September 2014 AAII MODEL PORTFOLIOS UPDATED – Race to the Top

Posted on September 15, 2014 | Model Portfolios

The S&P 500 index climbed 4.0% in August, pushing past any resistance to trade at new all-time highs. Eventually, the bears will be right and there will be a pullback, but it hasn’t happened yet. While global worries ranging from war in Ukraine, Syria and Iraq to a possible European Union recession continued to dominate headlines last month, these concerns didn’t slow down the indexes like they did in July. Data continued to point to a slowly strengthening economy, and with Fed chair Janet Yellen insisting that the Federal Reserve is in no rush to raise interest rates, the market’s climb had little to oppose it. Earnings were overall better than expected and supported the story of a strengthening economy. The positive momentum carried over to both the Model Shadow Stock Portfolio and the Model Fund Portfolio, although only the Model Shadow Stock Portfolio beat its benchmark in August. The Model Fund Portfolio was up 3.6% for the month, while the Model Shadow Stock Portfolio, which concentrates on small-cap stocks, rose 6.4%. The Model Shadow Stock Portfolio can experience greater short-term volatilities because it is made up of stocks trading in the “shadows” of Wall Street, and are therefore more likely to be mispriced. While there may be negative periods in such a portfolio, over time the portfolio tends to significantly outperform the S&P 500. Short-term volatility is the price to be paid for higher long-term expected returns. While in July this worked against the Model Shadow Stock Portfolio, in August it turned in the portfolio’s favor.

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August 2014 AAII MODEL PORTFOLIOS UPDATED – Signs of a Pullback

Posted on August 15, 2014 | Model Portfolios

The S&P 500 index declined 1.5% in July, putting a smile on the face of many a bear who have been wrong for so long. Still, the decline is too small to even qualify as a pullback. Global worries ranging from war in the Ukraine, Syria and Iraq to a possible recession in the European Union dominated headlines last month and weighed on the indexes. Even a solid jobs report in the U.S. could not push the markets higher in July. This resulted in a “risk off” month that impacted the model portfolios, but to different degrees. Still, despite all the negative headlines and the rotation out of small cap stocks, both the Shadow Stock Portfolio and the Model Fund Portfolio beat their benchmarks in July. The Model Fund Portfolio declined only slightly for the month, while the Model Shadow Stock Portfolio, which concentrates on small-cap stocks, dropped significantly. The Model Shadow Stock Portfolio can experience greater short-term volatilities because the portfolio is made up of stocks trading in the “shadows” of Wall Street and more likely to be mispriced. While there may be periodic negative periods in such a portfolio, over time the portfolio tends to significantly outperform the S&P 500. Short-term volatility is the price to be paid for higher long-term expected returns.

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Model Fund Portfolio: Adjust Risk Based on Personal Factors

Posted on August 5, 2014 | Model Portfolios

Performance figures for the Conservative Portfolio are being dropped because the proper risk exposure is unique to each investor.

The Model Fund Portfolio is up 7.5% and the All-ETF Portfolio is up 7.7% year-to-date. This compares to 7.0% for the S&P 500 index as represented by the Vanguard S&P Index fund (VFINX).

Results for the Model Fund Portfolio over longer periods can be viewed in Figure 1 and Tables 1 and 2. Performance for the All-ETF Portfolio is shown in Table 3. The Vanguard REIT Index (VNQ) exchange-traded fund continues to lead the pack and is making up for the weak period a year ago. The iShares MSCI Frontier 100 (FM) exchange-traded fund, up 9.9% year-to-date, is still outperforming the Vanguard Emerging Markets Stock Index (VWO) exchange-traded fund, which is up 7.1% year-to-date.
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JULY 2014 AAII MODEL PORTFOLIOS UPDATED – An Exhausted Bull Reaches New Highs

Posted on July 15, 2014 | Model Portfolios

On June 24, the S&P 500 index touched a new high of 1968.17. While many bears have been patiently waiting for what they feel is a long-overdue correction, the market pushed into record territory during a bumpy June. Fuel for the upward move was provided by the Federal Reserve, which recently reaffirmed its focus on jobs over financial stability, as well as by improving jobs and consumer confidence data. This move higher lifted all boats, but the Model Shadow Stock Portfolio especially benefited as it invests in more volatile micro- and small-cap stocks. The Model Fund Portfolio trailed the Model Shadow Stock Portfolio as it holds less risky assets, but it still performed well for the month.

