The Conservative Portfolio climbed 0.24% in December.

In the end, 2007 produced a lot of volatility but not much in returns. The S&P 500 was up just 5.5% for the year. Keep in mind no risk low fee money market funds returned about as much - Vanguard Prime Money Market returned 5.17% in 2007. The story was better for Dow and tech stocks. The Dow was up 8.89%, the Nasdaq was up 9.82%. Small cap stocks were the real losers, down 1.57% for the year, though this doesn't tell the story of how smaller cap value stocks underperformed, down almost 10% in 2007 (small cap growth was up 7.05%). Safer bonds were a decent place to be in 2007, with longer term government bonds returning just shy of 10% and the total bond market up about 7%.

All of our Powerfund Portfolios beat the S&P 500 for the calendar year. All of them are beating the S&P 500, Dow, and Nasdaq since their inception on April 1, 2002, while. Our volatility has also been lower than stock indexes due to the diversification including bond fund stakes. Two of our model portfolios (Aggressive Growth and Daredevil) have doubled the S&P 500; one (Growth) came close. Keep in mind our portfolios could become more risky than the indexes, notably Daredevil.

Our solid year was due to heavy exposure to investment grade bonds, larger cap stocks, and in more aggressive portfolios, tech. We did miss the ongoing excitement in energy stocks and emerging markets. We also missed out on the ongoing crash in financial stocks by not buying sector funds that invest in this area. In fact we profited from the crash in real estate with real estate short ETFs - a very risky short term strategy - in our Daredevil portfolio.

December was bad all around - all major indexes were down including bonds. However, two of our portfolios were up for the month, and all the rest fell less than half of the S&P 500's negative 0.70% return.

Bill Gross had a fabulous year. Harbor Bond (HABDX) was up 8.72% for the year, and 0.43% for the month of December. He has been calling for a weak economy and housing bust and his move to safer longer term bonds benefited from falling interest rates and the flood of money in to safer bonds.

Bridgeway Balanced (BRBPX) was a good holding for us in 2007 and especially in December. For the month the fund was up 1.41%, for the year, up 6.59%. Keep in mind this fund is a good deal safer than the stock market as a whole. We like the strategy of option writing particularly as we feel stock market upside is limited to about 6% a year for the foreseeable future. The trick is finding funds that can do this cheaply. We're in about two of the best funds of this type (this one and Gateway GATEX) but are considering some others going forward.

Healthcare Select SPDR (XLV) had a rotten December, down 3.03%. Even with this bad month the ETF was up a solid 6.93% in 2007. We see this fund doing very well in our recessionary environment as investors flock to companies with relatively safe earnings in an economic downturn. We've already seen this trend in early 2008.

Vanguard Growth ETF bucked the market trend in December with a 0.17% return. Larger cap growth stock have been strong, but recently the Nasdaq has been hit hard so this fund is in for a rocky early 2008.

Janus Global Research (JARFX) had a good December (up 0.65%) and a great 2007, up 26.74%. We're up over 32% here and we only added the fund in late 2006. Some of this outperformance comes from the fund being global because foreign stocks have been beating U.S. stocks, but the rest is a return to larger cap growth stocks beating the market and some likely games Janus is playing trying to help their new funds build great track records. We're getting quite negative on foreign stocks and as the new fund effect will wane, may be looking to move on in 2008.

Vanguard U.S. Value (VUVLX) was fine in December (up 0.41%) but was a disappointment in 2007 with a -0.77% return. We've been negative on value and should have cut back here but we liked one of the manager's broader take on the global economy and elevated asset prices. The fund's fault certainly wasn't expenses- it charges just 0.43%. The culprit is just what you'd expect with "value" in the name, financial services firms and big banks like Citigroup. This goes to show you don't need P/E ratios of 100 to have a bubble. We wish Wall Street read our commentary on home loans and the real estate bubble over the last few years - they would have saved quite a bit of money.

The Aggressive Portfolio dipped -0.30% in December.

In the end, 2007 produced a lot of volatility but not much in returns. The S&P 500 was up just 5.5% for the year. Keep in mind no risk low fee money market funds returned about as much - Vanguard Prime Money Market returned 5.17% in 2007. The story was better for Dow and tech stocks. The Dow was up 8.89%, the Nasdaq was up 9.82%. Small cap stocks were the real losers, down 1.57% for the year, though this doesn't tell the story of how smaller cap value stocks underperformed, down almost 10% in 2007 (small cap growth was up 7.05%). Safer bonds were a decent place to be in 2007, with longer term government bonds returning just shy of 10% and the total bond market up about 7%.

All of our Powerfund Portfolios beat the S&P 500 for the calendar year. All of them are beating the S&P 500, Dow, and Nasdaq since their inception on April 1, 2002, while. Our volatility has also been lower than stock indexes due to the diversification including bond fund stakes. Two of our model portfolios (Aggressive Growth and Daredevil) have doubled the S&P 500; one (Growth) came close. Keep in mind our portfolios could become more risky than the indexes, notably Daredevil.

