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November 2017 Performance Review

December 5, 2017

Investor exuberance is becoming irrational.

It doesn't seem like what you would want to do in the face of dead-end bonds and fast rising equities globally (not to mention the increasing likelihood of corporate tax cuts), but we may have to take the portfolio's risk levels down a bit soon. Hopefully a risk reduction will be contrarian and not stupid…but the two often walk hand-in-hand.

While we don't (necessarily) think a 2000 or 2007 grade stock meltdown is in the cards, upside potential is looking smaller than downside potential. This would mean a move to lower-risk stock funds and even less credit risk on our bond side.

The Conservative portfolio gained 1.19% in November and the Aggressive portfolio gained 1.40%. Benchmark Vanguard funds for November 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 3.06%; Vanguard Total Bond Market Index Fund (VBMFX) down 0.17%; Vanguard Developed Markets Index Fund (VTMGX) up 0.85%; Vanguard Emerging Markets Stock Index (VEIEX) up 0.18%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.40%.

With bonds down and stocks up, up, and away our portfolios did a little better than expected for their risk level this month. The Vanguard STAR fund benchmark was also up 1.4% in November matching our Aggressive portfolio exactly, however, in down markets we're generally falling less than this total portfolio fund, mostly because of our short positions and longer-duration bond holdings.

Our lower-risk stance also resulted in our under-performing the Vanguard STAR fund so far this year. The S&P 500 is up just over 20% in 2017, while Vanguard STAR is up just over 17% — as opposed to 11.97% YTD for our Aggressive portfolio and 12.65% for our Conservative portfolio. (The fact that a balanced conservative portfolio is up over 12% YTD and we're making excuses about the poor performance is one reason this market is overheated. By now, a down market almost seems nostalgic.)

Shorting MLPs worked even with rising oil prices as ETRACS 1xMonthly Short Alerian MLP (MLPS) was up 3.2% for the month. This short fund is having a good year for an inverse fund, up around 12% even in the face of a strong economy and rising oil prices. This is a tiny fund and unpopular strategies tend to work (like shorting commodities with funds in 2008 on or buying commodities long in 2000-2002).

Value stocks did well last month with Vanguard Value (VTV) up 3.52% and Homestead Value (HOVLX) up 3.11%. Utilities and telecoms rebounded with Vanguard Utilities (VPU) up 2.89% and Vanguard Telecom Services ETF (VOX) up 2.48%. Basically everything we owned in stocks was up that wasn't short.

In bonds SPDR Barclays Intl. Treasury (BWX) was up 2.11% as the U.S. dollar turned back down. Vanguard Extended Duration Treasury (EDV) was up 1.35% while longer-term bonds outperformed shorter-term bonds. In addition, lower-risk debt did better than higher-risk debt, which is why Artisan High Income Fund (ARTFX) was down 0.45% while the bond index fell 0.17% and longer-term government bond indexes were up. Our prediction for a flat yield curve in the future is slowly coming true, especially with a Fed dying to prove their inflation fighting powers (hopefully not to the point of deflation).

In general, U.S. stocks beat foreign stocks though for the year foreign stocks have now outperformed the U.S. (this is partly due to a falling dollar).

Surprisingly both cyclical AND defensive stocks beat the S&P 500 in November — as if investors are evenly split on making bets on both a booming economy and a collapse.

With so much money going into indexing it's almost a surprise everything isn't moving in unison. But for all the indexing going on there's still plenty of betting on specific areas, just through index funds. This is why long-term under-performance of broad indexes will continue even with the savings in active management fees.

Stock Funds1mo %
Vanguard Value (VTV)3.52%
ETRACS 1xMonthly Short Alerian MLP (MLPS)3.20%
Homestead Value (HOVLX)3.11%
[Benchmark] Vanguard 500 Index (VFINX)3.06%
Vanguard Utilities (VPU)2.89%
Vanguard Telecom Services ETF (VOX)2.48%
Artisan Global Equity (ARTHX)1.66%
Vanguard Europe Pacific ETF (VEA)0.86%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)0.85%
iShares MSCI BRIC Index (BKF)0.41%
iShares Mortgage REIT (REM)0.40%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)0.18%
iShares MSCI Italy Capped (EWI)0.16%
Vanguard European ETF (VGK)-0.05%
Gold Short (DZZ)-0.53%
Proshares Ultrashort NASDAQ Biotech (BIS)-1.39%
Proshares Ultrashort Russel2000 (TWM)-5.76%
PowerShares DB Crude Oil Dble Short (DTO)-9.81%
Bond Funds1mo %
SPDR Barclays Intl. Treasury (BWX)2.11%
Vanguard Extended Duration Treasury (EDV)1.35%
Vanguard Long-Term Bond Index ETF (BLV)0.75%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.17%
Vanguard Mortgage-Backed Securities (VMBS)-0.18%
Artisan High Income Fund (ARTFX)-0.45%