' top fund, gaining 4.16%, though Wasatch Frontier Emerging Small Country (WAFMX) surprised with a 2.84% return in an otherwise tough month for risky stocks - and WAFMX is risky.

Losers for April included growth stock fueled PRIMECAP Odyssey Growth (POGRX), down almost 4%, and Satuit Capital Micro Cap (SATMX), down just over 5% in a bad month for smaller cap growth stocks.

In Bondland, longer term investment grade and government bonds were best as rates slipped, pushing up Vanguard Extended Duration Treasury (EDV) almost 3% and Vanguard Long Term Bond Index ETF (BLV) up 2.4%. Energy and utilities were top sectors with financial, healthcare, and technology at the bottom.

The seesaw is back. A market that was looking a little scary in January and early February rebounded strongly, leaving the stocks basically flat for the year (until, that is, the start of March when Russian mischief sent stocks plummeting anew).

Our Conservative portfolio gained 2.10% in February; our Aggressive portfolio was up 1.03%. Benchmark Vanguard funds for February 2014: 500 Index (VFINX) up 4.56%; Total Bond Market Index (VBMFX) up 0.48%; International Index (VTMGX) up 5.73%; Emerging Markets Stock Index (VEIEX) up 3.42%; Vanguard STAR (VGSTX), a total balanced portfolio, up 3.61%.

The Conservative Powerfund Portfolio is having a better 2014 than our Aggressive, which is being held back by weak foreign stock markets. Emerging markets, already stumbling from investor outflows and somewhat scary tales of inflation and currency slides and weakening economies, now have to deal with one of the biggest markets, Russia, embroiled in what emerging market fund prospectuses would call “political instability”. We currently own a small stake in Russia indirectly through iShares MSCI BRIC Index (BKF), an emerging market ETF we added in 2013. We’ll consider a larger stake in this or a similar fund if we get crisis pricing. In our Aggressive portfolio we were largely out of emerging markets in 2006 through 2013.

February was strong for bonds and stocks across the board – even hard beaten areas like precious metals funds gained almost 10%. The worst category performers were only posted gains of one to two percent, including Japan and some emerging markets. Vanguard Telecom Services ETF (VOX) was one of the few funds that do not short that was down in February.

Happy New Year! And what a year it was. The S&P 500 was up just over 32% with dividends – its best year since the mid-1990s. Hopefully, the economy will be as good as it was in the late 1990s, or those buying small-cap stock indexes at 30+ P/E ratios and 1% yields might be sorry.

In hindsight, it was a year in which to invest wholeheartedly in U.S. stocks, the perfect cap to a multi-year trend of outperformance that began right about the time everyone gave up on America.

Bonds – except junk bonds, very low-duration bonds, and bonds  convertible into (rising) stocks – were down for the year. Emerging market stocks were also down, as were commodities and gold. Major foreign markets were up, but not as much as the U.S. market. 

Our Conservative portfolio was up 0.66% in December, while our Aggressive portfolio gained 0.46%. Benchmark Vanguard funds for December 2013 were as follows: 500 Index (VFINX) up 2.51%, Total Bond Market Index (VBMFX) down 0.65%, International Index (VTMGX) up 1.59%, Emerging Markets Stock Index (VEIEX) down 0.96%, and Vanguard STAR (VGSTX), a total balanced portfolio, up 1.35%.

We were held back late in the year by our large longer-term bond positions, and recently added emerging market stocks (we've been light on the latter for years now.)

In general, global balanced (stocks and bonds from around the world) portfolios did well in 2013, but still significantly lagged behind U.S. stock portfolios. We were too global and balanced, although we largely avoided foreign bonds. 

Global balanced strategies have become popular in recent years; Blackrock Global Allocation (MDLOX), the largest total global portfolio fund with its $60 billion in total assets, and one of the largest funds in general, was up just over 14% in 2013. But before 2013, MDLOX performed only so-so. Over the last three years, it’s posted only a 6.63% average annual return, while the S&P 500 has been up 16% (annualized) during the same time period.

MDLOX carries about the same level of risk as our Aggressive portfolio now (although we fell less in 2008, down 16.23% vs. 20.56% for MDLOX). Our Aggressive portfolio performed better than MDLOX in 2013, up 19.04%. The Aggressive portfolio has also fared better over the last three years, up 10.74% (annualized). The 10-year annualized return for our Aggressive portfolio is higher than BlackRock Global Allocation as well, and BlackRock beat more than 80% of the global allocation funds still in existence over the past ten years.

We won't dwell on all of the expert (and expensive) Wall Street competition we routinely outperform. Let's look at the Vanguard 500 (VFINX) fund that underperformed in 2013, instead. Our mistake was playing it a bit too conservatively in 2013 and getting too global, too soon. This whole global portfolio diversification thing has gotten way too popular in the years since 2000, when U.S. stock-focused portfolios ruled the roost. 

What really worked this year (and has for most of the last seven years now) was owning 1999-style portfolios: U.S. stock-heavy, with a focus on growth. Small growth stock funds were up 41% in 2013. Of our current holdings, only PRIMECAP Odyssey Growth (POGRX) (39.30% in 2013) and Satuit Capital Micro Cap (SATMX) (39.51% in 2013) reached these heights last year, although our recently sold long-term holding, SPDR Healthcare ETF (XLV), was up 41.4% in 2013.

Weak areas in 2013 included commodities in general and precious metals, in particular. Anything that's typically bought in order to fight the ravages of inflation – namely REITs, TIPs and gold – had a lousy 2013. After a roughly 50% hit in 2013, precious metals funds are basically the worst fund category (that doesn’t short) over the last 1, 3, 5, and eventually, 10-year time period, as it has been most of the time since the dawn of the fund business. 

