The Conservative Portfolio dipped -0.32% in June.

In June the market continued downward, with a 5.24% drop in the S&P 500. Small cap stocks were hit harder, off 7.75% for the month (and recently went into officially bear market territory, down 20% from their 2010 peak). The Nasdaq wasn’t much better, falling 6.55%.

At the end of June the S&P 500 was down about 6.66% (yikes!) for the year while our average model portfolio has fallen 2.4%. The strongest areas last month were bonds, with returns for bond funds ranging from 1% to as high as 6% for some longer-term US government bond funds. The Dow was relatively strong with a 3.43% drop.

Once again we’re seeing interest rates decline as the reality of a slow economy and low demand for borrowing trumps fears of government-fueled inflation. Junk bonds performed surprisingly well. Normally, if there is such a thing as  “normally” in investing, the boost high yield bonds prices get from lower interest rates during a sliding stock market would be overridden by growing economic fears and expectations for higher defaults in the future on high yield bonds. This is largely why junk bonds did so badly in 2008. 

The consensus could now be that the economy won’t grow fast enough to push stocks (or interest rates) up much, but won’t slow enough to increase debt defaults in the economy, a sort of junk bond goldilocks. Our take is that there is too much money going into Junk bonds and that’s a time to be cutting back, as we’ve been doing lately. We prefer the payouts on higher dividend utility and telecom stocks today.  While these payouts are not as high as junk bond yields, these stocks are more likely to make the payments if the economy dips anew. They also likely have more stock market like upside from these levels given that high yield bonds are not far off their pre-credit-crisis highs and have outperformed utilities in this recovery.

Bill Gross recently moved back into treasuries, and just in time to get a boost. Harbor Bond was up 1.71% in June, a bit better than the total bond markets 1.57% increase, and above Junk Bonds. 

Health Care Select SPDR (XLV) dropped just 1.8% in June, another month during which it was down less than the broad market. 

American Century Utility Income (BULIX) dipped just 1.28% as higher dividend stocks in out of favor categories fell less than the market.

Telecom stocks booked another market beating month. Vanguard Telecom ETF (VOX) fell just 1.96%. This fund is still underperforming the S&P 500 over the last year, but that should change soon.

Metropolitan West High Yield Bond (MWHYX) rose 0.77% as ongoing economic fears were not so severe as to panic junk bond investors into forecasts for increasing defaults.

The Aggressive Portfolio dropped -2.02% in June.

In June the market continued downward, with a 5.24% drop in the S&P 500. Small cap stocks were hit harder, off 7.75% for the month (and recently went into officially bear market territory, down 20% from their 2010 peak). The Nasdaq wasn’t much better, falling 6.55%.

At the end of June the S&P 500 was down about 6.66% (yikes!) for the year while our average model portfolio has fallen 2.4%. The strongest areas last month were bonds, with returns for bond funds ranging from 1% to as high as 6% for some longer-term US government bond funds. The Dow was relatively strong with a 3.43% drop.

Once again we’re seeing interest rates decline as the reality of a slow economy and low demand for borrowing trumps fears of government-fueled inflation. Junk bonds performed surprisingly well. Normally, if there is such a thing as  “normally” in investing, the boost high yield bonds prices get from lower interest rates during a sliding stock market would be overridden by growing economic fears and expectations for higher defaults in the future on high yield bonds. This is largely why junk bonds did so badly in 2008. 

The consensus could now be that the economy won’t grow fast enough to push stocks (or interest rates) up much, but won’t slow enough to increase debt defaults in the economy, a sort of junk bond goldilocks. Our take is that there is too much money going into Junk bonds and that’s a time to be cutting back, as we’ve been doing lately. We prefer the payouts on higher dividend utility and telecom stocks today.  While these payouts are not as high as junk bond yields, these stocks are more likely to make the payments if the economy dips anew. They also likely have more stock market like upside from these levels given that high yield bonds are not far off their pre-credit-crisis highs and have outperformed utilities in this recovery.

