Portfolio Returns Comparison--Moderately Aggressive Strategies

Below is how Potomac Wealth Strategies' portfolios (80 Flex III, 80 Flex IV, and 80 Strategic) have performed.  In short, these models show better returns and lower volatility than their competition, even after accounting for our advisory fee.

Other portfolios below provide similar Moderately Aggressive strategies but use low-cost, style-pure index funds from either Fidelity or Vanguard.  Many experts preach this kind of "indexing" because it is cheaper (no advisor to pay, for example) and usually beats "actively managed" mutual funds.  However, Potomac Wealth Strategies disagrees that cheaper must be better.  Just because most actively managed funds don't keep up with their benchmarks does not mean we should give up and settle for ordinary portfolios.  Superior performance, lower volatility, or even both at the same time, can be achieved consistently--if the effort is made to identify and use the best-of-breed mutual funds.

Please look at the data below and see for yourself the advantages offered by Potomac Wealth Strategies' Flex and Strategic portfolio models.  Oh, one more thing...  the returns shown for the Flex and Strategic portfolios have our advisory fee already deducted.  We firmly believe that cost-justification is more important than cost alone.

Thank you for your interest.  Let us know how we can help!

US and Foreign Indexes	3 mo		1 yr		3 yr		5 yr		10 yr		2008
Stock Markets (50-40-10)	0.3%		17.9%		13.4%		3.2%		8.1%		-40.7%
S&P 500	2.9%		20.6%		18.5%		7.0%		7.3%		-37.0%
MSCI EAFE	-1.0%		18.6%		10.0%		-0.6%		7.7%		-43.1%
Barclays Agg Bond--US	-2.3%		-0.7%		3.5%		5.2%		4.5%		5.2%
Barclays Agg Bond--Global	-2.8%		-2.2%		3.6%		3.7%		4.8%		4.8%
Moderately Aggressive	0.3%		15.1%		12.2%		3.8%		7.2%		-32.0%
80 Flex III	-2.3%		6.9%		7.6%		5.8%		7.5%		-15.0%
80 Flex IV	-2.3%		7.2%		7.9%		6.4%		8.3%		-15.2%
80 Strategic	1.7%		21.8%		15.4%		11.0%		10.3%		-32.6%
Fidelity 80	0.4%		15.7%		12.3%		3.9%		7.3%		-32.0%
Russell Growth	-0.8%		12.6%		10.3%		2.9%		6.2%		-36.1%
NOTE 1:  Past performance is no guarantee of specific future results.  This data is presented by Potomac Wealth Strategies, LLC.  This data is from Morningstar and should be accurate, but it has not been independently verified.
NOTE 2:  "Flex" and "Strategic" portfolios are designed and managed by Potomac Wealth Strategies, LLC.  These models show track records of better returns, lower volatility, or both, compared to their benchmarks and popular competitors.
NOTE 3:  "Vanguard 80" and "Fidelity 80" portfolios are low-cost implementations of the Moderately Aggressive strategy.  They are comprised of index funds offered by Vanguard or Fidelity.  This is what many columnists and financial experts on TV would have us use.
NOTE 4:  Russell portfolios are offered by one of the most highly-regarded institutional investment advisors in the country.  These portfolios handle money for dozens of high net-worth people and famous organizations.
NOTE 5:  Nothing on this blog post represents investment advice to any individual or organization.  If the information hereon is of interest to you, please contact us at Garo.Partoyan@PotomacWealthStrategies.com for a consultation.

 

Flex and Strategic Portfolio Performance Through June 2013

Flex portfolios continue to lag strategic/traditional portfolios in the shorter time-frames.  This is the cost of having reduced volatility and using managers who are willing to go to the sidelines.  However, the Flex portfolios continue to show strong cost-justification and benchmark out-performance in the 5- and 10-year time frames.

Meanwhile, I am now posting the performance of the more popular Strategic portfolios.  These show very impressive results.  But such has come with much higher volatility.

For investors who are wary of the economy and skeptical of the stock market's four-year rise--and who thus fear another bear market or worse, the Flex portfolios are recommended.

