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January 2016 Performance Review

February 2, 2016

So much for the January effect.

In Wall Street lore, the January effect is the historical pattern where stocks do well in January relative to other months for dubious reasons that include year-end tax loss selling and reinvestment. The first few weeks of 2016 have turned out to be the worst start of any year on record.

For the month, our Conservative portfolio was down 0.59%. Our Aggressive portfolio fell 0.46%. Benchmark Vanguard funds for January 2016: Vanguard 500 Index Fund (VFINX) down 4.98%; Vanguard Total Bond Market Index Fund (VBMFX) up 1.43%; Vanguard Developed Markets Index Fund (VTMGX) down 5.75%; Vanguard Emerging Markets Stock Index (VEIEX) down 6.05%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, dropped 3.74%.

The U.S. market dropped about 5% in January, and that's with a bit of a rebound in the latter half of the month. (It was down just shy of 9% at one point.) The Powerfund Portfolios had a good month relative to the markets, with both portfolios down less than 1%.

Our relative returns were helped by longer-term bonds, which gave us offsetting gains to our stocks - unlike in 2015. Vanguard Extended Duration Treasury (EDV), which is the most sensitive to interest-rate changes, was up 8.43%, followed by a 2.34% gain for Vanguard Long-Term Bond Index ETF (BLV). In general, it's cheaper and safer to use longer-term bonds to reduce stock market risk than shorting with expensive and unpredictable engineered ETFs. But as rates go down, we have to look elsewhere for downside protection.

Some other areas we just added with our early January trade, notably new shorts and utility stocks, helped keep us above benchmarks and other balanced portfolios. One notable performer is our new biotech leveraged short ETF Proshares Ultrashort NASDAQ Biotech (BIS), which is up around 30% so far and hasn't even been a holding for a full month yet. This sort of gain can evaporate in days in such a fund so we aren't counting our chickens, but it did serve its main purpose, which was to go up much faster than the market falls.

Our remaining oil short PowerShares DB Crude Oil Dble Short (DTO) continues to deliver even though we've made two sales reducing this position, already the most recent in our early January trade. For the month, DTO was up 25.5%. Oil has become the focus of all action lately. With wild swings in "a bubbling crude," this fund now goes up and down by double digits almost daily.

It wasn't all roses in shorting in January. Gold went up as the deceived put money into it, probably because of general panic in the global markets and the expectation of more loose monetary policy (a not totally unfounded expectation given Japan's action recently). The mistake is expecting this policy to create massive price increases. For gold bugs, stagflation is always what we are going to get next Tuesday for monetary action today. But as followers of Wimpy from Popeye know, that burger won't get paid for next week - it winds up just being a free burger. Did I mention the gold mining stock index, the XAU, is now down to the lowest levels in history? That is a claim no long-term stock index can and probably will ever make. I can almost hear gold bugs saying, "That is why I own metal, not mining shares." Just wait until the emerging markets start selling their gold to make debt payments. Meanwhile, we lost 10.6% in Gold Short (DZZ) in January, which was even worse than our emerging market ETF iShares MSCI BRIC Index (BKF)'s lousy performance.

Large cap value was the best of the U.S. funds, falling just over 6%. Small growth fell over 11%. Utilities were the only category other than precious metals that posted gains in January. So far, we're glad we cut back on growth and moved into value and utilities in early January. Riskier bonds continued to fall, with 1 to 2% drops across the board common.

Healthcare, notably biotech, took a huge slide with a 15% drop for the month. Selling healthcare-heavy PRIMECAP Odyssey Growth (POGRX), which fell just shy of 10% for the month, and shorting biotech turned out to be a good idea thus far, but we should have done it a few weeks earlier.

What doesn't work for most ordinary investors is chasing trends, well-known patterns, streaks, and popular investment themes (like beating inflation with commodities). This applies to the January effect, star ratings, top-performing lists, doomsday theories, and protection strategies against said doom. Investors should either low-cost index a balanced portfolio and leave it alone or make sure they are targeting unpopular strategies and avoiding the popular delusions.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)25.50%
Vanguard Telecom Services ETF (VOX)1.23%
[Benchmark] Vanguard 500 Index (VFINX)-4.98%
Vanguard Europe Pacific ETF (VEA)-5.53%
Vanguard European ETF (VGK)-5.55%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-5.75%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-6.05%
Artisan Global Equity (ARTHX)-8.60%
iShares MSCI BRIC Index (BKF)-9.22%
Gold Short (DZZ)-10.60%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)8.43%
Vanguard Long-Term Bond Index ETF (BLV)2.34%
[Benchmark] Vanguard Total Bond Index (VBMFX)1.43%
Vanguard Mortgage-Backed Securities (VMBS)1.23%
SPDR Barclays Intl. Treasury (BWX)0.29%