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