The Model Shadow Stock Portfolio gained 7.4% in June, outperforming the Vanguard Small Cap Index fund (NAESX), which gained 5.0%, and the DFA US Micro Cap Index fund (DFSCX), which gained 4.3%. For the year, the Model Shadow Stock Portfolio is now down 0.7%, trailing NAESX, which is up 6.4%, and DFSCX, which is up 1.5%. The Model Shadow Stock Portfolio has a compound annual return of 17.8% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.4% annually over the same period.

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June 2014 AAII MODEL PORTFOLIOS UPDATED – Mixed Up May

Posted on June 15, 2014 | Model Portfolios

While the broad market steadied itself near its all-time high, economic data continued to reflect the economy’s Jekyll & Hyde personality. Car sales rose to levels not seen since February 2007, to the delight of auto manufacturers, but the labor force participation rate remained mired at a 36-year low of 62.8%. Concern over the possibility of a market correction is foremost in investors’ minds. The Dow Jones industrial average has spent much of 2014 in a range between 16,000 & 16,700, and May was no different. This could be indicative of a decline in risk appetite. This attitude has clearly hurt the Model Shadow Stock Portfolio, which invests in more volatile micro- and small-cap stocks and significantly underperformed its target. The same trend, however, has resulted in the Model Fund Portfolio outperforming its benchmark.

The Model Shadow Stock Portfolio lost 0.5%, underperforming the Vanguard Small Cap Index fund (NAESX), which gained 1.2%, and the DFA US Micro Cap Index fund (DFSCX), which gained 0.1%. For the year, the Model Shadow Stock Portfolio is now down 7.5%, trailing NAESX, which is up 1.3%, and DFSCX, which is down 2.8%. The Model Shadow Stock Portfolio has a compound annual return of 17.5% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3% annually over the same period.

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May 2014 AAII MODEL PORTFOLIOS UPDATED – Small Caps Disappoint

Posted on May 15, 2014 | Model Portfolios

The current market environment continues to be a bit of an enigma, though we are finally seeing some trends. As we all know, the market has been going sideways for most of the year, without much sustained upward or downward movements. However, we are clearly seeing a shift in investors’ appetites for risk. Over the past few months, investors have been favoring defensive stocks and sectors while rotating out of aggressive holdings. This change has clearly hurt the Model Shadow Stock Portfolio, which invests in micro- and small-cap stocks, which tend to be more volatile. On the other hand, the same trend has resulted in the Model Mutual Fund Portfolio having outperformed its index.

As in recent months, the market was relatively flat during April. The Model Shadow Stock Portfolio lost 3.9%, underperforming the Vanguard Small Cap Index fund (NAESX), which lost 2.3% and the DFA US Micro Cap Index fund (DFSCX), which was lost 3.4%. For the year, the Model Shadow Stock Portfolio is now down 7.1%, trailing NAESX, which is up 0.2% and DFSCX, which is down 2.9%. The Model Shadow Stock Portfolio has a compound annual return of 17.6% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3% annually over the same period.

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April 2014 AAII MODEL PORTFOLIOS UPDATED -Ups and Downs

Posted on April 15, 2014 | Model Portfolios

We are now a full quarter of the way through 2014 and the market still does not have a clear direction. March turned out to be a volatile month for stocks, but the market did end up slightly higher. The employment outlook continues to look better, although we are far from witnessing the hiring sprees normally attributed to fast economic expansions.

Our assumption is that without drastic news or significant change in economic policy coming from the Federal Reserve, the market will trade in a range with much movement upward or downward, especially between earnings seasons. A strong earnings season may give investors incentive to continue driving stock prices up, while a weak earnings season will likely have the opposite effect.

After a weak January and a strong February, the market was relatively flat during March. AAII’s Model Portfolios followed suit. During March, the Model Shadow Stock Portfolio gained 0.3%, outperforming the Vanguard Small Cap Index fund (NAESX), which lost 0.3%, but underperforming the DFA US Micro Cap Index fund (DFSCX), which was up 1.0%. For the year, the Model Shadow Stock Portfolio is still down 3.4%, which trails NAESX, which is up 2.6% and DFSCX, which is up 0.6%. The Model Shadow Stock Portfolio has a compound annual return of 17.9% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3% annually over the same period.