For investors who are comfortable with the bull market and feel we are in the middle of its cycle, the Strategic portfolios are recommended.

Here is the data through the first-half of 2013 (past performance is no guarantee of specific or comparable future results):

US and Foreign Indexes	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	-2.7%	0.8%	7.8%	17.5%	6.4%	13.1%	3.4%	7.3%
S&P 500	-1.3%	2.9%	13.8%	20.6%	12.8%	18.5%	7.0%	7.3%
MSCI EAFE	-3.6%	-1.0%	4.1%	18.6%	1.1%	10.0%	-0.6%	7.7%
Barclays Agg Bond--US	-1.6%	-2.3%	-2.4%	-0.7%	3.3%	3.5%	5.2%	4.5%
Barclays Agg Bond--Global	-1.2%	-2.8%	-4.8%	-2.2%	0.2%	3.6%	3.7%	4.8%
Moderately Aggressive	-2.2%	0.3%	6.4%	15.1%	6.1%	12.2%	3.8%	7.2%
80 Flex IV	-2.5%	-2.3%	1.5%	8.4%	4.0%	9.1%	7.6%	9.5%
80 Strategic 2013	-2.0%	1.7%	10.5%	22.3%	10.3%	15.9%	11.8%	11.3%
80 Flex III	-2.4%	-1.6%	2.3%	9.5%	4.1%	9.3%	6.1%	8.9%
80 Fidelity	-1.9%	0.4%	6.5%	15.7%	6.0%	12.3%	3.9%	7.3%
Moderate	-1.9%	-0.3%	3.9%	10.6%	5.2%	10.1%	4.1%	6.7%
60 Flex IV	-2.5%	-2.0%	1.6%	9.3%	4.9%	9.4%	8.1%	9.8%
60 Strategic 2013	-2.4%	0.1%	5.2%	16.4%	7.5%	13.5%	9.8%	11.3%
60 Flex III	-2.5%	-1.9%	1.5%	8.8%	4.6%	8.9%	7.2%	8.8%
60 Vanguard	-2.2%	-0.8%	3.7%	11.0%	6.1%	10.7%	4.9%	6.8%
Moderately Conservative	-1.7%	-1.0%	1.4%	6.3%	4.2%	7.9%	4.3%	6.1%
40 Flex IV	-2.6%	-2.2%	0.7%	8.4%	5.2%	8.7%	8.4%	9.2%
40 Vanguard	-2.3%	-1.6%	1.5%	7.0%	5.5%	8.5%	5.2%	6.1%
Conservative	-1.4%	-1.7%	-1.1%	2.1%	3.1%	5.7%	4.3%	5.3%
20 Flex IV	-2.6%	-2.3%	-0.2%	7.7%	5.5%	8.1%	8.8%	8.5%
20 Vanguard	-2.4%	-2.6%	-0.9%	3.0%	5.0%	6.6%	5.7%	5.6%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex IV	24%	44%	23%	9%
60 Flex IV	24%	38%	31%	8%
40 Flex IV	26%	25%	43%	6%
20 Flex IV	27%	12%	56%	5%

Bonds Explained (briefly)

The Fed Funds Rate is at historic lows and interest rates will eventually rise.  That will cause downward pressure on bond prices.  Bonds, though, are usually considered the safer, more stable part of a diversified portfolio.  So, professionals and individual investors alike have bonds on the brain these days…

Bonds Explained, briefly:

1.       Bond investors are essentially making loans to companies, governments, and municipalities

2.       In exchange for their temporary investment (a few months on up to 30 years or more; mostly 1-10 years), bond investors are paid interest (usually monthly, sometimes just yearly, and maybe at other times).

3.       The longer the bond, or the riskier the bond, the higher the interest rate paid.

4.       Bond investors get their money back at the end of the term, in addition to interest; sometimes there is no interest paid ongoing but instead it’s included with the principal repayment at the end.

5.       If the bond issuer has financial trouble, bond investors may not get some or any of their money back; that's rare, though, even in the case of "junk bonds".

