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May 2018 Performance Review

June 2, 2018

The market was rolling along just fine in May with the volatility from earlier in the year seemingly easing and good economic data slowly pushing up stocks and interest rates (and inflation).

Then, at the end of the month, Italy returned as a potentially destabilizing force to foreign investing, sending Italian stocks (which we own directly through iShares MSCI Italy Capped (EWI)) down sharply and taking the euro and most other foreign markets down with it.

Treasury bonds had one of their best days in years at the end of the month as money flowed into the U.S. (which, ironically, is following similar policies being discussed by rising political parties in Italy — raising spending and cutting taxes and backing away from global trade arrangements). With losses in our foreign currency dominated bonds in SPDR Barclays Intl. Treasury SPDR Barclays Intl. Treasury (BWX) and European stock ETFs, plus our shorts on suddenly hot small cap and biotech stocks, we couldn't come close to the U.S. stock and bond heavy benchmarks.

Our Conservative portfolio gained 0.01% in May. Our Aggressive portfolio fell 1.22%. Benchmark Vanguard funds for May 2018 were as follows: Vanguard 500 Index Fund (VFINX) up 2.39%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.61%; Vanguard Developed Markets Index Fund (VTMGX) down 1.60%; Vanguard Emerging Markets Stock Index (VEIEX) down 2.86%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.23%.

Investors have been favoring foreign markets up until recent weeks. This could have been a warning sign this slide was coming but is also largely the result of everybody benchmarking and indexing these days. In other words, unlike in 2000 investors aren't favoring foreign stocks so much as rebalancing. Foreign stocks have been underperforming for years, which is why investors still have 2.5x times more money in domestic stocks.

Even though interest rates slipped and our longer-term bond holdings like Vanguard Extended Duration Treasury (EDV) and Vanguard Long-Term Bond Index ETF (BLV) posted returns of 2.33% and 1.28% respectively in May, we had too many negatives in foreign funds and shorts — including a 2.03% drop in foreign bonds owned through SPDR Barclays Intl. Treasury SPDR Barclays Intl. Treasury (BWX) as the euro slid along with Italian bonds.

The hottest areas in the market last month were growth funds — notably small cap growth which was up 6.68% for the month.

Emerging markets were hit hard, especially Latin American funds which were down by double digits in May.

Technology funds were the strongest sector, up over 6% last month, and have the highest five year returns now of any fund category at just under 20% annualized returns.

Currently out-of-favor communication sector funds, which where the worst sector last month, should be considered for the next five years. The dividend yield will make a decent return compared to alternatives, in all likelihood.

We're sitting on a solid economy domestically and now globally. The trouble for investors going forward is two-fold. First, things looked great in 2000 as well. Second, people seem hell bent on messing up a good thing and pulling defeat from the jaws of victory.

We're risking our longer term financial solvency and increasing interest rates needlessly in the shorter run to increase spending and cut taxes into an already solid economy that doesn't need stimulus. Then we are pursuing risky and vaguely defined trade wars to fix wrongs in global trade. Abroad there seems to be rising nationalism with Brexit and now Italy to separate from global economic policy. Little was broke in post WWII global economics except a brief period of high inflation with low growth and a dangerous real estate bubble, but there seems to be a rising desire to fix it anyway.

Stock Funds1mo %
iShares Mortgage REIT (REM)2.89%
Gold Short (DZZ)2.81%
[Benchmark] Vanguard 500 Index (VFINX)2.39%
Homestead Value Fund (HOVLX)0.98%
Artisan Global Equity (ARTHX)0.93%
PowerShares DB Crude Oil Dble Short (DTO)0.74%
Vanguard Value ETF (VTV)0.61%
Vanguard Utilities (VPU)-0.31%
iShares MSCI BRIC Index (BKF)-1.09%
Vanguard Europe Pacific ETF (VEA)-1.43%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-1.60%
Vanguard European ETF (VGK)-2.42%
Vanguard Telecom Serv ETF (VOX)-2.63%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-2.86%
ETRACS 1xMonthly Short Alerian MLP (MLPS)-4.57%
Proshares Ultrashort NASDAQ Biotech (BIS)-9.27%
iShares MSCI Italy Capped (EWI)-9.77%
Proshares Ultrashort Russel2000 (TWM)-11.09%
Vanguard Extended Duration Treasury (EDV)2.33%
Vanguard Long-Term Bond Index ETF (BLV)1.28%
Vanguard Mortgage-Backed Securities (VMBS)0.74%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.61%
Artisan High Income Fund (ARTFX)0.42%
SPDR Barclays Intl. Treasury (BWX)-2.03%