American Century Utility Income (BULIX) dipped just 1.28% as higher dividend stocks in out of favor categories fell less than the market.

Health Care Select SPDR (XLV) dropped just 1.8% in June, another month during which it was down less than the broad market. 

Bill Gross recently moved back into treasuries, and just in time to get a boost. Harbor Bond was up 1.71% in June, a bit better than the total bond markets 1.57% increase, and above Junk Bonds. 

Telecom stocks booked another market beating month. Vanguard Telecom ETF (VOX) fell just 1.96%. This fund is still underperforming the S&P 500 over the last year, but that should change soon.

The Conservative Portfolio dropped -2.82% in May.

May was the first truly bad month for stocks and higher-risk bonds since the great comeback that started a little over a year ago. The only fund categories that were up, besides funds that short, were municipal bond funds and federal government bond funds. Funny how whenever there is a global panic of any size investors pile into what is supposedly the root of all evil in the economy, fiscally irresponsible governments.

The worst fund categories were foreign stocks and energy. European stocks – the heart of the latest fears – were down just over 11%, while most foreign funds fell around 10% - much of this because of a rising US dollar. Investors probably don’t realize how much a falling US dollar made foreign investments look good over much of the last ten years. Many who piled in during the last decade are now learning what happens when the pendulum swings back. Energy stocks lost the most, with funds in this category down a average of 12.5% in May. Among the ‘looking good by comparison’ areas of the stock market were utilities, real estate, and telecom, each down around 5%. 

The S&P 500 dropped 8%, while the Nasdaq slid 8.3%. Long Term Government bonds were up 4.11% as interest rates fell anew. Junk bonds slid hard with a near 4% drop in the high yield bond indexes.

The Powerfund Portfolios had a month almost as bad as the broad US market, with our stock heavy portfolios down between 5% and 7%. Relatively low international exposure kept our performance better than a global stock index which was down about 10% in May despite our exposure to stocks and high yield bonds was a little heavy.

Bill Gross underperformed the total bond index again with a 0.40% gain in the Harbor Bond fund (HABDX) compared to the bond indexes 0.87% total return. In a strange turn of events, Bill Gross did cut back on government bonds too soon and apparently is now buying them back. We don’t second guess our fund manager’s calls on their areas of expertise much but in this case we were right. 

Health Care Select SPDR (XLV) dropped 6.51% in May. Healthcare stocks tend to do relatively well during market drops as the stocks are less economically sensitive and usually less leveraged than others in the market.

Telecom stocks were about the best stocks to be in last month with a 4.45% drop for Vanguard Telecom ETF (VOX). Underperformance on the way up is usually a good indicator of outperformance on the way down. 

Metropolitan West High Yield Bond (MWHYX) slid 2.93% as global economic fears finally hit high yield bond funds, which have been on quite a run. This fund for example is up 26.69% since we added it 23 months ago, and that includes some initial trouble as we bought it a little too soon in the great credit crisis. We used the recent trade to cut back on junk bonds.

The Aggressive Portfolio fell -6.71% in May.

May was the first truly bad month for stocks and higher-risk bonds since the great comeback that started a little over a year ago. The only fund categories that were up, besides funds that short, were municipal bond funds and federal government bond funds. Funny how whenever there is a global panic of any size investors pile into what is supposedly the root of all evil in the economy, fiscally irresponsible governments.

The worst fund categories were foreign stocks and energy. European stocks – the heart of the latest fears – were down just over 11%, while most foreign funds fell around 10% - much of this because of a rising US dollar. Investors probably don’t realize how much a falling US dollar made foreign investments look good over much of the last ten years. Many who piled in during the last decade are now learning what happens when the pendulum swings back. Energy stocks lost the most, with funds in this category down a average of 12.5% in May. Among the ‘looking good by comparison’ areas of the stock market were utilities, real estate, and telecom, each down around 5%. 