6.       It is complicated for individual investors to build and manage their own bond portfolios.

7.       High-net worth individuals and institutional investors can get much better pricing.

8.       Bond funds have costs that eat away at income and total returns, but there are several bond funds that have excellent cost-justification track records (I am constantly searching for and evaluating such).

9.       Bond funds, however, do not offer the actual return of investment; instead, bond funds have a "net asset value" (like a share price) that fluctuates indefinitely.

10.   So, there are trade-offs, and my professional opinion is that bond funds with excellent track records and consistent management are very suitable for most investors

Interest Rate Risk Explained, briefly:

1.       In short, bond prices rise when interest rates drop, and they decline when rates rise.

2.       That is because bond interest rates move up and down as the prevailing interest rates (fed funds rate, treasury bonds, etc.) change.

3.       Different types of bonds will move more or less with prevailing rates for various reasons.

4.       Bond holders can wait for their bond to mature and get 100% of their money back after already getting the interest rates promised.

5.       Bond prices, meanwhile, fluctuate as bond rates move because of the secondary market for bonds:

a.       You buy a bond today that pays 3% interest, but, when rates rise, someone else looking to buy a bond next year can get something similar to yours that pays a higher rate.

b.      If you want your investment back before the bond comes due, someone might be willing to buy your bond instead of a new one.

c.       But since yours has a lower rate than what they can now get, they'd only pay you less for your bond than they would for a brand-new one offering a higher rate.

d.      So, bond prices decline when interest rates rise.  Likewise, though, bond prices rise when interest rates fall.

6.       You might have a very safe and sound bond portfolio, but its value may fluctuate between the time you buy the bonds and get your money back.

7.       But holders of individual bonds do get their money back (plus interest already paid or included with the principal repayment at the end) if they hold to the end; that is, of course, unless the bond issuer goes bankrupt or has major financial trouble.

8.       Bond fund holders would have to ride-out the interest rate fluctuations and/or the bond fund managers would have to successfully adjust the portfolio in order to keep the fund's NAV going up (or from going down) in a rising-rate environment.

9.       Even if rates rise and bond prices fall, you can still make money (and keep getting interest income) from bond funds.

10.   The better bond funds have methodology and strategy that work well, and track records to demonstrate that.

11.   There are no guarantees that a great bond fund manager will succeed all the time, of course.

Bottom line:

1.       Bonds are not as safe as they usually are because interest rates are likely to rise.

2.       But bonds remain one of the three most important parts of any diversified portfolio.

3.       Portfolios of individual bonds are difficult for most individual investors to assemble and manage; bond funds have drawbacks but are good choices for many.

4.       Bond index funds have been touted for their low-costs and benchmark-matching performance (or close to it), but they pose increased risks in this likely rising-rate environment.

5.       Actively-managed Bond mutual funds offer a lot of advantages to individual investors—diversification, potentially cost-justifying performance, and convenience.

6.       I work hard to find and use only the best bond funds that are likeliest to perform well going forward.

7.       PIMCO is an example of a "active" bond fund manager that has an outstanding track-record

a.       While I have no obligation to keep using PIMCO funds (or those of other managers I favor), I expect PIMCO and some others will remain a key part of the bond portion of my Flex and Strategic portfolios.

Getting a Mortgage Without Having Income Is Difficult--FYI to retirees

Here is an example of how the banks are probably acting prudently, even though it is easy to see how some would think, "Wow, the guy has a million bucks and the bank won't lend to him??"

http://www.cnbc.com/id/100719396

Income is more important than assets when it comes to evaluating mortgage creditworthiness.  $1mm in the bank gets you about $30k/year right now in a conservative (but not "no risk") portfolio.  If the bank needed this guy to have an income of $100k and he was getting $60 from investments and Soc Sec, then they were smart to deny him the loan or offer him a smaller amount to borrow.

And the loan officer would be in need of a talking-to for misleading the applicant in the first place--one of the major things that got us into trouble last decade.

Flex Portfolio Performance Through March 2013

Here are the (unaudited by anyone but me; data comes from Morningstar) performance #s for selected Flex portfolios through March of 2013.

