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July 2018 Performance Review

August 5, 2018

The stock market continued its rebound in July. We're still underperforming for the year, with too much interest rate exposure and too little stock exposure, but for the month we were basically in line with the benchmark Vanguard total portfolio fund while still taking less risk in both our portfolios. Our recent changes to our Conservative portfolio seem to be helping.

Our Conservative portfolio gained 2.04%. Our Aggressive portfolio gained 1.87%. Benchmark Vanguard fund performances for July 2018 were as follows: Vanguard 500 Index Fund (VFINX) up 3.71%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.03%; Vanguard Developed Markets Index Fund (VTMGX) up 2.32%; Vanguard Emerging Markets Stock Index (VEIEX) up 3.18%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.12%.

In general, larger value stocks did best in July and smaller growth stocks the worst — though all U.S. broad categories were in positive territory. The only real weakness was Chinese stocks, as the growing trade war seems to be impacting their stock and currency markets. (Commodities were also down.)

Value stocks took the lead after a long stretch of growth stock outperformance. This boosted Homestead Value (HOVLX) to our top performer's spot for the month, with a 6.84% rise. Shorting gold and oil through PowerShares DB Crude Oil Dble Short (DTO) and Gold Short (DZZ) delivered gains of 6.77% and 4.79% respectively. After a long run up, oil seemed to hit a ceiling, and commodities in general were weak. Our biggest loser was in shorting biotech stocks with leverage, which resulted in a double-digit loss for Proshares Ultrashort NASDAQ Biotech (BIS).

Stocks sensitive to interest rates did well in July, though bonds were mixed to down. Our new holding Dodge & Cox Global Bond Fund (DODLX) had a solid month — up 1.68% — but our high interest rate risk zero-coupon bond fund Vanguard Extended Duration Treasury (EDV) was down 2.21% as interest rates climbed.

iShares Global Telecom ETF (IXP), our new pick for our Conservative portfolio, had a good month. It was up 3.53%, in sharp contrast to our old telecom pick, Vanguard Telecom Services ETF (VOX).

Vanguard Telecom Services ETF (VOX) was up only 0.30% in July because the index makers decided telecom and communication indexes are too boring and needed some Facebook (FB) magic, because why own boring stocks like Verizon (VZ)?

Of course, the index experts didn't cook up this idea years ago when social media stocks were new to the market. No, they waited until Facebook was one of the most valuable stocks in history before adding the stock to the dull benchmark index, and just days before Facebook collapsed 20% in ONE DAY as various questionable behaviors began to scare investors.

You know what stocks don't fall 20% in one day? Verizon and other large telecom companies. This is a warning to anyone over-relying on index funds these days (ourselves included).

Not to belabor the point, but one of the long-term rationales for indexing or passive management over actively managed funds has been control over the holdings and no style drift, which means a fund going from, say, a value slant to a growth slant. I can't imagine a bigger drift in style than cutting back on old phone companies for Facebook stock. At the end of the day, these indexes are actively managed. They chase performance and trends just as much as actively managed funds.

Questions hanging over the market for the short and long term include: 1) rising tariffs with China, which has so far been almost a non-event for U.S. stocks ; 2) the continuing investigations into Trump and Russia; 3) rising interest rates and the impact we're starting to see in real estate, and; 4) increasing government debt without a recession, resulting from tax cuts and spending increases.

Lots escalating — including stocks, for now…

Stock Funds1mo %
Homestead Value (HOVLX)6.84%
PowerShares DB Crude Oil Dble Short (DTO)6.77%
Gold Short (DZZ)4.79%
Vanguard Value (VTV)4.65%
[Benchmark] Vanguard 500 Index (VFINX)3.71%
iShares Global Telecom ETF (IXP)3.53%
Vanguard European ETF (VGK)3.40%
iShares MSCI Italy Capped (EWI)3.39%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)3.18%
Vanguard Utilities (VPU)2.56%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)2.32%
Vanguard Europe Pacific ETF (VEA)2.28%
iShares MSCI BRIC Index (BKF)2.04%
Vanguard Telecom Services ETF (VOX)0.30%
Proshares Ultrashort Russel2000 (TWM)-3.27%
Proshares Ultrashort NASDAQ Biotech (BIS)-11.76%
Bond Funds1mo %
Dodge & Cox Global Bond Fund (DODLX)1.68%
Vanguard Long-Term Bond Index ETF (BLV)0.41%
SPDR Barclays Intl. Treasury (BWX)0.29%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.03%
Vanguard Mortgage-Backed Securities (VMBS)-0.05%
Vanguard Extended Duration Treasury (EDV)-2.21%