Our solid year was due to heavy exposure to investment grade bonds, larger cap stocks, and in more aggressive portfolios, tech. We did miss the ongoing excitement in energy stocks and emerging markets. We also missed out on the ongoing crash in financial stocks by not buying sector funds that invest in this area. In fact we profited from the crash in real estate with real estate short ETFs - a very risky short term strategy - in our Daredevil portfolio.

December was bad all around - all major indexes were down including bonds. However, two of our portfolios were up for the month, and all the rest fell less than half of the S&P 500's negative 0.70% return.

Bridgeway Blue Chip 35 Index (BRLIX) was acceptable in 2007 but really underwhelmed us with just a 6.08% return for the year and a -0.71% return for the month. Big cap stocks led the market but this was not quite enough of a market beating return. The fund holds hot stocks like Google, but also had large stakes in some weak bank stocks.

Healthcare Select SPDR (XLV) had a rotten December, down 3.03%. Even with this bad month the ETF was up a solid 6.93% in 2007. We see this fund doing very well in our recessionary environment as investors flock to companies with relatively safe earnings in an economic downturn. We've already seen this trend in early 2008.

Bill Gross had a fabulous year. Harbor Bond (HABDX) was up 8.72% for the year, and 0.43% for the month of December. He has been calling for a weak economy and housing bust and his move to safer longer term bonds benefited from falling interest rates and the flood of money in to safer bonds.

While healthcare in general wasn't that strong in 2007, biotech stocks were red hot. SPDR Biotech (XBI) was down 2.13% in December but still delivered a 29% return in 2007 - our portfolios best holdings.

Janus Global Research (JARFX) had a good December (up 0.65%) and a great 2007, up 26.74%. We're up over 32% here and we only added the fund in late 2006. Some of this outperformance comes from the fund being global because foreign stocks have been beating U.S. stocks, but the rest is a return to larger cap growth stocks beating the market and some likely games Janus is playing trying to help their new funds build great track records. We're getting quite negative on foreign stocks and as the new fund effect will wane, may be looking to move on in 2008.

Vanguard Growth ETF bucked the market trend in December with a 0.17% return. Larger cap growth stock have been strong, but recently the Nasdaq has been hit hard so this fund is in for a rocky early 2008.

The market started the month of October by continuing the comeback from the August lows, but by the second week the strength had begun to fizzle. The real trouble (call it mortgage woes v2) didn’t strike until November 1st so for the month of October the Dow eked out a modest 0.38% return. The S&P 500 fared a little better with a 1.58% return, beaten by a big move – which is looking a lot like a last gasp – by small caps stocks, moving up 4.5% for the month. But all indexes pale in comparison to the Nasdaq as investors continue to rediscover the magic of tech and growth stocks – or at least want to get as far away from bank stocks as they possibly can. The Nasdaq 100 index rocketed by just over 7% for the month, while the Nasdaq as a whole gained 5.84%.

Bonds improved on fears of a slowing economy, and general risk aversion by income investors pushed up prices (and lowered yields) of safer government bonds. The total bond market was up about 0.90% while longer term government bonds gained 1.38%.

With bonds and stocks up, the Powerfund Portfolios had no problem keeping pace with the market in October. Our more aggressive portfolios benefited from tech and growth stakes and were up quite a bit more than the S&P 500 or Dow.

The Conservative Portfolio jumped 1.82% in October.

Janus Global Research (JARFX) is performing so we’re getting a little worried - performance chasing investors will soon  notice it. We’re keeping a close eye on asset growth, but in general what we expect to happen is that the fund will stop outperforming by quite so much. It’s likely Janus Global Research will begin to move more like an index of global larger cap growth. For October the fund was up 6.34%, making a grand total of 38.09% since we added the fund one year ago. Janus has many hot funds right now as the market has moved back to favoring their types of stocks, but this is about at the top of the list, bested only by a few Janus foreign funds.

October was another month for Bill Gross to beat the benchmarks in bonds with a 1.12% return in Harbor Bond (HABDX). Just when you thought he was having an off year, Gross is back to outgunning most other funds and the index. He appears to be calling for lower yields in one last move down in rates before the economy falls apart. We’re going to keep an eye on him to see how he moves into beaten-down mortgage debt. 

The US dollar took another hit, which accelerated into November. American Century Global Bond was up 1.92% and we’re seriously considering dumping our remaining stake here as the falling dollar game is all but over.

Funds that write options benefited from falling premiums, which lowers the value of the options they already sold (a good thing). As the market settled down, option premiums fell. An uptick in fear and volatility will likely lead to more so-so months here, but in October Bridgeway Balanced was up 2.37% and more conservative Gateway was up 1.25%. 

Our crummiest stock fund this year is Vanguard U.S. Value, proving that low fees and expert management are not going to save you if you are in the wrong place at the wrong time.  We cut back on this fund in some portfolios this year, but perhaps we didn’t cut far enough. Vanguard U.S. Value was up just 0.39% in October, though that was in line with the Dow. The culprit here, and the reason the fund is up just around 5% year-to-date, is mortgage-related financial stocks. Citigroup, Bank of America, Fannie Mae, Merrill Lynch, Freddie Mac – you name it, if it’s a financial stock with mortgage troubles, this fund is in it. Fortunately the other value plays in the portfolio  like ExxonMobil are keeping the fund’s head above water. One problem with value investing this year is the best values were in financial stocks – low price-to-earnings ratios and high dividend yields. As we’ve noted before, there was very little value left in value after the big run-up in recent years.