US and Foreign Indexes	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	2.0%	7.1%	7.1%	11.6%	6.1%	8.5%	2.7%	9.8%
S&P 500	3.8%	10.6%	10.6%	14.0%	11.2%	12.7%	5.8%	8.5%
MSCI EAFE	0.8%	5.1%	5.1%	11.3%	2.4%	5.0%	-0.9%	9.7%
Barclays Agg Bond--US	0.1%	-0.1%	-0.1%	3.8%	5.7%	5.5%	5.5%	5.0%
Barclays Agg Bond--Global	-0.3%	-2.1%	-2.1%	1.3%	3.2%	4.5%	3.7%	5.5%
Moderately Aggressive	1.8%	6.0%	6.0%	10.7%	6.6%	8.3%	3.2%	8.6%
80 Flex IV	1.3%	3.9%	3.9%	8.4%	6.2%	8.7%	7.8%	10.9%
80 Flex III	1.3%	4.0%	4.0%	9.0%	5.6%	8.4%
80 Fidelity	2.1%	6.1%	6.1%	11.0%	6.4%	8.3%	3.5%	8.7%
Moderate	1.3%	4.2%	4.2%	8.6%	6.2%	7.7%	3.7%	7.9%
60 Flex IV	1.1%	3.7%	3.7%	9.7%	7.0%	9.1%	8.2%	11.2%
60 Flex III	1.1%	3.4%	3.4%	9.7%	6.4%	8.7%
60 Vanguard	1.6%	4.6%	4.6%	10.1%	7.5%	8.7%	4.6%	8.1%
Moderately Conservative	0.9%	2.4%	2.4%	6.5%	5.8%	6.9%	4.0%	5.4%
40 Flex IV	0.8%	2.9%	2.9%	10.2%	7.3%	9.0%	8.5%	10.4%
40 Vanguard	1.2%	3.1%	3.1%	8.5%	7.5%	8.1%	5.2%	7.3%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex IV	24%	45%	21%	10%
60 Flex IV	21%	39%	31%	9%
40 Flex IV	23%	26%	44%	7%

Flex Portfolio Performance Through February 2013

Here are the performance data for the most widely-used Flex portfolios and their strategic counterparts comprised of Vanguard or Fidelity index funds.

As the stock markets in the USA set or rapidly approach all-time highs despite mixed macroeconomic data globally and confounding politics domestically, I believe the Flex portfolios remain the most effective way to be fully-invested but ready to weather storms that may be brewing.

US and Foreign Indexes	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	0.2%	7.3%	5.0%	10.6%	4.8%	10.0%	2.1%	9.6%
S&P 500	1.4%	7.6%	6.6%	13.3%	9.1%	13.4%	4.9%	8.1%
MSCI EAFE	-1.0%	7.6%	4.2%	9.8%	0.8%	6.7%	-1.3%	9.2%
Barclays Agg Bond--US	0.5%	-0.3%	-0.2%	3.1%	5.7%	5.5%	5.5%	5.0%
Barclays Agg Bond--Global	-1.0%	-2.2%	-1.9%	0.8%	3.6%	4.4%	4.1%	5.5%
Moderately Aggressive	0.1%	5.8%	4.1%	9.8%	5.2%	9.4%	2.7%	8.4%
80 Flex IV	-0.1%	4.0%	2.6%	7.1%	5.9%	9.4%	7.4%	10.7%
80 Flex III	-0.2%	4.3%	2.6%	8.0%	5.4%	9.2%
80 Fidelity	0.1%	6.1%	3.9%	10.0%	4.9%	9.4%	3.0%	8.5%
Moderate	0.0%	3.9%	2.8%	7.7%	5.2%	8.4%	3.4%	7.7%
60 Flex IV	0.0%	4.0%	2.5%	8.5%	6.7%	9.8%	7.8%	10.9%
60 Flex III	0.0%	3.8%	2.3%	8.8%	6.3%	9.5%
60 Vanguard	0.3%	4.2%	2.9%	9.1%	6.2%	9.4%	4.2%	7.9%
Moderately Conservative	0.0%	2.1%	1.5%	5.7%	5.2%	7.3%	3.9%	6.9%
40 Flex IV	0.2%	3.4%	2.1%	9.4%	7.3%	9.7%	8.2%	10.2%
40 Vanguard	0.5%	2.7%	1.9%	7.5%	6.5%	8.5%	4.9%	7.1%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex IV	24%	46%	21%	9%
60 Flex IV	21%	40%	30%	9%
40 Flex IV	23%	26%	44%	7%

