In this Newsletter:
The market correction may have first become visible in March of 2000 but the warning signs were flashing way back in the Spring of 1999. That's when large cap growth stocks as well as the S&P 500 were still on a moonshot, interest rates had started to rise, and we published our first Newsletter.
Here's what we said at that time (Newsletter #1, May 13, 1999):
"Merely owning large US growth stocks has beaten almost all other categories of investments. Owning small/mid cap stocks, value stocks, and foreign stocks has only served as a drag on returns.
"Recent results, within the last few months especially, suggest that this pattern has started to change. For many funds in these underperforming categories, their returns have started to surpass those in the big cap growth category. This turnaround suggests we are at the beginning of a period of extended outperformance by these up to recently badly performing investment categories.
"Therefore, if you own almost exclusively funds/stocks such as an S & P 500 index fund or large growth-oriented funds/stocks such as for example Magellan, you should consider re-balancing your portfolio ..."
" ...looking out over the next year or two, the ... underperformers seem like much better choices to catch up to and likely surpass the current high fliers.
We then went on to recommend that value stocks should comprise approximately 35 - 45% of your total stock portfolio. Since then, in several of our Newsletters last year, and many this year, we have continued to recommend value funds as being attractive and an advisable addition to any portfolio without one.
"Strategic investing" recognizes that no category of investment can continue to be near the head of the pack, year in and year out. Conversely, nearly every type of investment, no matter how lackluster its recent results, has the potential to enter sustained periods of market beating performance.
As a consequence, it makes sense to not always keep sticking with those funds/categories that mutual fund tables tell us are "winners" and to look elsewhere at times. But how can one recognize when those times are?
We like to analyze the comparative attractiveness of the various fund groups in determining when to begin focusing on an out of favor category. Thus, a fund category that has performed well in the past, but is currently not doing especially well, is always a good starting point for picking the potential winners in the years ahead.
But recent underperformance alone is not enough to base some of your current investment decisions on. We believe that two other factors must be considered as well:
Current trends: As we have implied in other Newsletters, investment trends tend not to be a series of short-term "jiggles" that completely reverse themselves erratically from one month to the next. Rather, such trends, once established can continue far longer than most people expect. Therefore, although most people, for example, seem to have expected that the current stock market correction would just pass fairly quickly, we now see that it has been with us for 10 long months. Although we seldom make short-term predictions on the direction of the market as a whole, and we are not doing so now, it is still possible that the correction will continue for many more months as well.
The trends we focus on tend to spotlight areas within the overall investment realm, such as various stock and bond fund categories, which also show much longer-term cycles than most people expect. And right now, growth funds have been trending down while value funds trending up.
At the present time, the opposite situation exists. Rates have been falling and the Fed has started to become friendly. While this is good, there many other pieces of economic data that must be weighed as well, such as falling corporate profits, lower consumer confidence, and the potential for higher unemployment. We will be watching these and other statistics over the coming months before becoming more positive on the overall market and given areas within the broader market.
Given our view back in the Spring of 1999 that non-large-cap and value stocks were in a position to show better comparative performance than the large cap growth or S&P 500 type stocks, we began investing in a mid cap value fund, T. Rowe Price Value. (This fund is now part of our Model Portfolio.)
After our initial minimum investment to open the account, we invested relatively small amounts gradually into this fund, as shown below, somewhat like dollar-cost averaging. However, we also tried to invest into the fund at those times at which a) either the rest of the market appeared "unappetizing" and/or b) its NAV was relatively low compared to its own recent price.
Using this approach, here is exactly what our strategic buying program led us to do beginning on April 5th, 1999:
|
'99 Date |
Purchase |
NAV |
'00 Date |
Purchase |
NAV |
|
|---|---|---|---|---|---|---|
|
4/5/99 |
$2500 |
18.50 |
2/07/00 |
$250 |
16.68 |
|
|
4/28/99 |
$250 |
20.33 |
3/07/00 |
$500 |
15.26 | |
|
5/20/99 |
$500 |
20.93 |
3/22/00 |
$500 |
16.93 | |
|
6/18/99 |
$500 |
21.02 | 5/8/00 |
$250 |
17.97 | |
|
8/5/99 |
$600 |
20.26 |
6/23/00 |
$250 |
17.63 | |
|
9/7/99 |
$350 |
19.90 |
9/5/00 |
$350 |
18.77 | |
|
9/20/99 |
$750 |
19.35 | 10/23/00 |
$350 |
18.14 | |
|
10/4/99 |
$650 |
18.74 |
12/18/00 |
$500 |
18.37 | |
|
10/26/99 |
$250 |
18.02 |
|
|
| |
|
12/16/99 |
$300 |
16.92 |
|
|
|
Total Return Price Value Fund: 13.7% (Annualized, as of 1-12-01; current NAV 19.48; the table does not show the re-investment of dividends and capital gains.)
For comparison, let's look at how an unmanaged investment in the Vanguard S&P 500 Index compromised exclusively of the largest cap stocks did over the same period. Its NAV was 122.12 on 4/5/99, the day we started investing in the Price Value Fund. Its NAV on 1/12/01 was 121.75. When you figure in dividends & capital gains of $2.98 per share, you get:
Total Return Vanguard 500 Index: 1.2% (Annualized, as of 1-12-01)
Although not every strategic investment you make in a given fund will show the kind of results we have presented here, we believe that such an approach will pay off more often than not. And because this strategy is not dependent on any one class of investments always doing well, there will usually be opportunities in various categories of funds (including bonds, for example) even when the overall market isn't performing well, as has been the case during most of 2000.
For further information on outperforming even in a bad overall market, there is further helpful advice in our Newsletter of Oct 15, 2000
Our Newsletter has always been a free, non-commercialized service. However, in order to continue publishing, we need to have a minimum level of readership. If you value this service, you hope you will let others know of its availability.
As a new, additional service to our customer base, we will be glad to answer any questions you have on mutual funds investing. Just send your questions/input to tom@funds-newsletter.com
Tom Madell, PhD
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