Our call to rebalance portfolios by taking profits from Bond Funds to increase allocations back to targets in Stock Funds to start the 4th Quarter proved to be a profitable maneuver. That being said, we do not expect the stock market to do much between now and the November elections, so we are keeping our Asset Allocation at the targets we set three months ago.

We have no additions to our Mutual Fund list or our ETF Watch List for this quarter, but we have added Forward Commodity L/S Strategy (FCOMX) and Grant Park Managed Futures Strategy (GPFNX) to our model portfolios.

Asset Allocation January 2012

Markets reached extreme levels in September, led by Long Term Treasury Bonds, which skyrocketed last quarter in a flight to quality. A move similar to this has not been seen since it happened twice in the 1980’s. The extent of this move is somewhat a surprise given the fact that Treasuries did not move up this much during the Financial Crisis at the end of 2008. On the other side of the scale Large Cap Value Stocks have taken the worst of it for equities. The best thing we can say about the third quarter of 2011 is that is was not as bad as the fourth quarter of 2008, but that is not much of a comforting thought for investors. As bad as August was for stocks, September was even worse. The anxiety in the markets pushed up volatility to its highest level since the ‘flash crash’ in May 2010, a level that is high, but not quite as severe as the financial crisis in 2008.

A couple of points to make when comparing today’s market with the past: Both times in the 1980’s when Long Treasuries were making highs, stocks were also making highs, which is not the case today. One explanation for this difference may be that in the 80’s inflation moved from high to normal, while now inflation has moved from normal to low. The current relationship looks more like 2008, but at this time the move up by bonds is stronger, while the drop in stocks is weaker.

It has been only 6 months since we suggested you rebalance your portfolio to its target allocations. This time, however, we are coming at it from the opposite direction. It is at times like the present, when anxiety levels are high and prices are low, that you should be increasing your allocation to stocks. That being said, we are not suggesting that you increase your equity target, but rather that you take the profits you have made from the bond side of your portfolio and use those dollars to increase your stocks back to their target allocation. Our overweight to Long/Short equity helped our portfolios lose less during the market’s recent downturn. Time to reverse course here too, by equally weighting that with Large Cap, Mid Cap, and Small Cap at 8% of your portfolio.

We have no additions to our Mutual Fund list this quarter, but we continue to reduce the number of funds in order to simplify your choices. We are replacing Elements Rogers Intl Commodity Agriculture ETN (RJA), Elements S&P CTI ETN (LSC) and iShares Dow Jones US Basic Materials (IYM) with iShares Barclays 20+ Year Treasury Bond (TLT), Vanguard Total Bond Market ETF (BND) Barclays S&P 500 Dynamic VEQTOR ETN (VQT) in our ETF Watch List.

Asset Allocation October 2011

It has been 8 years since we started the Insightful Investing Newsletter, so we could not leave our Asset Allocation unchanged. Heading in to the second half of 2011, we have added a 2% allocation to Micro Cap stocks in our Small Cap allocation, and added a 2% allocation to International Small Cap in our International Allocation. In order to do this we are reducing our allocation to Cash and Short Term Bonds by 2% each.

It is also the time of year for us to make significant changes to our list of Mutual Funds and Model Portfolios. We have reduced the number of funds on our list in an effort to simplify your choices by having at most one Fidelity and two additional No Load Mutual Funds for you to consider for your portfolios. While you may not have any of these funds available to you in a particular account, remember that it is more important to have a good asset allocation than to have every one of the best funds in your investment portfolio.

Another change you will notice is that we have changed the ‘Combined Mutual Fund Portfolio’ to be the ‘Fidelity NTF Mutual Fund Portfolio’. That resulted in a few funds that we consider to be our top choice in a particular category being replaced by either a Fidelity Fund or a fund available on the Fidelity NTF platform. That being said, while our top fund choice for each category is still listed in the ‘No Load Funds Model Portfolio’, every fund in our Mutual Fund list is a fine selection for your investment portfolio. One fund note here is that the Invesco Balanced-Risk Allocation Fund (ABRIX), may be considered in a Fidelity Mutual Fund Portfolio, even though there is a transaction fee, if you do not have access to this fund from another brokerage account.

A few of the new funds included on our Mutual Fund List are Managers Intermediate Duration (MGIDX), Loomis Sayles Global Bond (LSGLX), Fidelity Focused Stock (FTQGX), Jensen (JENSX), Westcore Micro Cap Opportunity (WTMIX), Fidelity International Growth (FIGFX), Manning and Napier International (EXITX), Westcore International Small Cap (WTIFX), Marketfield Fund (MFLDX), and Highland Long/Short Equity (HEOZX). Another note, the Lazard Emerging Markets Fund (LZOEX) joined the Artisan Mid Cap Value Investor Fund (ARTQX) as the second fund on our list that is closed to new investors, so if you are not in that one, you may not be able to get in at this time, which is why we have give you additional choices in this category.

Asset Allocation July 2011