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March 2018 Performance Review

April 4, 2018

The relatively tame overall decline of 2.56% in the S&P 500 in March belies the extreme swings that have occurred in the market lately. In the last two months we've seen a fairly quick 10% drop followed by a very quick recovery and then another collapse just recently. Hot tech stocks actually moved to new highs in the bounce back.

Unlike in February, when interest rate increases hurt returns, we fared better relative to the market in March and are now (slightly) outperforming for the year at a just under 0.50% decline in both portfolios (as opposed to a 0.80% decline in the S&P 500).

Our Conservative portfolio gained 1.34% in March. Our Aggressive portfolio gained 0.20%. Benchmark Vanguard funds for March 2018 were as follows: Vanguard 500 Index Fund (VFINX) down 2.56%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.63%; Vanguard Developed Markets Index Fund (VTMGX) down 0.47%; Vanguard Emerging Markets Stock Index (VEIEX) down 1.19%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.89%.

All balanced and target date fund categories were down in March so it was noteworthy we were up, albeit only slighty, as essentially a global balanced portfolio. But then we have shorts and are positioned more yield-sensitive and are generally less credit-sensitive than most balanced portfolios.

Yield-oriented investments did well in March with gains of 6.46% in iShares Mortgage REIT (REM) and 4.02% in Vanguard Utilities (VPU).

Only two of our non-inverse funds underperformed the S&P500 in March.

Longer term investment grade bonds did the best with Vanguard Extended Duration Treasury (EDV) up 4.11%.

Small cap funds were the only main U.S. fund categories in the green, which caused our inverse small cap ETF to go down in an otherwise bad month for stocks.

The other surprise was losses in our short crude oil fund as oil did well in the down market.

Even weirder: our short MLPs fund ETRACS 1xMonthly Short Alerian MLP (MLPS) did very well with a 6.77% gain. In general after years of small cap value relative underperformance it's time to focus on shorting the outperforming — namely larger cap tech and growth stocks. But this is hardly 2000 when value was much cheaper than growth.

All this downside reducing costs upside — no way around it. That is why recently we were even lagging behind total portfolio benchmarks (not that these low fee Vanguard balanced funds are easy to beat). It's nice to see our downside (thus far) lower than these funds. What's more surprising is how our downside compares to funds that are really trying to control downside with active shorting. These funds generally come with a serious upside drag compared to regular cheap balanced index funds.

Market Neutral funds as a category were down 0.31% for the month while we were up. Long-short credit funds were down 0.33%. Long-Short equity funds were down 1.08%. It would be one thing if these funds all fell a little in a down market but had decent upside in up markets. The five year average annual return on these funds are: 0.87% for Market Neutral, 1.6% for Long-Short Credit, 4.49% for Long-Short equity. Our Conservative 5 year average annual return is 5.98% and our Aggressive is 8.36% (all real money with trading commissions and fund fees) as compared to 13.14% for the S&P 500 Vanguard fund.

We do even better if you include a real bear market, which we haven't even had in the last five years. These other fund categories that use shorting to reduce downside are terrible categories to choose from and an investor would do better to just own a balanced index fund and more cash to reduce downside. The fees are just too high and the ideas on what to short just too lousy.

Stock Funds1mo %
ETRACS 1xMonthly Short Alerian MLP (MLPS)6.77%
iShares Mortgage REIT (REM)6.46%
Vanguard Utilities (VPU)4.02%
iShares MSCI Italy Capped (EWI)1.39%
Proshares Ultrashort NASDAQ Biotech (BIS)1.15%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-0.47%
iShares MSCI BRIC Index (BKF)-0.73%
Gold Short (DZZ)-0.76%
Vanguard Europe Pacific ETF (VEA)-0.76%
Vanguard European ETF (VGK)-0.84%
Artisan Global Equity (ARTHX)-0.88%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-1.19%
Vanguard Value ETF (VTV)-2.44%
[Benchmark] Vanguard 500 Index (VFINX)-2.56%
Homestead Value Fund (HOVLX)-2.67%
Vanguard Telecom Serv ETF (VOX)-2.86%
Proshares Ultrashort Russel2000 (TWM)-3.08%
PowerShares DB Crude Oil Dble Short (DTO)-9.26%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)4.11%
SPDR Barclays Intl. Treasury (BWX)1.77%
Vanguard Long-Term Bond Index ETF (BLV)1.51%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.63%
Vanguard Mortgage-Backed Securities (VMBS)0.56%
Artisan High Income Fund (ARTFX)0.10%