<i>NOTE: We made a mistake calculating our September 2007 performance (shown

in mid October commentary) for the conservative portfolio. The performance

quoted did not reflect the trade we made at the end of August 2007 where we

cut our 5% American Century Long-Short Equity (ALHIX) stake and doubled our

Janus Global Research (JARFX) position from 5% to 10% of entire portfolio. We mistakenly said the performance for the portfolio during September was 1.91%, when in fact the performance was a bit higher, at 2.21%, as Janus Global Research has performed better than the fund that was sold at the end of August.</i>

The market started the month of October by continuing the comeback from the August lows, but by the second week the strength had begun to fizzle. The real trouble (call it mortgage woes v2) didn’t strike until November 1st so for the month of October the Dow eked out a modest 0.38% return. The S&P 500 fared a little better with a 1.58% return, beaten by a big move – which is looking a lot like a last gasp – by small caps stocks, moving up 4.5% for the month. But all indexes pale in comparison to the Nasdaq as investors continue to rediscover the magic of tech and growth stocks – or at least want to get as far away from bank stocks as they possibly can. The Nasdaq 100 index rocketed by just over 7% for the month, while the Nasdaq as a whole gained 5.84%.

Bonds improved on fears of a slowing economy, and general risk aversion by income investors pushed up prices (and lowered yields) of safer government bonds. The total bond market was up about 0.90% while longer term government bonds gained 1.38%.

With bonds and stocks up, the Powerfund Portfolios had no problem keeping pace with the market in October. Our more aggressive portfolios benefited from tech and growth stakes and were up quite a bit more than the S&P 500 or Dow.

The Aggressive Portfolio jumped 2.21% in October.

Janus Global Research (JARFX) is performing so we’re getting a little worried - performance chasing investors will soon  notice it. We’re keeping a close eye on asset growth, but in general what we expect to happen is that the fund will stop outperforming by quite so much. It’s likely Janus Global Research will begin to move more like an index of global larger cap growth. For October the fund was up 6.34%, making a grand total of 38.09% since we added the fund one year ago. Janus has many hot funds right now as the market has moved back to favoring their types of stocks, but this is about at the top of the list, bested only by a few Janus foreign funds.

Bridgeway Blue Chip 35 had a mediocre October; up just 0.68% (almost 1% less than the S&P 500, an index this fund has been beating by a bit this year). The fund has a decent sized stake in some mega banks that have been weak lately amidst the mortgage fallout.

October was another month for Bill Gross to beat the benchmarks in bonds with a 1.12% return in Harbor Bond (HABDX). Just when you thought he was having an off year, Gross is back to outgunning most other funds and the index. He appears to be calling for lower yields in one last move down in rates before the economy falls apart. We’re going to keep an eye on him to see how he moves into beaten-down mortgage debt. 

Large cap growth stocks remain in top place.  Currently, small cap stocks are actually down for the year. Vanguard Growth ETF(VUG) was up 3.24% in October and is up 9.47% over the last three months. This fund’s 16%+ year-to-date return is on a par with the hot Nasdaq.

While we are only back to where we started a few months ago in our hedge fund-like American Century Long Short Equity (ALHIX), the 1% return in October is what you want to see from a fund like this in an up-and-down month. The increased volatility we saw in August was not what you want to see from such a fund. 

August came in like a lion and went out like a lamb. Miraculously the stock market recovered early losses – not all the losses from July, but the losses from early August. At the end, the S&P 500 was up 1.5% for the month, just outpacing the Dow’s 1.4% return. The real action was in tech stocks, with the NASDAQ up 3%. Even small cap stocks came back (though are still underperforming over the last year) with a 2.52% gain in the Russell 2000 small cap index.

The gains weren’t limited to socks. Longer term bonds scored a 2% return as fears about the economy and general risk aversion boosted bond prices. Even junk bonds rallied as fears refocused on mortgage backed debt.

In such an environment, it was hard to lose money. All of our model portfolios were up for the month, with returns in the 1 – 2% range.

The Conservative Portfolio climbed 0.99% in August.

Healthcare stocks performed well in the tumultuous month. Investors sought the safety of big cap healthcare names, which helped our Healthcare SPDR (XLV) rise 2.52%.

August came in like a lion and went out like a lamb. Miraculously the stock market recovered early losses – not all the losses from July, but the losses from early August. At the end, the S&P 500 was up 1.5% for the month, just outpacing the Dow’s 1.4% return. The real action was in tech stocks, with the NASDAQ up 3%. Even small cap stocks came back (though are still underperforming over the last year) with a 2.52% gain in the Russell 2000 small cap index.

The gains weren’t limited to socks. Longer term bonds scored a 2% return as fears about the economy and general risk aversion boosted bond prices. Even junk bonds rallied as fears refocused on mortgage backed debt.