Our more conservative, bond-heavy Conservative portfolio was up 10.43% in 2013, and 7.43% (annualized) over the past three years – a three-year return that's still better than Wall Street’s most successful global portfolio. 

In October stocks went back to their old tricks and treats…see-sawing up and down on scary financial news but ultimately ending with a big gain. As the specter of global calamity resulting from a shutdown and defaulting U.S. Government fell to the wayside (at least for a few months…) the stock market sprang back to life, and is now up for the year about as much as the entire year of 2008 – a major rebound year for stocks after a sharp slide.

Even bonds are coming back as inflation remains low and the Federal Reserve seems wary enough of shutdown antics to continue low rate policies for longer than investors thought was likely a few months ago.

Our Conservative portfolio was up 2.71% in October. Our Aggressive portfolio gained 3.29%. Benchmark Vanguard funds for October 2013: 500 Index (VFINX) up 4.59%, Total Bond Market Index (VBMFX) up 0.78%, International Index (VTMGX) up 3.23%, Emerging Markets Stock Index (VEIEX) up 4.65%, Vanguard STAR (VGSTX), a total balanced portfolio, up 2.91%.

Not a bad month all around for the Powerfund Portfolios considering our relatively low stock allocations. Beating other balanced portfolios is an important gauge of success because we fell by more than ten percentage points less than the average moderate risk balanced portfolio in 2008. An important factor in our outperformance versus alternatives is that we fall less during down markets. That said, we won’t beat the pure-equity S&P 500 when it gains over 25% YTD at our risk level, though with our Aggressive portfolio up just over 17% YTD we’re satisfied.

Our main fear now is stretching valuations. If the economy and revenues don’t start growing faster, we don’t see how stock prices can continue clocking big gains in coming years. This doesn’t mean a great collapse is coming like in 2007 when the economy was built on a teetering housing bubble, just that future returns will likely be lackluster. This is a bigger problem in smaller cap stocks (which we are largely out of) which are getting into 2000-ish stock bubble level valuations with near 30 trailing P/Es and 1% dividend yields. Long term investment grade bonds are looking quite favorable compared to smaller cap stocks right now even though the next 10 years for bonds will be nothing like the last. Post shutdown, money is coming back into stock funds, which could be a sign of trouble down the road. Overconfident investors are a symptom of market tops, not bottoms.

Telecom was strong, with our Vanguard Telecom Services ETF (VOX) up over 7%. This sector is now among the best of the last five years (and did well in the down turn when we owned it). This fund has now delivered among our best since inception returns - 122% since we added it to the Powerfund Portfolios. Interestingly, other top sectors for the last five years include healthcare and technology funds, areas we focused on for much of the last five years (because investors were not focusing on them). More recently healthcare was weak relative the market last month, though we have cut back here. Utilities, which were underperforming this year, did well last month.

India was the hottest foreign market, up over 10%, which we only partially benefited from as our recently bought ‘BRIC’ fund saw its Indian stocks returns weighed down by so-so returns in China and Brazil.

Stocks and bonds sunk in August, which makes it difficult for a portfolio made up of both to perform well. Of all the things investors worry about, the high correlation of all asset classes is the most distressing, and most likely.

Our recent cutting back on stocks in our Aggressive portfolio and rebalancing into less stocks in our Conservative helped returns, but adding long term bonds and other higher volatility funds didn’t lead us to beating the S&P 500 by all that much since the trade in late August. Our moves will show rewards if the recent rise in interest rates slows, stops, or reverses and stocks remain choppy; we’re well situated for just about any any scenario save one in which stocks go straight up. Even if rates continue to climb and bonds fall, if stocks fall harder than longer-term bonds our new-look portfolios will still beat the old allocations.

In August, our Conservative portfolio fell 1.69%. Our Aggressive portfolio was down 2.22%. Benchmark Vanguard funds for August: 500 Index (VFINX) down 2.91%, Total Bond Market Index (VBMFX) down 0.53%, International Index (VTMGX) down 1.25%, Emerging Markets Stock Index (VEIEX) down 3.57%, Vanguard STAR (VGSTX), a total balanced portfolio, down 1.42%. 

Once again emerging markets were the hardest hit – and we are starting to move back into emerging markets for the first time in years. Money has finally (and rapidly) started moving out of emerging markets, but there is still too much investor money in them. We’re waiting for even greater outflows before we increase our allocation significantly. We may never get to total investor emerging markets surrender that we saw back in the late 1990s, but we can hope for the largest ETFs in this area to lose a few more billion (and maybe even a few recently launched emerging market funds to close for lack of investor interest).

Of special note is the stock market in India, down almost 14% last month and the worst performing emerging market recently. We are starting to run towards the fire here - our recent emerging market fund purchase owns a good chunk of Indian stocks - but trouble in India may not be over. We think this slide may have something to do with the yellow metal itself, which Indian citizens fetishize  more than Auric Goldfinger. There seems to be some relationship between the earlier slide in gold prices and stocks in India. As their currency drops sharply, could gold hoarding to protect wealth make the economic and currency problem worse as money is converted to gold and not ordinary consumer purchases? This won’t be the first time in history countries were brought down economically by the seemingly prudent move of investing in precious metals during periods of economic uncertainty.

Commodities, notably precious metals, were the main area of strength in August (after years of massive underperformance) as fears of trouble in Syria drove up oil and gold – which were both already gaining recently. Both should fizzle soon (which is what we are now positioning our Aggressive portfolio for).

About the worst area of the U.S. market was small cap value (a category with one of the lowest ratings on MAXfunds because of investor interest and outperformace), which fell 3.4% last month.