The S&P 500 dropped 8%, while the Nasdaq slid 8.3%. Long Term Government bonds were up 4.11% as interest rates fell anew. Junk bonds slid hard with a near 4% drop in the high yield bond indexes.

The Powerfund Portfolios had a month almost as bad as the broad US market, with our stock heavy portfolios down between 5% and 7%. Relatively low international exposure kept our performance better than a global stock index which was down about 10% in May despite our exposure to stocks and high yield bonds was a little heavy.

Health Care Select SPDR (XLV) dropped 6.51% in May. Healthcare stocks tend to do relatively well during market drops as the stocks are less economically sensitive and usually less leveraged than others in the market.

Bill Gross underperformed the total bond index again with a 0.40% gain in the Harbor Bond fund (HABDX) compared to the bond indexes 0.87% total return. In a strange turn of events, Bill Gross did cut back on government bonds too soon and apparently is now buying them back. We don’t second guess our fund manager’s calls on their areas of expertise much but in this case we were right.

Telecom stocks were about the best stocks to be in last month with a 4.45% drop for Vanguard Telecom ETF (VOX). Underperformance on the way up is usually a good indicator of outperformance on the way down. 

The Conservative Portfolio climbed 0.60% in April.

April ended weak but still delivered a 1.58% return for the S&P 500, and even higher numbers for tech and small cap: the Nasdaq was up 2.64%, while the Russell 2000 index of smaller cap companies gained 5.66%. Longer term government bonds jumped 2.76% as what looked like a move up in interest rates fizzled out once again. Professionals keep warning us about rates going up, but the only thing going up is the assets under management of fund companies offering solutions to the inflation and rising rate fears. The total bond market edged up 1% for the month.

The stock market started sinking in late April and is now down about 8% from this year’s peak. It’s a pullback, but not much of one considering the almost uninterrupted run up from the abyss in March 2009. More interesting is what is causing the fall – though as stocks get more expensive they don’t need much reason to dive. 

Europe is falling out of favor with investors fast, as if it’s finally dawning on the world that all this money going overseas to avoid America’s dismal future may have invested in an even worse one. The US dollar wasn’t going to fall forever, and European economies were no better than America’s, with all the things investors supposedly hate about America and then some: high unemployment, expensive government spending programs, debts, etc.

The other popular destination for investor money, commodities, has also been down sharply lately, with oil down around 20% from recent highs. The only commodity bucking the trend is gold, which apparently should go up every day even as our dollar rises. Once an investment has no apparent downside risk, it is very close to having lots of it. Remember when real estate prices never went down?

As for us, we may have waited too long to get our risk downgrade trade in that we noted in our last monthly commentary was imminent, but we’ll still fall less than the S&P 500 in May.

Bill Gross underperformed the total bond index by a slim margin with a 0.89% return for the Harbor Bond fund (HABDX). He may have cut back on government bonds a little too early.

Health Care Select SPDR (XLV) sank 3.89% as healthcare stocks really broke from the market and had one of the worst relative sector performances in quite some time.

Telecom stocks sank with a market-underperforming 0.82% slide in Vanguard Telecom ETF (VOX). We expect these more conservative sectors to start leading the market as risk becomes less attractive to investors.

Metropolitan West High Yield Bond (MWHYX) delivered another good month with a 2% return in April. This Greek debt fiasco is now weighing on junk bonds as well (though not as much as it probably should), highlighting the growing optimism of American debts relative to the rest of the world. It’s still not a bad time to cut back after a big run up.

The Aggressive Portfolio climbed 0.20% in April.

April ended weak but still delivered a 1.58% return for the S&P 500, and even higher numbers for tech and small cap: the Nasdaq was up 2.64%, while the Russell 2000 index of smaller cap companies gained 5.66%. Longer term government bonds jumped 2.76% as what looked like a move up in interest rates fizzled out once again. Professionals keep warning us about rates going up, but the only thing going up is the assets under management of fund companies offering solutions to the inflation and rising rate fears. The total bond market edged up 1% for the month.

