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October 2017 Performance Review

November 6, 2017

OK it's official: the market is overheating. What minor skittishness there was around the 30th anniversary of the 1987 crash evaporated faster than a Bartles & Jaymes wine cooler spilled on the hood of a VW Rabbit in the parking lot of a summer concert featuring Poison, Ratt, and Cinderella.

Our Conservative portfolio gained 0.77% in October. Our Aggressive portfolio gained 0.93%. Benchmark Vanguard funds for October 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 2.32%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.11%; Vanguard Developed Markets Index Fund (VTMGX) up 1.87%; Vanguard Emerging Markets Stock Index (VEIEX) up 2.44%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.38%.

When the market gets hot, we tend to lag. We're underperforming the stock market so far in 2017, as we did in 2007 before the drop in the market. Most of this current drag is from our bond allocation, but more recently we've also suffered from being in lagging fund categories like telecom.

Because stocks fell so far between 2007-2009, the market still hasn't caught up to our Aggressive portfolio for the trailing 10 years (which includes this drop) even though we've been at a significantly lower risk level than the stock index for essentially all of this time (though our risk level was quite a bit higher than today in late 2009).

A too-hot market is one where you have to explain why you are up just 8.5% and 9.3% over the last twelve months in our Conservative and Aggressive portfolios respectively as opposed to a 23.5% gain in stocks.

Much of this current excitement is with the large tech stocks in the NASDAQ index where several companies are now in the $500 billion to $1 trillion market value range. The NASDAQ index level is up a bit more than 30% over the last 12 months as opposed to the still impressive 22% gain (just over 23.5% including dividends) in the S&P 500.

As hot as these stocks are now, it's noteworthy that the NASDAQ index is up only about 35% from its early 2000s peak — while we broke that level just over a year ago. Sure, this doesn't include dividends, but for much of this time the NASDAQ's dividends were minimal because of its high stock prices.

The NASDAQ of today is a far better deal than the early 2000 NASDAQ and neither plunge 80% from these levels or gain 2% a year going forward, which is about the average annual return since 2000. This also highlights the error of investing near peak enthusiasm. We're not at peak enthusiasm, but we're at levels where future returns will be modest.

Sort of surprisingly, Vanguard Utilities (VPU) was up 4.77% while a similar lower risk yield investment Vanguard Telecom Services ETF (VOX) was down 2.2%. Telecom stocks are getting attractively priced. In other odd parings our crude oil short PowerShares DB Crude Oil Dble Short (DTO) was down 9.27% as oil continued up on global economic strength while ETRACS 1xMonthly Short Alerian MLP (MLPS) which shorts companies that move energy around the country was up 4.8%.

Europe was weak compared to emerging market stocks which held back some of our foreign holdings like Vanguard Europe Pacific ETF (VEA) and Vanguard European ETF (VGK).

Bonds were quiet in October. Higher risk bonds like in Artisan High Income Fund (ARTFX) beat the bond index again.

Stock Funds1mo %
Proshares Ultrashort NASDAQ Biotech (BIS)12.20%
ETRACS 1xMonthly Short Alerian MLP (MLPS)4.80%
Vanguard Utilities (VPU)4.77%
Artisan Global Equity (ARTHX)2.81%
Homestead Value (HOVLX)2.78%
iShares MSCI BRIC Index (BKF)2.63%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)2.44%
[Benchmark] Vanguard 500 Index (VFINX)2.32%
Gold Short (DZZ)1.99%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.87%
Vanguard Value (VTV)1.83%
Vanguard Europe Pacific ETF (VEA)1.77%
Vanguard European ETF (VGK)0.46%
iShares Mortgage REIT (REM)-0.79%
iShares MSCI Italy Capped (EWI)-1.28%
Proshares Ultrashort Russel2000 (TWM)-1.55%
Vanguard Telecom Services ETF (VOX)-2.20%
PowerShares DB Crude Oil Dble Short (DTO)-9.27%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)0.80%
Artisan High Income Fund (ARTFX)0.56%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.11%
Vanguard Mortgage-Backed Securities (VMBS)0.09%
Vanguard Long-Term Bond Index ETF (BLV)0.02%
SPDR Barclays Intl. Treasury (BWX)-0.76%