Third Quarter 2016 Model Portfolios

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Includes: BND, BOND, DBLTX, DISVX, DLTNX, DXJ, FCNTX, FOSFX, HABDX, HEDJ, PFRAX, PTTRX, TBGVX, VDIGX, VEIEX, VEIPX, VEURX, VFIIX, VFINX, VFSTX, VGENX, VGK, VIGRX, VIPSX, VISVX, VPACX, VUVLX, VWEHX, VWITX, VWLTX, YACKX
by: Tom Madell

Summary

I publish Model Stock and Bond Portfolios for fund/ETF investors at the start of every quarter for investors willing to hold funds for at least several years.

These portfolios show allocation percentages recommended for various funds/ETFs and for fund categories.

My research indicates that the majority of funds are currently "weak holds" while some fund categories should be avoided, or if already owned, reduced.

I mention those several categories of funds that seem to have better prospects.

At the start of every calendar quarter, I publish new stock and bond recommendations for fund/ETF investors in my monthly Newsletters. These portfolios have wound up having had a very good performance record over the following years. Here are the latest recommendations for the quarter beginning July 2016.

Overall Allocations to Stocks, Bonds, and Cash

For Moderate Risk Investors

Asset Current (Last Qtr.)
Stocks 52.5% (52.5%)
Bonds 35 (35)
Cash 12.5 (12.5)
Click to enlarge

For Aggressive Risk Investors

Asset Current (Last Qtr.)
Stocks 67.5% (67.5%)
Bonds 27.5 (25)
Cash 5 (7.5)
Click to enlarge

For Conservative Risk Investors

Asset Current (Last Qtr.)
Stocks 17.5% (20%)
Bonds 52.5 (50)
Cash 30 (30)
Click to enlarge

Specific Stock Fund/ETF Recommendations

While I do value the usefulness of holding funds/ETFs for the long term in most cases, changes to one's degree of commitment to a given fund often do make sense. It is unrealistic to assume that all funds will perform equally going forward, so when I can bring my own research as well as economic knowledge to bear on which funds will likely do better, I find it helpful to alter either the fund rating or its percent allocation.

My current reading shows that the majority of our specific stock fund/ETF recommendations are currently "Weak Holds." While these funds may perform adequately over the next several years, their upside potential may be limited. Under current market conditions where my research suggests there are very few excellent opportunities ("Buys"), any fund or ETF or fund category that is a Hold of any sort ("Weak Hold," ordinary "Hold," or "Strong Hold") would likely be among the best possibilities out there for now. Obviously, as the descriptions imply, "strong" may be a better bet than "weak" or ordinary.

I have marked in bold type those funds which seem to have the best prospects.

Our Specific Fund and Allocation
Recommendations Now
(vs. Last Qtr.) / Fund Rating

Fund
Category
Recommended
Category
Weighting
Now
(vs. Last Qtr.)
-Vanguard Small Cap Value Index Fund (MUTF:VISVX) (New!) 10% (0%) /
Weak Hold

Mid-Cap/
Small Cap

10% (10%)
-Fidelity Overseas (MUTF:FOSFX) 5 (5) / Weak Hold
-Vanguard Europe Index (MUTF:VEURX) 5 (5) / Weak Hold
-Vanguard Pacific Index (MUTF:VPACX) 5 (10) / Weak Hold
-Tweedy Brown Global Val (MUTF:TBGVX) 7.5 (5) / Weak Hold
-Vanguard Emerging Markets Idx (MUTF:VEIEX) 10 (10) / Strong Hold
-DFA Internat Small Cap Val I (MUTF:DISVX) 5 (5) / Weak Hold
(See Notes 1 and 2.)

International

37.5 (40)
-Vanguard Dividend Growth (MUTF:VDIGX) 7.5 (7.5) / Hold
-Vanguard 500 Index (MUTF:VFINX) 7.5 (7.5) / Weak Hold
-AMG Yacktman Fund Service Class (MUTF:YACKX) 2.5 (0) / Weak Hold (New!)