In such an environment, it was hard to lose money. All of our model portfolios were up for the month, with returns in the 1 – 2% range.

The Aggressive Portfolio jumped 2.08% in August

Other than SSgA Yield Plus (SSYPX), our 2nd worst performer in August was American Century Long Short Equity (ALHIX). This in a month where you would expect shorting stocks would help returns – not hurt. The fund fell 3.34% for the month, but that disguises the really sharp one day drop we saw early in the month, which the fund has largely recovered from. Apparently so many hedge funds are following a similar quantitative strategy that when the market went haywire in early August, heavily shorted stocks took off - even though the market fell. This fund took it on the chin as the worst of both worlds for a market neutral fund took place: the shorts rose in price, the longs fell. We cut this fund from our conservative portfolio at the end of August as this is more market risk than we currently want in one of our lower risk portfolios. 

We’re glad we moved into longer term bonds when the ten year government bond was yielding over 5% because the recent fall in interest rates has helped our returns (compared to shorter term bonds but especially compared to stocks). Vanguard Intermediate Bond Index (VBIIX) delivered a 1.71% return in August.

Bridgeway Blue Chip 35 (BRLIX) scored an impressive 2.86% return – nearly double the S&P 500 - as big cap and tech lead the markets in August.

Healthcare stocks performed well in the tumultuous month. Investors sought the safety of big cap healthcare names, which helped our Healthcare SPDR (XLV) rise 2.52%.

SPDR Biotech (XBI) delivered a surprising 10.26% return in a month in which most investors shunned risk. Our theory is some money is always going to seek high risk high return investments, and to that money biotech stocks are looking better than other formerly hot higher risk areas like emerging market stocks and bonds.

It was the best of times, it was the worst of times…

So far, August is among the strangest month for fund investors since before we started MAXfunds.com in 1999. In fact, it’s in one of the strangest months since we first got into the mutual fund business over 15 years ago…certainly up there with the Asian contagion, the Russian bond default, the dot com crash, and the junk bond crash.

On the one hand, we’re very happy with our portfolios overall performance. As readers know, we have been cutting back on many hot fund categories and recently did a substantial trade across all portfolios and eased up on stocks in general. Our timing was impeccable. The day our trade alert went out the market was within a fraction of a percent of the peak in the market for this year. It was a great time to move into longer term bonds – not far off from the peak in interest rates for the year. It was a great time to get out of international stocks, go into growth stocks, and get out of junk bonds. 

In July the S&P 500 was down a sharp 3.1%. Worse, small cap stocks were down over 5%. Don’t even ask about foreign markets. The FTSE or “footsie” a key European index, was down almost 6% - much of it in the last few days of July. So far August is even worse. Yesterday the Japanese market fell over 5% in one day. As we’ve noted, the vast majority of new money going into mutual funds this year was and is going into foreign funds. 2007 will likely be another year where fund investors underperform because of their performance chasing ways.

Longer term bonds were up a smart 2.4% as panicky investors bought safety. Yet all was not rosy for bonds. Anything with credit risk was hit hard – safe bonds went up in value, unsafe bonds fell. Long time holdings Vanguard High Yield Corporate fell 3.3% in July. Fortunately we told you get out of this fund before the crash. As we noted at the time of the trade announcement, we were concerned that there was no longer an increased return for the increased risk – junk bonds only paid a little more than ultra safe treasury bonds. Why take on the default risk?

We expect this market action to lead to opportunities. Let’s not forget we used to have 15% stakes in junk bond funds back when they were cheap a few years ago (and 10% stakes in emerging market bonds). We’ve been cutting back ever since and if we can get 5% or more over a treasury bond, we’ll get right back in there.

Because of our recent trades we had a very good month. Three of our portfolio were actually up in July. Only one – low minimum, which because of the restrictions we have choosing funds is not or most dynamic portfolio – was down over 1% (-1.07% to be exact). Moderate, Growth, and Aggressive growth were down just 0.50%, 0.63%, and 0.51% respectively. Daredevil was up 0.27%, Safety was up 0.75%, Moderate up 0.23%. Our stock-oriented portfolios are now all beating the S&P 500 for the year, and factoring in early August, all of our portfolio will be ahead of the benchmark.

Our stock and bond funds did well. Most of our stock funds had good months relative to the market: Janus Global Research (JARFX) was up 0.07%, Gateway (GATEX) was down 1.06%, Bridgeway Balanced was down 0.46%, American Century Long Short was up 1.34%, Vanguard Growth ETF was down 1.56%, Technology SPDR (XLK) was down 0.72%, SPDR Biotech (XBI) was down 0.92%, and Bridgeway Blue Chip 35 was down 1.53%.

In fact, only a few funds took significant hits: HealthCare Select SPDR (XLV) was down 4.33%, Buffalo Mid Cap down 2.08%, SSgA Disciplined Equity (SSMTX) down 3.31%, ICON Healthcare (ICHCX) down 3.49%, Wasatch Heritage Growth (WAHGX) down 3.93%, Vanguard U.S. Value (VUVLX) down 4.81%.

