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December 2017 Performance Review

January 6, 2018

In 2017 the Powerfund Portfolios gained 13% and 12.1% in our Conservative and Aggressive portfolios respectively.

It must have been a hot year in the markets because these were underwhelming returns, not considering downside. Vanguard Star Fund Vanguard Star Fund (VGSTX) was up a whopping 18.33% in 2017, the best showing in our total portfolio benchmark since a 24.85% big-crash-rebound return in 2009. This fund has more in stocks than our portfolios, and of course no shorts.

In general, a 50/50 portfolio of S&P 500 and bond-focused index funds would have been up 12.56% because the Vanguard bond index fund was up 3.46% for the year while the 500 Index fund climbed 21.67%. If you owned both of our portfolios you would have earned about this return, though perversely our more conservative account did better. The real question is, do we beat these benchmarks in the inevitable down market that's sure to follow?

As Warren Buffett said, you don't know who is swimming naked until the tide goes out. In all likelihood we're under a 50/50 stock/bond downside risk level as we're just 30% in stocks in our Conservative account in real money terms today (the rest being 61% bonds, 6% Mortgage REITs, and 2.6% short); our Aggressive portfolio is now about 54% stocks, 39% bonds and 7% leveraged short (and less stocks and more shorts in real money terms at the beginning of the year). That means that we were up 13% in an account with just 30% stocks…not too bad.

It was a hard year to lose money in 2017. Most riskier fund categories gained double digits. The weakest areas were U.S. smaller-cap value, up just 8.56%, and energy stocks, down just shy of 5%. Telecom gained just over 7%.

The hottest areas (besides cryptocurrencies) were Indian stocks, up 46%, and China which gained 41%. We captured most of this with our holding iShares MSCI BRIC Index iShares MSCI BRIC Index (BKF) up 41.81% for the year — our best position. Almost all foreign markets beat the U.S. as our dollar slid in 2017.

In December our Conservative portfolio gained 0.33% and the Aggressive portfolio gained 0.12%. Benchmark Vanguard funds for December 2017 were as follows: Vanguard 500 Index Fund (VFINX) up 1.10%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.44%; Vanguard Developed Markets Index Fund (VTMGX) up 1.68%; Vanguard Emerging Markets Stock Index (VEIEX) up 3.49%; Vanguard Star Fund Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.09%.

For the month of December our foreign and value stocks were the benchmark beaters with Homestead Value (HOVLX) up 1.91%, iShares MSCI BRIC Index iShares MSCI BRIC Index (BKF) up 1.83%, and Vanguard Value (VTV) up 1.65%. Besides shorting, the losses we saw in December were in utilities and Italy, with Vanguard Utilities (VPU) down 5.88% for the month and iShares MSCI Italy Capped (EWI) down 1.3% (though Italy had a great year with a 28.7% return compared to utilities 12.5%).

In debt, longer-term bonds did well with Vanguard Extended Duration Treasury (EDV) up 2.16% and Vanguard Long-Term Bond Index ETF Vanguard Long-Term Bond Index ETF (BLV) up 1.55%. In general, longer-term investment grade as well as high risk bonds are doing well, with shorter-term investment grade debt a so-so area as shorter-term interest rates climb. Vanguard Long-Term Bond Index ETF Vanguard Long-Term Bond Index ETF (BLV) was up 10.74% for the year compared to 3.46% for the bond index most investors measure success by. In general, we had good stock and bond picks relative to the indexes and certainly relative to other fund choices; our drag was shorting and just not enough stocks.

Going forward we'll likely shift more towards the dividend-oriented areas that have had a rough time lately (those rough times caused largely by investors getting too focused on stock dividends as the end-all-be-all in the middle of the 2000s after getting pummeled in growth stocks). Now growth is back and value funds should beat tech funds again — though the valuation gap isn't nearly as great as it was in 2000. Foreign markets are no longer the relative bargain they were in early 2017.

We're watching for the Federal Reserve to push up short-term rates too far in anticipation of an economic boost from tax cuts that have driven much of the excitement in the markets recently. The boost the economy gets from lower taxes without significantly lower spending is financed by government borrowing. If the Federal Reserve raises rates because of fears of an overheated economy from tax cuts during a period of good growth and low unemployment we get even more government borrowing because the government must pay these higher interest rates on new debt. Go too far and we get a recession, no economic growth, just lots of new government debt. In general, we're well positioned for market turbulence yet continue to capture a decent chunk of the upside.

Stock Funds1mo %
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)3.49%
iShares Mortgage REIT (REM)2.20%
Homestead Value (HOVLX)1.91%
iShares MSCI BRIC Index (BKF)1.83%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.68%
Vanguard Value (VTV)1.65%
Vanguard Europe Pacific ETF (VEA)1.64%
Vanguard European ETF (VGK)1.53%
[Benchmark] Vanguard 500 Index (VFINX)1.10%
Artisan Global Equity (ARTHX)0.98%
Vanguard Telecom Services ETF (VOX)0.64%
Proshares Ultrashort Russel2000 (TWM)0.63%
iShares MSCI Italy Capped (EWI)-1.30%
Proshares Ultrashort NASDAQ Biotech (BIS)-3.16%
Gold Short (DZZ)-4.63%
Vanguard Utilities (VPU)-5.88%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-7.61%
PowerShares DB Crude Oil Dble Short (DTO)-9.18%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)2.16%
Vanguard Long-Term Bond Index ETF (BLV)1.55%
Artisan High Income Fund (ARTFX)0.72%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.44%
SPDR Barclays Intl. Treasury (BWX)0.25%
Vanguard Mortgage-Backed Securities (VMBS)-0.01%