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March 2014 AAII Model Portfolios Updated – Stocks Bounce Back and a Shadow Stock Transaction

Posted on March 15, 2014 | Model Portfolios

It may not feel like it for some, but the market has had an incredible run. In fact, on March 9, we celebrated the fifth anniversary of the bull market. It is easy to discount how far the market has come. On March 9, 2009, the Dow Jones industrial average bottomed out at 6507.04, while the NASDAQ hit 1,268.64 and the S&P 500 dropped to 676.53. These numbers are astounding given the fact that these indexes closed at 16,340.08, 4,323.33 and 1,868.20, respectively, as of March 12, 2014. Back in March of 2009, negative emotions were running high. If you were disciplined enough to stay the course, or even invest more at that time, you were well rewarded with one of the longer bull rallies in recent memory. The lesson to be learned here has been summed up well by Warren Buffett—“Be fearful when others are greedy and greedy when others are fearful.”

February was a bounce-back month for the stock market. AAII’s Model Portfolios followed the strength of the overall stock market. During February, the Model Shadow Stock Portfolio gained 4.3%, underperforming the Vanguard Small Cap Index fund (NAESX), which gained 5.1%, but beating the DFA US Micro Cap Index fund (DFSCX), which was up 4.2%. For the year, the Model Shadow Stock Portfolio is still down 3.6%, which trails NAESX, which is up 2.9% and DFSCX, which is down 0.4%. The Model Shadow Stock Portfolio has a compound annual return of 17.9% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3% annually over the same period.

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February 2014 AAII Model Portfolios Updated – Market Pulls Back to Open the Year

Posted on February 14, 2014 | Model Portfolios

After pulling back to begin 2014, it seems that the market has stabilized slightly and is in need of a catalyst to spur any movement in either direction. While our recovery seems to be ongoing, the improvements have been slow, especially in the labor markets. We have now had two months of weak jobs growth. And although the unemployment rate is decreasing, there are still a record number of long-term unemployed as well as underemployed workers. On a positive note, however, we will not be seeing a repeat of 2013’s gridlock on the debt ceiling. The Republican-controlled House passed a “clean” bill to increase the debt ceiling, meaning that the bill did not include any other demands. It is almost certain to pass the Democrat-controlled Senate. Additionally, new Federal Reserve Chair Janet Yellen spoke before Congress, highlighting the still-weak labor market. She will likely continue slowly tapering government bond-buying while keeping interest rates near zero.

AAII’s Model Portfolios were not able to escape the weakness of the overall stock market last month. During January, the Model Shadow Stock Portfolio lost 7.6%, underperforming both the Vanguard Small Cap Index fund (NAESX), which lost 2.1%, and the DFA US Micro Cap Index fund (DFSCX), which fell 4.4%. The Model Shadow Stock Portfolio has a compound annual return of 17.8% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.1% annually over the same period.

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January 2014 AAII Model Portfolios Updated – Model Portfolios Finish a Strong Year

Posted on January 15, 2014 | Model Portfolios

The year 2013 was one of the strongest for both of the model portfolios. The economy has been generally trending in the right direction. Unemployment is dropping while companies seem to be growing again. Since the “Great Recession,” the economy has been boosted by unprecedented stimulus measures put in place by the Federal Reserve. In early 2014, the Federal Reserve will begin its “tapering” program, meaning that it will slow down its monthly bond buying. The rate of the tapering will be slow and, judging by recent stock market activity, investors seem to believe that the economy is strong enough to withstand the pullback from easy money.

For December, the Model Shadow Stock Portfolio finished the year on a high, gaining 3.5% and outperforming the Vanguard Small Cap Index fund (NAESX), which gained 2.6%, and the DFA US Micro Cap Index fund (DFSCX), which was up 1.9%. The Model Shadow Stock Portfolio finished the year up an incredible 61.0%, well ahead of the Vanguard Small Cap Index fund, which has gained 37.6%, and the DFA US Micro Cap Index fund, which is up 45.1%. The Model Shadow Stock Portfolio has a compound annual return of 18.3% from its inception in 1993, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.3% annually over the same period.

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