Then there was the high risk/ high return story of the month: real estate tanking. We just doubled up our short real estate fund in our highest risk portfolio Daredevil. Ultra Short Real Estate ProShares (SRS) was up a stunning 18.96% in July, wiping out the losses in other stock funds and then some. Note that this is an extremely high risk short term holding used in conjunction with our more aggressive positions.

As you can see from our longer term returns, our stock-oriented portfolios tend to beat the S&P 500 with lower risk. 2006 was the only exception, when our squeamishness on stocks didn’t pay off. However, we’ve found that not falling as much as the S&P 500 during weak periods helps us beat the S&P 500 over time more than matching it during big moves up.

But despite our relative success last month, all was not well in our portfolios. We have some serious mistakes to report and we saved the worst for last…

In our safest portfolio – Safety- we currently have a 5% stake in what should be the safest fund of the bunch: SSgA Yield Plus (SSYPX). We have owned this fund since 2002,  the very beginning of the Safety portfolio. The reason we own this fund is that cash sweep accounts at most brokers offer very little return – very often investors get as low as 0.5% interest. SSgA Yield Plus can often be bought for no transaction fee (NTF) at your discount broker, and historically pays about 0.5% more than most decent money market funds. The minimum is low ($1,000) and there is no short term redemption fee. This lets customers who follow our portfolios at brokers like Scottrade, Firstrade, and TD Ameritrade earn more money on their low risk cash. 

SSgA Yield Plus fell 1.48% in July. This may not sound like a big deal, but for an ultra short bond fund that holds investment grade debt, this is very unusual. Unfortunately, the situation went from bad to worse. In early August, this fund fell about 6% in one day. This was not because of a dividend. It was because the fund’s holdings – mortgage backed securities – were repriced down to reflect the major troubles in the mortgage market. This was not the only ultra short bond fund to have this problem, though it was one of the most severe. 

We wrote about this situation the day after the crash on the MAXfunds.com website (one week before Morningstar and the Wall Street Journal noticed). We also had a lengthy conversation with one of the fund managers about exactly what was going on.

But all this was still too late. Quite frankly we should have known better. Not only do we watch all of our funds closely, we have repeatedly warned investors about the troubles in real estate in general and mortgage backed bonds in particular. 

What could go wrong with a top rated portfolio (by major bond rating agencies who get paid to research debt for risk) of low duration bonds? You have virtually no credit risk (or so everyone thought) and little interest rate risk. Quite frankly we were more concerned about the risky bond fund portfolios like Vanguard High Yield Corporate that actually own longer term low grade bonds – the double risk whammy in the bond world. In retrospect, we should have sold it on the percentage of mortgage bonds alone - damn the experts.

What next? The fund manager reminded us that these bonds are still paying, so the price drop in the fund means a higher yield. The numbers are not in, but this fund may be yielding about 6% now. Will there be another repricing? We’re not 100% sure. We don’t think another repricing will take place in the next few weeks, but we are more concerned investors leaving the fund will lead to a sell at any price situation for the fund manager. We are monitoring this fund closely, and if necessary we will post a trade in coming days.

Another situation we are watching closely is our new long short fund – American Century Long Short Equity (ALHIX). While this fund had a great July, it has dropped sharply in early August in a bizarre situation that has also slammed many hedge funds. Basically, the shorts the fund has invested in have spiked up in price while the longs have tanked. Nobody knows why for sure, but hedge funds (and this fund) are following similar computer models and are in the same stocks. Perhaps because of losses elsewhere (mortgage bonds…) they are unwinding positions to raise cash. This fund is also on watch for possible sale and we have already talked at length with American Century. We didn’t buy a long short fund to add more stock market risk to the portfolios – we wanted less.

Bottom line, there are serious troubles in the debt and equity markets these days. While we intend to increase our stock allocations on more significant weakness, the market and entire economy are on shaky ground – more so than at any time in recent years. We don’t mind too when our high risk funds drop every once in awhile. We do mind when safer funds start misbehaving. Stay tuned.

It was the best of times, it was the worst of times…

So far, August is among the strangest month for fund investors since before we started MAXfunds.com in 1999. In fact, it’s in one of the strangest months since we first got into the mutual fund business over 15 years ago…certainly up there with the Asian contagion, the Russian bond default, the dot com crash, and the junk bond crash.

On the one hand, we’re very happy with our portfolios overall performance. As readers know, we have been cutting back on many hot fund categories and recently did a substantial trade across all portfolios and eased up on stocks in general. Our timing was impeccable. The day our trade alert went out the market was within a fraction of a percent of the peak in the market for this year. It was a great time to move into longer term bonds – not far off from the peak in interest rates for the year. It was a great time to get out of international stocks, go into growth stocks, and get out of junk bonds. 

In July the S&P 500 was down a sharp 3.1%. Worse, small cap stocks were down over 5%. Don’t even ask about foreign markets. The FTSE or “footsie” a key European index, was down almost 6% - much of it in the last few days of July. So far August is even worse. Yesterday the Japanese market fell over 5% in one day. As we’ve noted, the vast majority of new money going into mutual funds this year was and is going into foreign funds. 2007 will likely be another year where fund investors underperform because of their performance chasing ways.

