Insightful Investing

It was not hard to pick the winners this quarter, we just had to look for the positive numbers. While all of our tracked Fund Categories had negative returns for the quarter, there were a few bright spots. Artisan Mid Cap Value (ARTQX) led the pack with a 5.2% return for the quarter and a 23.6% return for the past year.

While Real Estate funds were the worst category with a loss of -6.6%, Third Avenue Real Estate Value (TAREX) managed to pick up 1.2% for the quarter and 19.8% for the last year. It was a good quarter for Third Avenue Funds, as a 1.5% return by Third Avenue Small Cap Value (TASCX) made it the only other fund we tracked to bring home more than 1%. Do you notice something that these three have in common? The word is Value, as Value funds once again outperformed their Growth counterparts.

The leading fund category in a down quarter you might ask? Why it was International Funds, which lost less than 0.5% for the quarter while gaining 12.5% over the last year, good enough to lead them all fund categories. Our leading funds in these categories were Julius Baer International Equity (BJBIX), and Vanguard International Value (VTRIX).

There was not much to say about bond funds for the quarter, or the year for that matter, as in spite of lots of volatility finished the quarter with losses of less than -1% and finished the year with gains of less than 1%. While the high flying High Yield Bond Funds dropped -1.5% on the quarter, they still gained more than 6% in the last year, with Fidelity Capital and Income (FAGIX) 10% for the year.

Our Mutual Fund Portfolios and Best Fidelity Funds have been updated through December 2004. The investment performance history of our mutual fund portfolios are tracked on our investment portfolio performance page.

Asset Allocation for 1st Quarter 2005

While we are not recommending any changes to our portfolios for the start of this quarter, remember that we could do that in the middle of the quarter. Be sure to sign up for our free newsletter or check back at least monthly to see any changes in Asset Allocation, fund additions, or fund deletions.

One thing we are looking at for our next report is to add some additional sector oriented or specialty funds to our recommended list besides Real Estate and Technology (which we do not recommend at this time).

Just a reminder that we recommended you REDUCE YOUR EQUITY EXPOSURE at the beginning of the year. While we have not changed that stance, that could change as the market is beginning to look a little oversold. If our outlook changes we will issue a mid quarter update. For now, DO NOT put any New Money in Stock Mutual Funds until the outlook for the market and the technical indicators get a little better.

Conservative Asset Allocation April 2005

Insightful Asset Allocation April 2005

There was no place to hide in the 1st quarter of 2005, well at least not unless you were heavily invested in Oil, which hit record highs over $57 per barrel in March. In addition to high energy costs, increasing interest rates also weighed on the stock market. With these two threatening the market all quarter, its almost amazing that stocks held up as well as they did. The S & P 500 lost just over 2% for the quarter, which given the circumstances could be considered a victory.

Surprisingly, Bonds, International Stocks, and Mid Cap Stocks held up the best as all three lost less than 0.5%. Why surprising? With the continued tightening of interest rates by the Fed one might have expected a bigger decline in Bonds. While the turnaround in the dollar is not that surprising given the rising interest rates, it did not go up enough to significantly hurt International investment returns, yet. A continuation of that trend could put a damper on returns from overseas down the road.

At first glance it may seem a little strange that Mid Cap Stocks performed better that both Large Cap Stocks and Small Cap Stocks as most of the time this asset class has returns between the other two. Looking a little closer at the boom and bust cycles that occurred over the last 10 years, guess who came out on top? To our surprise the winner was Mid Cap Stocks, gaining 2.5% more than both Large Cap Stocks and Small Cap Stocks, both of which had annualized gains approaching 11% during this time frame. While that may not sound like much, compounded over 10 years, you would have 40% more money. For example, if you had invested $10,000 in Small Cap Funds or Large Cap Funds 10 years ago, you would have about $17,000 today. If on the other hand, you had invested that $10,000 in Mid Cap Funds, you would have about $24,000 today. Maybe you really do need to break down your Market Capitalization allocations three ways instead of two. Sure looks that way to us.

Does not sound too bad, so why, you may be asking yourself, were we trash talking the stock market so much in the beginning of this newsletter. That is pretty easy to explain. Two of our favorite categories on the way up over the last few years needed a breather as Small Cap Stocks and Real Estate Funds fell 5% and 8% respectively this quarter. While we have not given up on these stocks, its nice to know that we avoided a 9% drop this quarter by continuing to stay away from Technology Funds which had their worst quarter since the 3rd Quarter of 2004. One good thing we can say about Technology Funds is that the 20% annualized return for the past 5 years will probably look much better next quarter on our benchmark chart since the peak of the NASDAQ bubble will no longer be included in 5 year calculations. Now that is one anniversary we have no interest in celebrating.

Our analysis would not be complete without pointing out that Value equities once again outperformed Growth equities as they have for most quarters over the last 5 years. Could it be time for the market to revert to the mean and start favoring growth stocks again? Only time will tell. In the mean time, we continue to recommend the diversification of being invested in both styles across all market capitalizations.

Investment Returns March 2005