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January 2014 Performance Review

February 4, 2014

The almost uninterrupted upward run in U.S. stocks ended in January, with a 3.5% drop in the S&P 500, a slide that so far is continuing into February. While hardly severe by historic standards, this was the worst month for stocks since May 2012 and we’re now down about 5% from all-time highs.

You can now start to see what we gained by giving up upside in recent years by cutting back on stocks. Our model portfolios were ‘only’ up 10.93% (Conservative) and 19.04% (Aggressive) in 2013 as opposed to the just over 32% return for the S&P 500 with dividends. In January our Conservative portfolio was up 0.5% while our Aggressive portfolio dipped just under 1%. This is the sort of downside to upside ratio these portfolios are targeting, at least until we start increasing our stock allocation if stocks continue to slide.

Benchmark Vanguard funds for January 2014: 500 Index (VFINX) down 3.47%, Total Bond Market Index (VBMFX) up 1.54%, International Index (VTMGX) down 4.57%, Emerging Markets Stock Index (VEIEX) down 7.27%, Vanguard STAR (VGSTX), a total balanced portfolio, down 1.38%.

Speaking of downside, the real slide going on here is in emerging markets, an area that is finally seeing serious outflows of money - $5 to $10 billion a week - after years of inflows. The predicted great decoupling of emerging markets –where the U.S. market will underperform as our economy stagnates, our dollar slides, and inflation grows – was almost completely wrong: the emerging markets are the ones facing weak currencies, inflation, slowing economic growth, and now sliding stock prices. Take that Wall Street experts.

Our own portfolios are no longer emerging market free, as they have been for much of the last seven years or so. We have been picking up small stakes on weakness in recent years. Our hardest hit areas last month were emerging markets, which were typically down 2 to 3 times as much as U.S. markets – in our case iShares MSCI BRIC Index (BKF), which fell 9.13% in January.

As the money leaves these once hot markets, valuations will plummet to the point where they will beat U.S. stocks over the next 10 years – sort of like the late 1990s. It’s not like U.S. stocks are the bargain of a lifetime at the moment, and another $50 - $100 billion in outflows, if we get it, which would likely coincide with a 30% slide in emerging markets. That level is about where we’d expect to significantly increase our emerging market holdings. And then wait.

In this worried market long-term bonds are up strongly as rates slide again – which is why our portfolios are doing well this year relative to most balanced portfolios. Utilities, which lagged in 2013, have been strong in this latest market slide. Oil should continue to decline along with with emerging markets, boosting our short ETF. This recent move up in gold should reverse as gold just isn’t going to seem like a great place to sit out any crisis now that it is down significantly from highs of a few years ago.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)2.71%
PRIMECAP Odyssey Growth (POGRX)0.64%
American Century Utility Income (BULIX)0.06%
Wasatch Frontier Emerg Sm Count (WAFMX)-1.93%
Artisan Global Equity (ARTHX)-2.72%
Vanguard Telecom Services ETF (VOX)-2.80%
Wasatch Long/Short (FMLSX)-2.84%
Vanguard MegaCap Growth (MGK)-3.38%
[Benchmark] Vanguard 500 Index (VFINX)-3.47%
Satuit Capital Micro Cap (SATMX)-3.77%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-4.57%
Vanguard European ETF (VGK)-4.57%
Vanguard Europe Pacific ETF (VEA)-5.21%
Gold Short (DZZ)-6.63%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-7.27%
iShares MSCI BRIC Index (BKF)-9.13%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)9.71%
Vanguard Long-Term Bond Index ETF (BLV)5.38%
[Benchmark] Vanguard Total Bond Index (VBMFX)1.54%
PIMCO Mortgage Opportunities D (PMZDX)1.32%
DoubleLine Floating Rate N (DLFRX)0.45%