Longer term bonds were up a smart 2.4% as panicky investors bought safety. Yet all was not rosy for bonds. Anything with credit risk was hit hard – safe bonds went up in value, unsafe bonds fell. Long time holdings Vanguard High Yield Corporate fell 3.3% in July. Fortunately we told you get out of this fund before the crash. As we noted at the time of the trade announcement, we were concerned that there was no longer an increased return for the increased risk – junk bonds only paid a little more than ultra safe treasury bonds. Why take on the default risk?

We expect this market action to lead to opportunities. Let’s not forget we used to have 15% stakes in junk bond funds back when they were cheap a few years ago (and 10% stakes in emerging market bonds). We’ve been cutting back ever since and if we can get 5% or more over a treasury bond, we’ll get right back in there.

Because of our recent trades we had a very good month. Three of our portfolio were actually up in July. Only one – low minimum, which because of the restrictions we have choosing funds is not or most dynamic portfolio – was down over 1% (-1.07% to be exact). Moderate, Growth, and Aggressive growth were down just 0.50%, 0.63%, and 0.51% respectively. Daredevil was up 0.27%, Safety was up 0.75%, Moderate up 0.23%. Our stock-oriented portfolios are now all beating the S&P 500 for the year, and factoring in early August, all of our portfolio will be ahead of the benchmark.

Our stock and bond funds did well. Most of our stock funds had good months relative to the market: Janus Global Research (JARFX) was up 0.07%, Gateway (GATEX) was down 1.06%, Bridgeway Balanced was down 0.46%, American Century Long Short was up 1.34%, Vanguard Growth ETF was down 1.56%, Technology SPDR (XLK) was down 0.72%, SPDR Biotech (XBI) was down 0.92%, and Bridgeway Blue Chip 35 was down 1.53%.

In fact, only a few funds took significant hits: HealthCare Select SPDR (XLV) was down 4.33%, Buffalo Mid Cap down 2.08%, SSgA Disciplined Equity (SSMTX) down 3.31%, ICON Healthcare (ICHCX) down 3.49%, Wasatch Heritage Growth (WAHGX) down 3.93%, Vanguard U.S. Value (VUVLX) down 4.81%.

Then there was the high risk/ high return story of the month: real estate tanking. We just doubled up our short real estate fund in our highest risk portfolio Daredevil. Ultra Short Real Estate ProShares (SRS) was up a stunning 18.96% in July, wiping out the losses in other stock funds and then some. Note that this is an extremely high risk short term holding used in conjunction with our more aggressive positions.

As you can see from our longer term returns, our stock-oriented portfolios tend to beat the S&P 500 with lower risk. 2006 was the only exception, when our squeamishness on stocks didn’t pay off. However, we’ve found that not falling as much as the S&P 500 during weak periods helps us beat the S&P 500 over time more than matching it during big moves up.

But despite our relative success last month, all was not well in our portfolios. We have some serious mistakes to report and we saved the worst for last…

In our safest portfolio – Safety- we currently have a 5% stake in what should be the safest fund of the bunch: SSgA Yield Plus (SSYPX). We have owned this fund since 2002,  the very beginning of the Safety portfolio. The reason we own this fund is that cash sweep accounts at most brokers offer very little return – very often investors get as low as 0.5% interest. SSgA Yield Plus can often be bought for no transaction fee (NTF) at your discount broker, and historically pays about 0.5% more than most decent money market funds. The minimum is low ($1,000) and there is no short term redemption fee. This lets customers who follow our portfolios at brokers like Scottrade, Firstrade, and TD Ameritrade earn more money on their low risk cash. 

SSgA Yield Plus fell 1.48% in July. This may not sound like a big deal, but for an ultra short bond fund that holds investment grade debt, this is very unusual. Unfortunately, the situation went from bad to worse. In early August, this fund fell about 6% in one day. This was not because of a dividend. It was because the fund’s holdings – mortgage backed securities – were repriced down to reflect the major troubles in the mortgage market. This was not the only ultra short bond fund to have this problem, though it was one of the most severe. 

We wrote about this situation the day after the crash on the MAXfunds.com website (one week before Morningstar and the Wall Street Journal noticed). We also had a lengthy conversation with one of the fund managers about exactly what was going on.

But all this was still too late. Quite frankly we should have known better. Not only do we watch all of our funds closely, we have repeatedly warned investors about the troubles in real estate in general and mortgage backed bonds in particular. 

What could go wrong with a top rated portfolio (by major bond rating agencies who get paid to research debt for risk) of low duration bonds? You have virtually no credit risk (or so everyone thought) and little interest rate risk. Quite frankly we were more concerned about the risky bond fund portfolios like Vanguard High Yield Corporate that actually own longer term low grade bonds – the double risk whammy in the bond world. In retrospect, we should have sold it on the percentage of mortgage bonds alone - damn the experts.