The stock market started sinking in late April and is now down about 8% from this year’s peak. It’s a pullback, but not much of one considering the almost uninterrupted run up from the abyss in March 2009. More interesting is what is causing the fall – though as stocks get more expensive they don’t need much reason to dive. 

Europe is falling out of favor with investors fast, as if it’s finally dawning on the world that all this money going overseas to avoid America’s dismal future may have invested in an even worse one. The US dollar wasn’t going to fall forever, and European economies were no better than America’s, with all the things investors supposedly hate about America and then some: high unemployment, expensive government spending programs, debts, etc.

The other popular destination for investor money, commodities, has also been down sharply lately, with oil down around 20% from recent highs. The only commodity bucking the trend is gold, which apparently should go up every day even as our dollar rises. Once an investment has no apparent downside risk, it is very close to having lots of it. Remember when real estate prices never went down?

As for us, we may have waited too long to get our risk downgrade trade in that we noted in our last monthly commentary was imminent, but we’ll still fall less than the S&P 500 in May.

Health Care Select SPDR (XLV) sank 3.89% as healthcare stocks really broke from the market and had one of the worst relative sector performances in quite some time.

Bill Gross underperformed the total bond index by a slim margin with a 0.89% return for the Harbor Bond fund (HABDX). He may have cut back on government bonds a little too early. 

Telecom stocks sank with a market-underperforming 0.82% slide in Vanguard Telecom ETF (VOX). We expect these more conservative sectors to start leading the market as risk becomes less attractive to investors.

The Conservative Portfolio climbed 0.79% in February.

In February the S&P 500 rebounded 3.09%, erasing most of January’s decline and leaving the index down 0.61% for the year (though still up some 53% for the last twelve months – a period starting at about the bottom of the market during the financial panic). Our average model portfolio is essentially flat, down 0.05% for these first two months of 2010.

Bonds were weak as long term treasuries lost about 0.5% in February. TIPS (inflation protected government bonds) slid as well, though higher yield (junk) bonds were up slightly with corporate bonds in general, further closing the gap between what safe and higher risk money earns. The total bond index returned about 0.33% for the month

Weak fund categories included utilities, European stocks, and foreign value-oriented stock funds in general. Strong categories included real estate, precious metals, and Latin America. Smaller cap stocks generally beat larger cap stocks. 

Utilities have been lagging this entire market rebound, which is why we are considering adding them back to our holdings. Our model portfolios averaged a 1.6% return for the month with a range of 0.79% to 2.29%.

Bill Gross eked out a slight gain over the total bond index with a 0.49% return in February. He’s been running a little more conservatively than most of the other larger total return style investment grade bond funds which are a bit heavier into junk bonds right now.

Nakoma Absolute Return (NARFX) dipped with a -1.11% return in February. The long / short fund is actually net long (by around 10%) but the fund’s shorts continue to go up more than the longs. It doesn’t bother us that the managers here are short more economically sensitive names which have been outperforming more conservative fare of late - we expect this strategy will do well in a crash as it did in 2008 when the fund fell less than 5% (though with truly great picks even this wouldn’t have happened). What is bugging us is the makeup of some of the longs. This fund has recently added a gold mining shares ETF to a position in the gold bullion ETF, a double whammy of stupid in our opinion and one that counters our belief that gold is in a bubble and should be avoided. Of course, maybe we’re wrong and there is far more to go in the great gold bubble. The Nasdaq was overpriced at 2,500 in the late 1990s, but that didn’t stop it from breaking through 5,000 before crashing 80%. Regardless, this fund is slated for sale.

The Vanguard Growth ETF (VUG) rose a bit more than the market, as did most growth stocks, in February with a 3.87% gain.

The Aggressive Portfolio rose 1.84% in February.

In February the S&P 500 rebounded 3.09%, erasing most of January’s decline and leaving the index down 0.61% for the year (though still up some 53% for the last twelve months – a period starting at about the bottom of the market during the financial panic). Our average model portfolio is essentially flat, down 0.05% for these first two months of 2010.

