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December 2014 Performance Review

January 7, 2015

Another year is in the can, and what a year it was. On the surface, 2014 was a great one: the economy ended on a high note and the U.S. stock market shook off a late-year slide to post a 13.51% 12-month return. This on top of the bond market's near 6% gain (and 2014 was supposed to be the year of the great bond collapse). 

How could an investor perform poorly in such an environment? All too easily, it turns out, especially if they 'diversified' abroad and into 'real' assets like commodities for fear of a falling dollar or rising inflation.

The S&P 500 was hard to beat in '14. Vanguard 500 Index Fund Vanguard 500 Index Fund (VFINX) beat 80% of larger-cap U.S. stock funds, and larger-cap U.S. stock fund averages beat at least 80% of other fund category averages. The chance of building a fund portfolio and beating the S&P 500 in 2014 was low.

Foreign stocks were down about 5.6% for the year, with emerging markets essentially flat (as a group — some markets — e.g. India — were way up; some others — e.g. Russia — plunged). If we could do it all over again we'd have stayed away from foreign stock markets after we cut back in the mid-2000s, like we did with foreign bonds.

December itself was pretty lousy — especially for foreign markets and anything commodity related — much like the entire year. Our Conservative portfolio fell 0.11% in December, while the Aggressive portfolio gained 1.52%. Benchmark Vanguard funds for December 2014: Vanguard 500 Index Fund Vanguard 500 Index Fund (VFINX) down 0.26%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.09%; Vanguard Developed Markets Index Fund (VTMGX) down 3.73%; Vanguard Emerging Markets Stock Index (VEIEX) down 4.97%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, fell 0.87%.

The fund-of-fund benchmark we use, Vanguard Star Fund Vanguard Star Fund (VGSTX), was down in December and up only 7.35% for the year, which still beat about 2/3rds of similar risk balanced portfolio funds but underperformed both Powerfund Portfolios. We're still looking over the yearly numbers, but our Aggressive portfolio, with a 12.61% 2014 return, gained just shy of the S&P 500 and in general was solidly in the top 1% of the thousands of fund-of-funds. Our Conservative portfolio advanced a respectable 9.63% for the year.

Aggressive bucked the down December largely on the back of PowerShares DB Crude Oil Dble Short (DTO), up about 40% in December alone and 126% for the year (surprisingly good December returns in microcap stocks and long-term bonds also helped). That return makes DTO the #3 top performing fund or ETF in 2014 out of 25k+ tickers (and as it happens, we owned the second best performer, ProShares UltraShort Bloomberg Crude Oil  [SCO], in some private management client accounts). You'll want to stick around and learn when we think it's time to dump DTO. If you don't already, follow our free email alerts.

The year's #1 ETF? VelocityShares 3x Inverse Crude Oil ETN (DWTI) — up over 250% — but it's three-times leveraged and didn't trade with enough volume to make it practical to own, even if we had wanted to.

That's how badly oil did in 2014: the three best performing ETFs were oil shorts. But hardly any investors came along for the ride: the combined assets in these and all short commodity funds were a fraction of the assets in just one popular long oil ETF, The United States Oil ETF (USO), which we slammed when it was launched in 2006 as being "A Gusher of a Bad Idea". As of January 6th, the fund is down over 70% from inception and fell 42% in 2014 alone. (Side note: we're still angry at PIMCO for announcing the liquidation of their CommoditiesPLUS Short Strategy Fund in 2014, right before the historic slide in crude. It was a fund that had better long-term performance potential than these dumb leveraged ETFs. But that's how the mutual fund business works: you can only sell what people want to buy).

Shameless horn-toot: normally owning an annual top five performing fund happens once in an investing lifetime, and with all the leveraged funds out there nowadays picking a top performer like we did with DTO could be more luck than acumen. But we also owned the number two performing fund in 2008 PowerShares DB Commodity Dble (DEE), up just over 100% that year. And back in 2003 we owned a top 1% performing fund of the year, Bridgeway Ul-Sm Co Mkt (BRSIX), up 79% — not bad for a non-leveraged offering.

We only had two negative months in our Aggressive portfolio in 2014: a -1.85% hit during the September crush and a 1% drop in January. During both down months the portfolio beat our Vanguard Star Fund (VGSTX) benchmark (which fell 1.97% in September and 3.47% in January). We'll need a bigger slide to compare downside risk, but it looks pretty good for this iteration of the portfolio.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)39.80%
Satuit Capital Micro Cap (SATMX)4.39%
American Century Utility Income (BULIX)1.54%
Wasatch Long/Short (FMLSX)-0.11%
[Benchmark] Vanguard 500 Index (VFINX)-0.27%
Wasatch Frontier Emerg Sm Count (WAFMX)-0.86%
Vanguard MegaCap Growth (MGK)-1.06%
PRIMECAP Odyssey Growth (POGRX)-1.23%
Artisan Global Equity (ARTHX)-2.41%
Gold Short (DZZ)-3.20%
Vanguard Telecom Services ETF (VOX)-3.30%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-3.73%
Vanguard Europe Pacific ETF (VEA)-3.77%
Vanguard European ETF (VGK)-4.69%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-4.97%
iShares MSCI BRIC Index (BKF)-5.27%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)5.33%
Vanguard Long-Term Bond Index ETF (BLV)2.13%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.09%
Vanguard Mortgage-Backed Securities (VMBS)0.08%
DoubleLine Floating Rate N (DLFRX)-0.56%