What next? The fund manager reminded us that these bonds are still paying, so the price drop in the fund means a higher yield. The numbers are not in, but this fund may be yielding about 6% now. Will there be another repricing? We’re not 100% sure. We don’t think another repricing will take place in the next few weeks, but we are more concerned investors leaving the fund will lead to a sell at any price situation for the fund manager. We are monitoring this fund closely, and if necessary we will post a trade in coming days.

Another situation we are watching closely is our new long short fund – American Century Long Short Equity (ALHIX). While this fund had a great July, it has dropped sharply in early August in a bizarre situation that has also slammed many hedge funds. Basically, the shorts the fund has invested in have spiked up in price while the longs have tanked. Nobody knows why for sure, but hedge funds (and this fund) are following similar computer models and are in the same stocks. Perhaps because of losses elsewhere (mortgage bonds…) they are unwinding positions to raise cash. This fund is also on watch for possible sale and we have already talked at length with American Century. We didn’t buy a long short fund to add more stock market risk to the portfolios – we wanted less.

Bottom line, there are serious troubles in the debt and equity markets these days. While we intend to increase our stock allocations on more significant weakness, the market and entire economy are on shaky ground – more so than at any time in recent years. We don’t mind too when our high risk funds drop every once in awhile. We do mind when safer funds start misbehaving. Stay tuned.

The conservative portfolio was up just 0.44% in May as bonds fell on rising rates. Stocks were very strong in May with the S&P 500 up almost 3.5%. Vanguard U.S. Value (VUVLX) and Janus Research (JARFX) were up 3.58% and 4.21% respectively, but the hits to bonds funds like Harbor (HABDX) down 1.38% largely wiped out the stock gains.

We are making trades in the Conservative portfolio, effective June 30th, 2007.

Because of the relative complexity of these trades we have created an easy-to-use <a href="http://maxadvisor.com/mint/pepper/orderedlist/downloads/download.php?file=http%3A//maxadvisor.com/newsletter/worksheets/conservativetrades0607.pdf">trade worksheet</a>. Subscribers who invest in the Conservative Portfolio can download, print out, and fill in the worksheet to help them determine how much of their holdings need to be bought and sold to match our post-trade portfolios and to rebalance. You can download the Conservative Portfolio Worksheet by <a href="http://maxadvisor.com/mint/pepper/orderedlist/downloads/download.php?file=http%3A//maxadvisor.com/newsletter/worksheets/conservativetrades0607.pdf">clicking here</a>. Please note that the document is an Adobe PDF. If you need to download Adobe Acrobat reader, you can find it by <a href="http://www.adobe.com/products/acrobat/readstep2.html">clicking here</a>.

<b>Sales:</b>

• <b>Sell entire</b> high yield bond allocation: Vanguard High Yield Corporate (VWEHX) from 5% to 0%

• <b>Sell entire</b> short term bond allocation: Vanguard Short Term Investment Grade (VFSTX) from 30% to 0%

• <b>Sell entire</b> international diversified allocation: SSgA International Growth Opportunity (SINGX) from 5% to 0%

• <b>Reduce</b> large cap value allocation: Vanguard U.S. Value (VUVLX) from 10% to 5%

<b>Buys:</b>

• <b>Buy new</b> short allocation: American Century Long-Short Equity (ALHIX) to 5%

• <b>Buy new</b> intermediate term bond allocation: Dreyfus Bond Market Index Basic (DBIRX) to 35%

• <b>Buy new</b> large cap growth allocation: Vanguard Growth ETF (VUG) to 5%

<b>Why: </b> As noted in our trade alert email, stock prices are up across the board and interest rates – while still on the low side historically – are high enough to reduce our short term bond fund holdings and to move more into intermediate term bonds. When stocks get too in favor, it can be particularly dangerous to those investing for low risk.

As we noted last year, “Our shift to short term bonds reflects our feeling that owning longer term bonds when the ten year government bond yields around 4.5% isn’t much of an idea.” Now we can get over 5% on a ten year bond (5.3% this past week) and stock prices are higher, making them not as attractive as last year. Cheaper bonds and more expensive stocks calls for a re-allocation.

We’re going out on a bit of a limb with the newish and undiscovered American Century Long Short Equity (ALHIX). Funds that shoot for so-called market neutral returns or just do heavy shorting (selling borrowed stock in the hope of buying it back at a cheaper price later) tend to underperform: their returns almost never justify their higher fees. This fund may prove a rare exception that is wroth taking a small stake in before it closes to new investors. It is among the lowest fee funds that takes heavy short positions, and so far has delivered acceptable low risk returns. Frankly, the appeal is higher when short term rates are lower, but we’re going to give this fund the benefit of the doubt for now. With the global stock market racing higher, we’re willing to take a risk on a counter-intuitive idea that has the potential to deliver big returns over the next 1-3 years.

<b>Redemption fee information: </b>

If you sell SSgA International Growth Opportunity (SINGX) within 60 days of purchase, you will get hit with a 2% redemption fee.

If you sell Vanguard High Yield Corporate (VWEHX) within one year of purchase you will get hit with a 1% redemption fee. While we’ve owned this allocation since 2002, if you are a new investor, wait until you can sell the fund for no redemption fee.

