June marks the 100th month we’ve published the Powerfund Portfolios newsletter, and to mark the occasion, we’re making some executive changes to our model portfolios. We’ll be reducing the number of model portfolios and (eventually) moving to daily performance updates.

But before we go into more detail, here’s some background on what we set out to do with the Powerfund Portfolios (then called the MAXadvisor Newsletter) when the first issue hit the Net back in April 2002.

Our model portfolios were designed to put into action our methodology/system of picking mutual funds through the mutual fund rating system we used on the MAXfunds.com website (which launched in late 1999).

Our method of rating funds has remained fundamentally the same since we began. Funds that meet the following criteria usually rate well:

• Low fees
• Good returns compared to similar funds
• In fund categories that are out of favor with fund investors
• Have recently underperformed other fund categories

Some aspects of our original rating system have since been taken on by the big fund raters, but nobody has our mix, which, among other feats of glory, gave low ratings to popular tech and growth funds before the crash in early 2000.

When we launched our model portfolios on April 1st, 2002, we focused on low-fee funds in out of favor fund categories. We also increased our overall stock fund allocation when fund investors appeared fearful of stocks in general (as we did most recently at the end of February 2009). When optimism was running wild, we cut back.

We did place some limitations on the model portfolios to make them available to as many people as possible. We generally avoided truly unknown funds that aren’t readily available through online brokers, since it can be difficult to follow a multi-fund portfolio if you have to buy some of your funds directly from fund companies.

We also used funds with lower minimum investment requirements since high minimum funds require you to maintain a larger portfolio in order to follow our allocations. (We often use higher minimum and institutional class funds in our managed accounts.) Our five core model portfolios were doable with portfolios of around $60,000 (or less, in the case of IRAs.) In fact, we optimized these model portfolios for accounts in the $50,000-$75,000 range. If you have less or more, review our alternate fund choices by clicking ‘view alternates’ below each fund listing in the model portfolio holdings for possible funds that may meet your needs. You’ll find lower fee or lower minimums can be found for most of our choices.

Our model portfolios have all done well relative to the S&P (They all beat the market by a wide margin since early 2002…) but there are areas in which we think we could improve.

The stock market has gone basically nowhere since we launched these portfolios just over eight years ago. Our positive returns have come from buying funds that beat the market, or buying funds during market lows and selling after runs up. This is not to say we were actively trading – typically we did two trades a year, and only changed a few funds in some of the model portfolios.

Going forward, we’ll be using real money in the model portfolios. That’s not to say the performance returns have been fake since we created the portfolios. All of the mutual funds posted the returns we listed, and anyone following our model portfolios could have largely duplicated our returns, pre-tax, although there would have been some commissions for buying and selling some of our funds, which would have slightly lowered actual returns. (That’s why we always recommend going with a broker with a good low-fee fund supermarket).

One benefit of going “real money” Our model portfolios will now include the effect of commissions when we buy and sell funds and ETFs. Whether we use real money or not, fund fees are and always have been included in our fund returns. 

We can also update our returns daily, since we know exactly how much our portfolio goes up or down each day after the market closes. It’s not that you have to have daily returns or watch an essentially long-term investment (our typical holding period is 2 years or so) but it’s nice to see how the model portfolios did on a day on which the market falls or rises significantly. We can also add statistics about our “worst day” and “worst week”’ for risk purposes. In the past, we only had a worst month, three months, and year.

We can also trade whenever we want. Since we started the newsletters, we booked all of our trades at the end of the month (as we are doing again now) for very clear and easy to follow trades and performance measurement. We announced our trades well before the trade date. Although we don’t think increased trading is the way to improve most investment returns, there were certainly some slides in the market that took place during a month that we would have liked to take action on.

Another big change – we’re cutting back the number of model portfolios to two. Previously, we had five core risk level portfolios, and two “special purpose” portfolios (Low minimum and Daredevil). Low minimum was designed for someone with approximately $5k – $20k to invest, and for whom building portfolios with an average of 10 funds was not feasible. Although this portfolio is useful, we realized few subscribers were following it. As for Daredevil, we intend to use some of the more speculative picks in the new model portfolios now that they have more funds.

The five core model portfolios were designed for different risk levels, beginning with very low (Safety) and progressing to high (Aggressive Growth). Although matching a portfolio to your personal risk level is important, we think it can be done well with our two new model portfolios: Aggressive and Conservative. Those wanting less risk than the new Conservative (like the Safety portfolio) can simply allocate less of their portfolio to the funds and supplement with cash or CDs.

Keep in mind that our model portfolios will continue to experience fluctuating risk levels. Key to our management system is increasing your stock allocation as stocks fall and grow more out of favor. This doesn’t mean a conservative portfolio allocates to 100% stocks just because the stock market dips 20%, but it does mean a portfolio that is normally 50% stocks could go to 65% if stocks become particularly cheap, or as low as 35% stocks after a long run up in stock prices. Although we think stocks become lower risk the more out of favor they become, it’s worth noting a good rule of thumb: stock funds can fall 50% from any place, and a portfolio that’s 80% in stocks can fall 40% in such a bad market.

We’re launching the new model portfolios with our trades at the end of June 2010. We’ll be redesigning the site in coming months to transition to daily performance updates and other enhancements. We expect to continue to beat the S&P 500 for the next eight years.

It took us less than 10 years to double our Aggressive Growth portfolio in a mediocre stock market environment. The S&P 500 was only up around 11% (including dividends) during this time. And we look forward to doing it again over the rest of this decade. Thank you for joining us.