May 2014 AAII MODEL PORTFOLIOS UPDATED – Small Caps Disappoint


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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