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August 2015 Performance Review

September 2, 2015

The S&P 500 is down about 3% year-to-date (NOT including the 3% slide in U.S. stocks on the first of September) and the bond market is flat. Pretty much everything else is down for the month and year — some areas by double-digits. The Powerfund Portfolios are both ahead of the S&P so far in 2015 — down less than 1% in the Aggressive portfolio and less than 2% in the Conservative.

Our Conservative portfolio fell 2.36% in August. Our Aggressive portfolio was down 4.13%. Benchmark Vanguard funds for August 2015: Vanguard 500 Index Fund (VFINX) down 6.04%; Vanguard Total Bond Market Index Fund (VBMFX) off 0.36%; Vanguard Developed Markets Index Fund (VTMGX) down 7.28%; Vanguard Emerging Markets Stock Index (VEIEX) down 9.32%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, fell 4.29%.

We should be doing a little better, but considering emerging markets are down between 10% and 20% and larger foreign markets are down about 5% this year, we could be doing a lot worse. On the plus side, we have been heavy in U.S. larger-cap stocks, which have done relatively well.

We got out of healthcare too soon, which has been outperforming on pure momentum and inflows over the last year. Healthcare just booked the top 5-year average annual return of any fund category at about 25% annualized. We were in healthcare most of that time, and we still own a reduced stake in healthcare focused funds like PRIMECAP Odyssey Growth (POGRX), which we are considering selling due to overvaluation of biotech stocks.

Bonds until the very recent rise in rates have helped counter the market's down periods. Oil and gold shorts have helped (though less so in August). Longer-term bonds haven't helped as much as in past slides. The Vanguard Long-Term Bond Index ETF (BLV) is down 3.65% for the year — about the same as stocks. We think if the market keeps sliding, long-term bonds will ultimately help us outperform the stock market (unlike they have in the early part of this year). Shorting oil will soon run out of gas, as oil has already slid to near-2009-crash lows.

We were too soon back into emerging markets with our 2013 buys and in general have had too high an allocation to foreign markets after the purchases in 2011 (even though they were fairly well timed as it was a brief low in foreign markets). After the 2013 buys we hit 21% total to foreign stocks in our Aggressive account. We had no pure foreign fund in 2008. While we've had low allocations abroad through most of this roughly eight-year period of U.S. outperformance, we should have waited for more money to leave foreign markets before we got back in (rather than buying based merely on years of underperformance and decent relative valuations).

As it turns out, money is now finally leaving these foreign markets (in droves) — which is a big reason for the huge slides going on now. We're not sure where this ends, but ultimately there will be opportunities to run large emerging market and foreign stock allocations, perhaps even emerging market bond allocations, like we did in the early 2000s.

Another missed opportunity was not doubling down in PowerShares DB Crude Oil Dble Short (DTO) after the major slide after we correctly sold near the top early in the year. The rebound in oil that hit this short fund hard was nothing but a dead cat bounce, and oil recently slid again. That new dip in oil sent this short fund close to yearly highs, only to fall in recent days as the oil dead cat bounced again, only to rise as oil slid hard (yet) again on September 1st.

It's a casino market in commodities now with 5% moves up or down each day. We'd prefer to switch to a different commodity short fund but our options are limited. The mutual fund and ETF business gives you dozens of ways to invest in commodities, but hardly any way to short them.

There will be no buying opportunities in commodities. That bubble popped in 2008 and it's only now coming to the final cataclysmic end where the hundreds of billions that went in seeking 'real' returns are now facing very real losses. Commodities have no long-term investment value, (unlike, say, emerging market stocks) and buying in after a big slide is a bad idea. When the fund business starts closing down commodity funds, consider funds that own actual energy and natural resource companies, rather than those that speculate on futures of commodity prices.

Stock Funds1mo %
Vanguard Telecom Services ETF (VOX)-3.13%
Wasatch Long/Short (FMLSX)-4.27%
Wasatch Frontier Emerg Sm Count (WAFMX)-4.75%
PowerShares DB Crude Oil Dble Short (DTO)-5.02%
Satuit Capital Micro Cap (SATMX)-5.81%
PRIMECAP Odyssey Growth (POGRX)-5.83%
[Benchmark] Vanguard 500 Index (VFINX)-6.04%
Vanguard MegaCap Growth (MGK)-6.53%
Artisan Global Equity (ARTHX)-7.01%
Vanguard European ETF (VGK)-7.02%
Vanguard Europe Pacific ETF (VEA)-7.23%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-7.28%
Gold Short (DZZ)-7.42%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-9.32%
iShares MSCI BRIC Index (BKF)-10.33%
Bond Funds1mo %
Vanguard Mortgage-Backed Securities (VMBS)-0.13%
SPDR Barclays Intl. Treasury (BWX)-0.19%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.36%
Vanguard Extended Duration Treasury (EDV)-0.79%
Vanguard Long-Term Bond Index ETF (BLV)-1.11%