Bonds were weak as long term treasuries lost about 0.5% in February. TIPS (inflation protected government bonds) slid as well, though higher yield (junk) bonds were up slightly with corporate bonds in general, further closing the gap between what safe and higher risk money earns. The total bond index returned about 0.33% for the month

Weak fund categories included utilities, European stocks, and foreign value-oriented stock funds in general. Strong categories included real estate, precious metals, and Latin America. Smaller cap stocks generally beat larger cap stocks. 

Utilities have been lagging this entire market rebound, which is why we are considering adding them back to our holdings. Our model portfolios averaged a 1.6% return for the month with a range of 0.79% to 2.29%.

Nakoma Absolute Return (NARFX) dipped with a -1.11% return in February. The long / short fund is actually net long (by around 10%) but the fund’s shorts continue to go up more than the longs. It doesn’t bother us that the managers here are short more economically sensitive names which have been outperforming more conservative fare of late - we expect this strategy will do well in a crash as it did in 2008 when the fund fell less than 5% (though with truly great picks even this wouldn’t have happened). What is bugging us is the makeup of some of the longs. This fund has recently added a gold mining shares ETF to a position in the gold bullion ETF, a double whammy of stupid in our opinion and one that counters our belief that gold is in a bubble and should be avoided. Of course, maybe we’re wrong and there is far more to go in the great gold bubble. The Nasdaq was overpriced at 2,500 in the late 1990s, but that didn’t stop it from breaking through 5,000 before crashing 80%. Regardless, this fund is slated for sale.

Bill Gross eked out a slight gain over the total bond index with a 0.49% return in February. He’s been running a little more conservatively than most of the other larger total return style investment grade bond funds which are a bit heavier into junk bonds right now.

The Vanguard Growth ETF (VUG) rose a bit more than the market, as did most growth stocks, in February with a 3.87% gain.

The Conservative Portfolio rose 1.56% in December.

December was just like the rest of 2009 after last spring's turnaround: up. The S&P 500 rose 1.95% while the Dow gained just under 1%. For the year the S&P 500 (with dividends) was up around 26.5% and has now ‘only’ about 35% more to go to hit the highs of 2007. 

The real action in US indexes remained in tech stocks, with the Nasdaq climbing 5.81%. Small cap stocks delivered an 8.05% rise. As investors continued to pile into risky assets, they also continued to run from safer bonds. The total bond market slid 1.56% while longer-term treasury bonds dropped 5.63%, leading to a total return for the year of negative 13%. Not all bonds were down. High yield ‘junk’ bonds were up around 3.28% for the month, which means the gap in yields between high risk and low risk debt got even closer and hence the investor taking risks today is not being rewarded as much as earlier in the year. Of course, the risk of defaults on junk bonds is down somewhat as the economy appears to be avoiding true calamity. In many cases high yield bonds are more expensive than they were during the peak of the credit boom.

While there are plenty of things we wished we did a little differently in 2009, all-in-all we’re quite happy with our returns. Our five core risk level portfolios (not including Daredevil and Low Minimum) are all at all time highs. 

Normally when the S&P 500 goes pretty much straight up in a short period of time, as it has since the early March lows, we would expect to underperform because our portfolios tend to have some bonds or cash weighting them down, a performance gap we tend to makeup during the next downturn or as our out-of-favor funds start to beat the market. In 2009 four of our five core model portfolios beat the S&P 500 anyway, largely because of good fund selection and a timely increase of our stock allocation within just a few days of the market bottom. 

The Aggressive Portfolio jumped 2.92% in December.

December was just like the rest of 2009 after last spring's turnaround: up. The S&P 500 rose 1.95% while the Dow gained just under 1%. For the year the S&P 500 (with dividends) was up around 26.5% and has now ‘only’ about 35% more to go to hit the highs of 2007. 