There are no other short-term redemption fees associated with these sales. Please check with your broker if you do not buy directly from the funds to see if you are beyond the time period of any broker-imposed short term penalty fees before selling. Do not pay a short term redemption fee just to leave a short term bond fund in favor of a longer term bond fund a few weeks before the fee would go away. Please note our alternative choices for those that have trouble buying the primary choice cheaply.

The aggressive growth portfolio was up 2.37% in May even though bonds were hit pretty hard. The shorter term bond holdings were only down slightly, but Harbor Bond (HABDX) down 1.38%. 

Stocks were very strong in May with the S&P 500 up almost 3.5%. The stock funds in the portfolio largely matched the market’s return in May, with HealthCare Select SPDR the notable underperformer up just 1.55% (after a big run in recent months). Another stinker was T. Rowe Price Japan up just 0.28%. Currently only larger cap Japan stocks are performing well. The real standout was an 8.77% return in the Vanguard Telecom ETF (VOX) – this fund is now up over 43% since added to the portfolio last year. We’re using the outpeformance of these funds as an opportunity to sell. Tech stocks were strong as the Technology SPDR (XLK) saw a 5.06% move.

We are making trades in the Aggressive Growth portfolio, effective June 30th, 2007.

Because of the relative complexity of these trades we have created an easy-to-use <a href="http://maxadvisor.com/mint/pepper/orderedlist/downloads/download.php?file=http%3A//maxadvisor.com/newsletter/worksheets/aggressivegrowthtrades0607.pdf">trade worksheet</a>. Subscribers who invest in the Aggressive Growth Portfolio can download, print out, and fill in the worksheet to help them determine how much of their holdings need to be bought and sold to match our post-trade portfolios and to rebalance. You can download the Aggressive Growth Portfolio Worksheet by <a href="http://maxadvisor.com/mint/pepper/orderedlist/downloads/download.php?file=http%3A//maxadvisor.com/newsletter/worksheets/aggressivegrowthtrades0607.pdf">clicking here</a>. Please note that the document is an Adobe PDF. If you need to download Adobe Acrobat reader, you can find it by <a href="http://www.adobe.com/products/acrobat/readstep2.html">clicking here</a>.

<b>Sales:</b>

• <b>Sell entire</b> Japan allocation: T.Rowe Price Japan (PRJPX) from 5% to 0%

• <b>Sell entire</b> short term bond allocation: Vanguard Short Term Investment Grade (VFSTX) from 20% to 0%

• <b>Reduce</b> large cap blend allocation: Bridgeway Blue-Chip 35 (BRLIX) from 35% to 20%

• <b>Sell entire</b> sector: telecom allocation: Vanguard Telecom Services ETF (VOX) from 5% to 0%

<b>Buys:</b>

• <b>Buy new</b> short allocation: American Century Long-Short Equity (ALHIX) to 5%

• <b>Buy new</b> intermediate term bond allocation: Vanguard Intermediate Term Bond Index (VBIIX) to 20%

• Increase diversified bond allocation: Harbor Bond (HABDX) from 5% to 15%

• <b>Buy new</b> large cap growth allocation: Vanguard Growth ETF (VUG) to 10%

<b>Why: </b> As noted in our trade alert email, stock prices are up across the board and interest rates – while still on the low side historically – are high enough to reduce our short term bond fund holdings and move more into intermediate term bonds. When stocks get too in favor, it can be particularly dangerous to those investing for low risk.

As we noted last year, “Our shift to short term bonds reflects our feeling that owning longer term bonds when the ten year government bond yields around 4.5% isn’t much of an idea.” Now we can get over 5% on a ten year bond (5.3% this past week) and stock prices are higher, making them not as attractive as last year. Cheaper bonds and more expensive stocks calls for a re-allocation.

We’re going out on a bit of a limb with the newish and undiscovered American Century Long Short Equity (ALHIX). Funds that shoot for so-called market neutral returns or just do heavy shorting (selling borrowed stock in the hope of buying it back at a cheaper price later) tend to underperform: their returns almost never justify their higher fees. This fund may prove a rare exception that is worth taking a small stake in before it closes to new investors. It is among the lowest fee funds that takes heavy short positions, and so far has delivered acceptable low risk returns. Frankly, the appeal is higher when short term rates are lower, but we’re going to give this fund the benefit of the doubt for now. With the global stock market racing higher, we’re willing to take a risk on a counter-intuitive idea that has the potential to deliver big returns over the next 1-3 years.

High yield bonds, international stocks, telecom stocks (and higher yield, value stocks in general) have all outperformered and attracted new money and we want to reduce our stake and focus on investment grade bonds and U.S. growth stocks.

<b>Redemption fee information: </b>

If you sell T.Rowe Price Japan (PRJPX)  within 90 days of purchase, you will get hit with a 2% redemption fee.

There are no other short-term redemption fees associated with these sales. Please check with your broker if you do not buy directly from the funds to see if you are beyond the time period of any broker-imposed short term penalty fees before selling. Do not pay a short term redemption fee just to leave a short term bond fund in favor of a longer term bond fund a few weeks before the fee would go away. Please note our alternative choices for those that have trouble buying the primary choice cheaply.