Flex Portfolio Performance Through January 2013

Global stock markets have been rising strongly.  This is despite global-macro economic and geopolitical concerns--very slow growth in USA, continued economic troubles in Europe, China slowing, Japan still in a rut, flare-ups exacerbating problems and potential for more in the middle east.  I sense that the U.S. Federal Reserve's pretty much open-ended commitment to buying Treasury debt (funding deficit spending in effort to keep the economy afloat while it tries to learn how to swim again) is creating an artificial wave that stock investors are willing to surf.  For now.

This is why I favor a global/flexible portfolio management approach.  My "Flex" portfolios are the best way I know to implement such.

Yes, diversified portfolios have struggled to keep pace with the stock markets, but that is understandable because such are invested at most around 80% in stocks, and perhaps as little as 20%.

What is more important to compare is portfolio performance against the correct blended benchmark.  A moderate-risk investor should be about 60-40 stocks-bonds, for example, and thus would compare to a benchmark of 60% stock indexes and 40% bond indexes--not merely the Dow Jones Industrial Average or the S&P 500 index.

This is where the Flex portfolios are doing their jobs well.  They are outperforming their benchmarks, as you can see in the data below, and doing so with much less volatility (a measure of risk).

While I do not ignore short-term performance comparisons, I believe it is most relevant and prudent to consider 3-, 5-, and 10-year time periods when comparing portfolios to each other and/or to their benchmarks.

US and Foreign Indexes	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	4.8%	8.6%	4.8%	15.7%	6.0%	10.2%	1.6%	9.1%
S&P 500	5.2%	6.8%	5.2%	16.8%	10.3%	14.1%	4.0%	7.9%
MSCI EAFE	5.3%	11.3%	5.3%	17.3%	3.0%	6.9%	-0.8%	9.2%
Barclays Agg Bond--US	-0.7%	-0.7%	-0.7%	2.6%	5.6%	5.4%	5.5%	5.1%
Barclays Agg Bond--Global	-0.9%	-1.3%	-0.9%	1.7%	4.4%	4.7%	4.7%	5.8%
Moderately Aggressive	4.0%	5.6%	4.0%	13.4%	6.0%	9.0%	1.8%	7.6%
80 Flex IV	2.6%	4.9%	2.6%	9.3%	6.9%	9.5%	7.0%	10.1%
80 Flex III	2.8%	5.4%	2.8%	10.3%	6.6%	9.2%
80 Fidelity	3.8%	7.2%	3.8%	13.6%	5.8%	9.2%	1.9%	7.7%
Moderate	2.7%	4.8%	2.7%	10.1%	5.5%	7.8%	2.3%	6.9%
60 Flex IV	2.5%	5.0%	2.5%	10.7%	7.4%	9.6%	7.3%	10.2%
60 Flex III	2.2%	4.6%	2.2%	10.7%	7.1%	9.4%
60 Vanguard	2.5%	4.9%	2.5%	11.0%	6.4%	8.7%	2.8%	7.0%
Moderately Conservative	1.5%	2.8%	1.5%	6.9%	5.2%	6.7%	2.9%	6.2%
40 Flex IV	1.8%	4.2%	1.8%	11.0%	7.7%	9.6%	7.7%	9.7%
40 Vanguard	1.4%	3.0%	1.4%	8.3%	6.3%	7.7%	3.6%	6.3%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex IV	24%	45%	21%	10%
60 Flex IV	21%	40%	30%	9%
40 Flex IV	23%	26%	43%	8%