The real action in US indexes remained in tech stocks, with the Nasdaq climbing 5.81%. Small cap stocks delivered an 8.05% rise. As investors continued to pile into risky assets, they also continued to run from safer bonds. The total bond market slid 1.56% while longer-term treasury bonds dropped 5.63%, leading to a total return for the year of negative 13%. Not all bonds were down. High yield ‘junk’ bonds were up around 3.28% for the month, which means the gap in yields between high risk and low risk debt got even closer and hence the investor taking risks today is not being rewarded as much as earlier in the year. Of course, the risk of defaults on junk bonds is down somewhat as the economy appears to be avoiding true calamity. In many cases high yield bonds are more expensive than they were during the peak of the credit boom.

While there are plenty of things we wished we did a little differently in 2009, all-in-all we’re quite happy with our returns. Our five core risk level portfolios (not including Daredevil and Low Minimum) are all at all time highs. 

Normally when the S&P 500 goes pretty much straight up in a short period of time, as it has since the early March lows, we would expect to underperform because our portfolios tend to have some bonds or cash weighting them down, a performance gap we tend to makeup during the next downturn or as our out-of-favor funds start to beat the market. In 2009 four of our five core model portfolios beat the S&P 500 anyway, largely because of good fund selection and a timely increase of our stock allocation within just a few days of the market bottom. 

As for mistakes, we cut back a little too early, misjudging how quickly investors would be comfortable taking on risks once again. Still, we were in some of the best performing funds for the year, even if some of our holding periods were abbreviated. RSX, the Russian stock ETF, which we bought near the market bottom in our Daredevil portfolio, was the 3rd best performing unleveraged stock fund in 2009. Other trades, like our brief foray into XLF the financial sector SPDR ETF in four of our model portfolios, worked out timing wise, as we earned just under 60% in the four months we owned the fund (even though we got out a little early). For the year the ETF was up 17.5%. 

Biotech stocks continued a comeback with a 6.92% return in December, just enough to eek out a positive return for the year of just 0.34% in our SPDR Biotech (XBI) ETF. While 2009 has been a disappointment, the fund whipped the S&P 500 over the last three years with big outperformance in 2007 and 2008.

The Vanguard Growth ETF (VUG) continued to outperform the market in 2009 with a 3.32% return in December. The growth and tech stock heavy ETF beat the market by a country mile in 2009 with a 36.12% return for the year. We’re going to use the unofficial definition of a ‘country mile’ to be more than ten percentage points of outperformance.

Telecom stocks are now officially in play with speculators. What was an out of favor, low volatility sector has become as volatile as more speculative areas. Vanguard Telecom Service ETF (VOX) was up 7.76% for the month, and closed the year out with a 29/46% gain, more than the S&P 500 on both counts.

As for mistakes, we cut back a little too early, misjudging how quickly investors would be comfortable taking on risks once again. Still, we were in some of the best performing funds for the year, even if some of our holding periods were abbreviated. RSX, the Russian stock ETF, which we bought near the market bottom in our Daredevil portfolio, was the 3rd best performing unleveraged stock fund in 2009. Other trades, like our brief foray into XLF the financial sector SPDR ETF in four of our model portfolios, worked out timing wise, as we earned just under 60% in the four months we owned the fund (even though we got out a little early). For the year the ETF was up 17.5%. 

The Vanguard Growth ETF (VUG) continued to outperform the market in 2009 with a 3.32% return in December. The growth and tech stock heavy ETF beat the market by a country mile in 2009 with a 36.12% return for the year. We’re going to use the unofficial definition of a ‘country mile’ to be more than ten percentage points of outperformance.

Telecom stocks are now officially in play with speculators. What was an out of favor, low volatility sector has become as volatile as more speculative areas. Vanguard Telecom Service ETF (VOX) was up 7.76% for the month, and closed the year out with a 29/46% gain, more than the S&P 500 on both counts.

The great junk bond rally won’t die. Metropolitan West High Yield Bond (MWHYX) was up 3.28% in December, and – get ready – 54.75% for the year, more than double the S&P 500.