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January 2019 Performance Review

February 6, 2019

What December took away January gave back. With the sharp rebound that started right after Christmas, the stock market has recovered a little over half the losses from the 20%+ drop that started in late September. The primary support has been low interest rates (which have also helped bond prices). Earnings have been good enough to beat reduced expectations. The fund categories that have lagged the most over the last 5+ years were leaders in January, the main exception being technology-oriented funds that have been top performers over the last five years and in January, bouncing back from a sharp decline in late 2018.

Our Conservative portfolio gained 3.34%. Our Aggressive portfolio gained 3.15%. Benchmark Vanguard funds for January 2019 were as follows: Vanguard 500 Index Fund (VFINX), up 8.00%; Vanguard Total Bond Market Index Fund (VBMFX), up 1.01%; Vanguard Developed Markets Index Fund (VTMGX), up 7.36%; Vanguard Emerging Markets Stock Index (VEIEX), up 8.52%; Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 5.90%.

These don't seem to be the most impressive figures for our model portfolios relative to the S&P 500 until you consider the recent downside as well. In December, the Vanguard 500 fund was down 9.04% and the Vanguard STAR fund was down 4.73%, as opposed to only a fractional decline in our Conservative portfolio and a 1.66% decline in our Aggressive portfolio. Our upside in January was significantly higher than the inverse of our downside, unlike these benchmarks. That said, much of this was the benefit of long-term interest rate exposure and, with rates now fairly low again, this upside potential and downside protection will diminish, which means we will have to take on more stock market risk to maintain significant upside which will increase downside as well.

It's looking like we missed a brief opportunity to increase our risk level and capture more upside, but the bottom in this 20% decline didn't last very long. Without a global recession, the stock market likely won't drop 20% to 50%. This is basically what happened in 2011 when problems in Europe led to a 20% slide in U.S. stocks, which then recovered— things just didn't get bad enough for it to drop more. There is just too much money piling in on dips (including companies buying back their own stock in big numbers), especially when the alternatives—bonds—are now yielding significantly less than in late 2018. That said, investors are on edge waiting for the bull market and economic expansion to end, so the selloff could be even more significant.

This recovery is also likely not the beginning of higher records for stocks. The rest of the world isn't doing that well, and the possibility of the U.S. having problems buying its way out of the next recession (as we already have tax cuts and increased spending) could start to be a concern. We need this economy to remain strong to get us financially stable for the next trouble zone.

Our top performer was iShares MSCI BRIC Index (BKF), up 11.6% as emerging markets rebounded and the U.S. dollar weakened slightly. Latin American stocks were the primary driver, up over 15% for the month. China has been a drag during the trade-war scuffle but recently turned around by having the second-best larger international market performance of the month.

Stocks from India were actually down but have been the hottest foreign market over the last five years.

Now that the index providers have turned telecom stocks into information-technology stocks, essentially by adding Facebook and the like, it is no surprise that Vanguard Telecom Services ETF (VOX) is now one of our most volatile holdings. This worked in our favor in January with a 10.56% return, followed by the recently added iShares Global Telecom ETF (IXP), up 9.07%.

Dodge & Cox Global Bond Fund (DODLX) was up 2.54% as this newish holding for us benefited from a slightly weak dollar and falling interest rates. We no longer own it, but higher-risk bonds did well in January, with high-yield (junk) bonds delivering about 4%, recovering much of their sharp losses of late 2018.

The last will be first as many of the worst places to be over the last 5+ years led the returns in January. Smaller cap value funds in general where tops—up over 11% after the worst five-year showing relative to other U.S.-style categories. The gap was significant even with this turn, as small cap value delivered annual returns of just under 5% over the last five years and larger cap growth gained just over 10%.

The hottest sector was energy-related funds, up around 14% for the month but also the worst- performing five-year sector.

Stock Funds1mo %
iShares MSCI BRIC Index (BKF)11.60%
Vanguard Telecom Services ETF (VOX)10.56%
iShares Global Telecom ETF (IXP)9.07%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)8.52%
iShares MSCI Italy Capped (EWI)8.10%
[Benchmark] Vanguard 500 Index (VFINX)8.00%
Vanguard Europe Pacific ETF (VEA)7.47%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)7.36%
Vanguard Value (VTV)6.95%
Vanguard European ETF (VGK)6.68%
Homestead Value (HOVLX)5.98%
Vanguard Utilities (VPU)3.72%
Gold Short (DZZ)-5.00%
Proshares Ultrashort Russel2000 (TWM)-19.60%
Proshares Ultrashort NASDAQ Biotech (BIS)-23.35%
PowerShares DB Crude Oil Dble Short (DTO)-34.61%
Bond Funds1mo %
Dodge & Cox Global Bond Fund (DODLX)2.54%
Vanguard Long-Term Bond Index ETF (BLV)1.86%
SPDR Barclays Intl. Treasury (BWX)1.41%
[Benchmark] Vanguard Total Bond Index (VBMFX)1.01%
Vanguard Mortgage-Backed Securities (VMBS)0.83%
Vanguard Extended Duration Treasury (EDV)0.18%