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The No-Load Fund Investor The No-Load Fund Investor

Highlights of the Current Issue
of The No-Load Fund Investor

From The No-Load Fund Investor, 8/17...

A Just Right Economy

The stock market sustained its bull move in July, as the large-cap S&P 500 gained nearly 2% and even the relatively beleaguered small-cap value segment produced gains on the order of 0.7% or so. The U.S. market was led higher by continued strength in technology stocks, as the average fund and ETF we track in this sector gained 4.1%, helping the tech-heavy NASDAQ composite gain 3.4%, pre-dividends. Through the first seven months of the year, the S&P 500 is up about 11.5%.

Some foreign stock markets, especially emerging market ones, did even better than the U.S. in July. On average, the emerging market funds and ETFs in our database rose 4.8%. In fact, investments in this area dominate the list of top performers for July, including ETFs for Brazil, India and China, as well as conventional funds for Latin America, the China region and even emerging markets as a whole.

The U.S. and foreign markets are benefiting from reasonably positive economic news and corporate earnings reports. According to Thompson Reuters, second-quarter earnings for S&P 500 companies are expected to increase 11.4% year over year, as a well-above average 72.3% of the 350 constituents that have already reported their earnings have beaten consensus estimates.

Best Buys Commentary. We are making no changes this month in any of our Best Buys models. Our speculative Master Aggressive model, with a theoretical gain this year through July of 14.2%, continues to perform best, thanks to a fully invested equity posture and particularly strong exposures to large-cap growth stocks, through such funds as RiverPark Large Growth (RPXFX), Price Blue Chip Growth (TRBCX) and Artisan Global Opportunities (ARTRX). However, each of our other 29 Best Buys models continue to perform acceptably, as all but the Income & Capital Preservation models (generally suitable for investors in at least their late 70s) recommend hefty allocations to equities.

Investing at 72

Target Retirement funds are ‘funds of funds’ that ostensibly become increasingly conservative as a stated year of retirement approaches assumed to coincide with an investor’s 65th birthday, and then beyond until the fund achieves a static allocation with a low equity exposure.

Vanguard followed through in July on previously announced plans to merge one of its Target Retirement offerings, Vanguard Target Retirement 2010 Fund, into Vanguard Target Retirement Income (VTINX), essentially providing a static allocation for a retired investor assumed to be 72 years old. This gave us the idea to touch on various approaches to asset allocation for investors in their early 70s, and to examine Vanguard Target Retirement Income as well as relevant Target Retirement offerings from Fidelity and T. Rowe Price.

Decades ago, many investors and stock brokers swore by a simple formula when considering equity allocation: 100 minus the investor’s age. Fast forwarded to today, that would suggest an equity allocation of 28% for the typical 72 year old. However, this maxim was prominent when investment-grade bonds yielded much more than now and people tended to live shorter lives. With a 10-year Treasury yield of slightly more than 2%, and the average lifespan for an American now up to 78.8 years (up by more than two years in just the past two decades, despite a slight decline very recently), we believe that this basic rule is now just an inadequate relic.

Given that today’s average 65-year-old is expected to live until about 85 (this number is higher than the overall average, which is brought down by people who die younger than 65), some believe that even senior citizens should devote the vast majority of their assets to equities. There’s some justification for this opinion: diversified portfolios of high-quality stocks have almost always produced attractive real returns over 20-year periods. Even a 72-year-old, with an average projected additional lifetime of about 15 years, would likely come out significantly ahead by investing most of his/her assets in equities, since the market is usually far ahead over periods of 15 years, too. Adherents of this approach to allocation generally recommend significantly more than half of one’s portfolio be in equities at retirement and shortly thereafter, but with a caveat: as investors proceed through their 70s, 80s and beyond, most of them should decrease equity allocations as their time horizons shorten and their ability to make up any financial shortfalls through changes in lifestyle, such as going back to work or reducing spending, declines due to advancing age.

Our complete analysis of target date funds for older investors can be found in the August issue of The No-Load Fund Investor.


Model Portfolios

Sample Model Portfolio from the Current Issue
of The No-Load Fund Investor

Wealth Builder Portfolio

Fund

Obj.

Beta

% Weighting

Price QM Small Cap Gr Eq agg gr 1.07 10%
RiverPark Large Growth growth 1.11 5%
Price Blue Chip Growth growth 1.03 5%
Vangd Total Stock Market Idx growth 0.99 15%
Amer Century MidCap Val growth 0.86 10%
Artisan Global Opps global 0.94 10%
Grandeur Peak Glbl Stalwarts global 0.87* 5%
Causeway Int'l Value int'l 0.81 5%
Vangd U.S. Value gr-inc 0.95 10%
Vangd Equity Income gr-inc 0.88 10%
Fidelity New Markets Inc. bond 0.33 5%
Vanguard Prime Money Market money mkt 0.00 10%
* = Estimated
N = New this month
H = Hold
W = increased portfolio weighting
D = Deletion this month
Average portfolio beta: 0.83
Average expense ratio: 0.65%
Since January 1, 1988, $10,000 has grown to $186,147


Best Buy Portfolios

 

Wealth Builder

Pre-Retirement

Retirement

Income & Preservation

Cash 10% 15% 20% 20%
Bonds 5% 15% 30% 60%
U.S. Equities 70% 60% 45% 15%
Int'l Equities 15% 10% 5% 5%
Portfolio returns since 1/1/88 through most recent month ($10,000 original investment) $186,147 $165,080 $118,125 $16,487
since 2/1/09
Average portfolio Beta 0.83 0.68 0.48 0.22
Average expense ratio 0.65 0.63 0.50 0.60

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