End-of-August Update/Tweak

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I am updating this as we move into the last day of August.

Over the last week the rate-of-change indicators on the C-Fund (SPY), I-Fund (EFA), and S-Fund (VXF) have moved quickly -- too quickly in fact.  I am aggressively allocated as per my previous message here, and the gains since that change are +1.203% in 6 trading days.  Normally, I'd yawn at this, but considering that we're heavily in cash (G-fund, 67%), this is a notable movement and one that is too aggressive for the volatility of the markets right now.

My risk models are all suggesting that this leg upward is failing to materialize, and that we are due for a pullback. While my longer-termed outlook is still cloudy (your crystal ball is as good as mine), my short-termed one suggests a reallocation to lighten up on equity until we get a clearer emergence of a trend upward.

Again, this trend upward has moved far too fast to be sustained.  Given this, I'm moving my wife's funds around as follows:

G-Fund:  79%
F-Fund:  12%
C-Fund: 5%
S-Fund: 3%
I-Fund:  1%

I consider this quasi-aggressive/conservative.  If your time horizon is long (like mine -- about 9 years), then this is probably too conservative, but I feel better.  Conversely, if your time horizon is short (e.g., less than 1-2 years), then for the short-term future (next month or so), then this allocation is probably a little too aggressive in the present climate.  If you fall into the shorter-termed category, look to lighten up (0% in) the I-Fund and S-Fund and put these monies into the G-Fund as a temporary parking place.  Both the S-Fund (small cap stocks) and the I-Fund (international stocks) are getting the heck walloped out of them lately and have the highest volatility.  A 20% drop in the markets here with the allocations shown above would take 2% off the top, and we've fought hard for these gains over the past 8 months (over 7% on a rolling 12 month tally).

Recapping, if conservative, look to the following allocation:

G-Fund:  83%
F-Fund:  12%
C-Fund:  5%

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your diligence, and please take ownership for your actions.

We'll revisit the portfolio this weekend.

Regards,

pgd

August 21st Weekend Update

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In a nut shell -- no changes unless you have some tolerance for risk.

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I am presently 54% in the G-Fund (the equivalent of a money market) and 46% in the F-Fund (the equivalent of a bond fund).  Since these allocations on June 6:

• F-Fund increase 3.218%
• G-Fund increase 0.511%

In the same time the equity funds have been slammed:

• C-Fund (equivalent to S&P500):  -12.090%
• I-Fund (equivalent to international index): -15.732%
• S-Fund (equivalent to ex-S&P500):  -16.787%

The allocations above in the account have a net realized and unrealized gain of +1.756% over 54 days, with the drawdown never exceeding -0.173%.  Drawdown is what makes us nervous and will take us off course with our strategies, so I'm comfortable with the present allocations.

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Outlook:

We may see some pressure on bonds (F-Fund) if the market begins to rally from here.  We are forming the second "bounce" of a double dip this summer, and the right side of a "W" typically keeps on moving upward if conditions are correct.  We literally are at the bottom of the second dip, so there is nothing to do in terms of allocations unless you are aggressive in your tolerance for risk.  My preferred approach here is to wait until we get an "all clear" on the equity markets (C-Fund, I-Fund, S-Fund), and as of today they are all quite bearish and telling us to sit on the sidelines.

No one would fault you if you took the F-Fund down to low values in your allocation, effectively locking in your gains to date.

No one would fault you if you also moved some funds into the equities, although this is a risky proposition at this time and could easily backfire.  For those of you interested in representative allocations, here are some suggestions:

• F-Fund (bonds):  14%
• I-Fund (international): 6%
• C-Fund (S&P500): 6%
• S-Fund (ex-S&P500): 7%
• G-Fund (money mkt): 66%

Because my time horizon is longer, I plan to make the allocation changes above, effective today.  If you have a shorter time horizon than myself, I would consider sitting pat for now.

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your own diligence, and please take ownership for your actions.

Regards,

pgd

August 7 Weekend Update

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I'm presently 54% in G-Fund, which is the equivalent of a money-market cash fund, and the balance is in the F-Fund, which is a bond fund.  We made this move effective June 6, 2011.

Since June 6 the account has increased +1.105% using the allocation levels above.  The high point of +1.365% was achieved with the close of markets on 8/4, and the low point of -0.173% was achieved on 7/1.  Given recent markets, this allocation is allowing me to sleep quite well and not have to play with this portfolio at all.

For the rolling 12-month period ending 7/31 the account has returned +6.36%.  This value has been dropping  over the past several months due to the cash position, but I do not think it is dropping as fast as it would have if we were in equities (C-Fund, I-Fund, S-Fund).

In the same time the performance of the individual funds is as follows:

• S&P500/C-Fund has returned +14.68% with a drawdown of -7.04%
• F-Fund has returned +0.68% with a drawdown of -4.63%
• I-Fund has returned +9.51% with a drawdown of -10.7%
• S-Fund has returned +22.43% with a drawdown of -8.88%

For comparisons, a buy/hold with equal weight on 8/2/10 within the equity funds (C, I, S)  would have produced a return of +15.49% with a drawdown of -8.01%.

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While I am somewhat disappointed at the returns compared to the benchmarks above I am quite content with the recent performance.  My longer-termed models have been quite bearish and hence the move in June.

The C-Fund has fallen -11.28% in the last month.  The I-Fund has fallen the same amount.  The S-Fund has dropped -16.55%.  Standard & Poors downgraded the debt rating of the U.S. after the market close on Friday night, in order to give the pundits time to think about this over the weekend.

Now is not the time to be in equities.  Although I do like to buy 20% of the recommended position size in equities with every drop of 10%, I'm going to hold off on this rule for now.  Despite this, for those of you who are more aggressive, you could allocate as follows:

F-Fund:  59%

C-Fund:  4%

I-Fund:  4%

S-Fund:  1%

G-Fund:  32%

This could be a good allocation if you have a long-term horizon, as it will permit you to participate on the upside if we move upward from here.  Conversely, if the markets fall, your exposure to the general markets is limited, even if they drop 25% from here (25% of 4 is 1%, so the most at risk is ~ 3%).

If the markets continue to drop I will most likely move some funds into equities as we cross the -20% from the peak level.

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Remember, you are responsible for your own investment decisions, and I am not.  Please do your diligence and please take ownership for your actions.

Regards,

pgd