With the first half of the year now behind us, this is a great time to share a broad review of my performance. Today I'll tell you how things have been performing over the last six months, and I'll tell you what's been working and what hasn't been working. Plus, I'll level with you about my performance…good and bad.
I believe that the only way to do business with you is to be open and honest about the work we do. As you may know, it's relatively easy to whitewash performance (just look at the quarterly filings of any poorly run company – you'd think they were doing great!). But I believe this type of deception is THE problem with the world of finance. It's part of the reason I founded my company over a decade ago. And I believe it's the big reason why individual investors rarely outperform the broad stock market. Simply put, they are too many foxes guarding the henhouse. But I believe I can make a good living by putting those foxes out of business.
So let's start with a brief recap of the stock market in general. The short answer is that stocks are performing remarkably well – just as I predicted 6 months ago.
In December, I told my readers:
"I like how the market is setting up for 2013 thanks to a lot of negativity swirling around right now. Once the fiscal cliff is resolved - and it will be resolved at some point - stocks will be free to march higher. Remove the uncertainty and negativity that permeates the market and stocks will roar higher. That's why I'm buying equities."
And stocks have marched higher in 2013. The S&P 500 index is up 12.6%, even after pulling back a bit in recent weeks. The flow of capital to equities has continued to grow, since bonds remain unattractive. Even after rising nearly 20% in the last year, S&P 500 stocks are attractively priced at 15x earnings and yield 2%.
While we would all love to see the good times continue, recent comments from Fed Chairman Bernanke put ice on the bull market. While his remarks sent stocks down in recent weeks, his suggestion that QE3 may end soon did the most damage to the bond market. That's because the yield on bonds is rising – quickly. The yield on the 10-year Treasury rose 50% in the last two months. Even after that gain, the 2.5% yield is pathetic.
The increase in yield is hurting bond prices. The iShares Barclay's 20+ Treasury Bond (NYSE: TLT) – one of the biggest bond ETFs – is down 11% this year. Corporate, muni, and high-yield bonds are similarly suffering losses. And these declines will continue when interest rates rise. I've been telling my readers to steer clear of bonds since last year. In fact December, I warned my reads with this message.
"Total government debt has ballooned in recent years to nearly 100% of GDP. The Fed's monetary policies have produced a nightmare situation for income investors: The 10-year Treasury note yields 1.7%, a high-grade municipal bond yields 1.5%, one-year certificates of deposit yields less than 1% and pass-book savings and Treasury bills yield a few basis points. None of these investments provide a positive real rate of return when taking inflation into account…Many bond investments are high-risk investments."
Instead, I've encouraged them build a diverse portfolio of dividend stocks, including dividend giants like McDonald's (NYSE: MCD), dividend growers like McCormick (NYSE: MKC), and tax advantaged dividend payers like Medallion Financial (NYSE: TAXI). This strategy has worked well thus far in 2013…allowing us to capture superior yields and capital gains. But not everything has worked exactly as planned…
My bullish outlook on gold has proven wrong. I've continued to believe gold will rise as governments continue to print more money to support economic growth. While that long view holds true today, gold has been out of favor since last fall, and is down 27% this year. This investment hasn't been working, and I've been slow to sell my gold position. Now, gold isn't a core position in my portfolio,but losses of this magnitude are painful.
Looking forward, I'm favoring gold stocks over ETFs like the SPDR Gold Shares (NYSE: GLD). This is because there are some really attractive value investments in the sector. In short, gold still has a place in my investment account, but that allocation is shifting more toward gold stocks and away from physical gold investments.
The pullback for the financial markets over the last five weeks is a script change. You see, previous pullbacks for stocks sent "safe" investments – like gold and U.S. Treasuries – rising. But not this time… This latest pullback impacted almost every investment. Stocks, bonds, and commodities are all falling in unison. These last few weeks, the only safe place to be has been cash.
My overall investment strategy will remain intact in the back half of the year. I'll be overweighting stocks, and underweighting bonds. My "bond" allocations have been replaced with income generating dividend stocks, including high yield stocks like REITs, MLPs, and BDCs.
Stocks rose considerably in the first half of 2013, and at a rate that is unsustainable for the full year. Just as the Fed is considering tempering QE3, investors should temper their expectations for gains in the next six months. Even so, the unattractive yields for bonds – and the real possibility of rising rates – means that investors will be best served sticking with stocks. And keeping a little cash on the sidelines is a smart move, should this correction continue during the summer doldrums.
If you've been invested in stocks, I'm sure your portfolio is posting healthy gains. Cheers to your continued prosperity in the next six months.
Disclosure: No positions