Large Blend

17.5 (15)
-Vanguard Growth Index (MUTF:VIGRX) 7.5 (7.5) / Weak Hold
-Fidelity Contra (MUTF:FCNTX) 5 (7.5) / Weak Hold
Large Growth 12.5 (15)
-Vanguard Equity Inc (MUTF:VEIPX) 10 (10) / Hold
-Vanguard US Value (MUTF:VUVLX) 7.5 (7.5) / Weak Hold

Large
Value

17.5 (17.5)
-Vanguard Energy (MUTF:VGENX) 5 (2.5) / Strong Hold

Sector

5 (2.5)
Click to enlarge

Notes:

  1. Vanguard ETFs (exchange traded funds) are often practically identical to similarly named Vanguard "Investor" index funds with even lower expense ratios and without the higher minimums required for the "Admiral" funds. Therefore, these ETFs can be substituted for any Vanguard stock or bond index fund shown in tables. E.g. Vanguard FTSE Europe ETF (NYSEARCA:VGK) can be substituted for VEURX.
  2. Although not included in the Model Portfolio, you may want to consider two other (or additional) international ETFs: WisdomTree Europe Hedged Equity ETF (NYSEARCA:HEDJ) and WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ). These ETFs, unlike the recommended Vanguard Europe and Pacific funds, tend to do better when the US dollar is strong, as it has been since roughly mid-2011.

Stock Fund Category Ratings

Since readers will not always own the specific stock funds I recommend, the following lists the major fund categories and how we view each, making use of our prior research as discussed in my prior Seeking Alpha article.

The categories under each heading are listed beginning with those we view most favorably progressing down to those we feel are least favorable to own as of mid-June. The ratings have a time frame of the next three to five years, although as events evolve over that long period, the outlook for each category will likely change.

US Domestic Funds

Large Value: Weak Hold

Large Blend: Weak Hold

Large Growth: Weak Hold

Mid-Cap Value: Weak Hold

Small Value: Borderline Reduce

Mid-Cap Blend: Reduce

Small Blend: Reduce

Mid-Cap Growth: Reduce

Small Growth: Reduce

Note: As stated above, my research indicates we are currently under market conditions where there are a general lack of good stock investing opportunities. While there obviously may be good funds other than those in my current (or past) Model Stock Portfolios, the above stock fund category ratings, as well as those below, reflect recommendations for the average fund within each category.

International Funds

Emerging Mkts: Strong Hold

Diversified Pacific/Asia: Hold

International: Weak Hold

Europe: Weak Hold

Japan: Reduce

Sector Funds

Precious Metals: Strong Buy

Commodities: Buy

Energy: Borderline Buy

Real Estate: Hold

Utilities: Hold

Consumer Staples: Hold

Communications: Hold

Industrials: Weak Hold

Technology: Weak Hold

Consumer Discretionary: Weak Hold

Financials: Borderline Reduce

Health Care: Reduce

Specific Bond Fund/ETF Recommendations

Our Specific Fund
and Allocation
Recommendations
Now (vs. Last Qtr.)
Fund
Category
Recommended
Category
Weighting
Now
(vs. Last Qtr.)
-PIMCO Total Return Instit (MUTF:PTTRX) 15% (15%), or
-Harbor Bond Fund (MUTF:HABDX) (See Note 2.)
-PIMCO Total Return Active ETF (NYSEARCA:BOND) 2.5 (2.5)
-Vanguard Total Bond Market ETF (NYSEARCA:BND) 5 (5)

Diversified

22.5% (22.5%)
-DoubleLine Tot Ret Bond I (MUTF:DBLTX) 10 (10), or
-DoubleLine Tot Ret Bond N (MUTF:DLTNX)
(See Note 3.)

Interm.
Term

10 (10)
-Vanguard Intermed.-Tm Tax-Ex (MUTF:VWITX) 17.5 (17.5)
-Vanguard Long-Term Tax-Exempt (MUTF:VWLTX) 2.5 (0) (New!)
(See Note 4.)

Muni

20 (17.5)
-Vanguard Sh. Term Inv. Grade (MUTF:VFSTX) 5 (10) Short-Term
Corp.
5 (10)
-Vanguard Inflation Prot. Sec (MUTF:VIPSX) 5 (0) (New!) Inflat.
Prot.
5 (0)
-Vanguard GNMA (MUTF:VFIIX) 5 (5) Interm.
Govt.
5 (5)
-Vanguard High Yield (MUTF:VWEHX) 7.5 (10)

High Yield

7.5 (10)
-PIMCO For. Bd (USD-Hdged) Adm (MUTF:PFRAX) 25
(25)

Internat.

25 (25)
Click to enlarge

Notes:

  1. I do not use Buy, Hold, Reduce ratings for bond funds. However, unlike many stock funds right now, I think that well-chosen bond funds offer interesting opportunities, especially as compared to merely holding cash.
  2. When possible, select PTTRX; HABDX is only recommended if you cannot meet PTTRX's minimum.
  3. The two funds are the same but have different minimums; select DBLTX if possible because of lower expense ratio.
  4. Muni bonds are only suitable for taxable accounts. Invest in a fund with bonds specific to your own state, if available, for the greatest tax savings.

Disclosure: I am/we are long AS DESCRIBED BELOW.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own virtually all the funds mentioned.