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EDITOR'S NOTE: The following article contains two errors. The first concerns a holding, iShares MSCI Emerging Markets Index (EEM, news, msgs), which the model had eliminated in the second quarter and therefore should not have been claimed here. The second concerns pricing data, which were out of date. The corrected portfolio delivered a return of 4.2% in the period, not the 6.6% the article claims. A fuller explanation appears at the bottom of this story.
I played it safe -- and you'd never know it.
Despite having less than two-thirds of my model portfolio of exchange-traded funds in equities, it finished the third quarter with a gain of 6.6%, only a hair behind the 6.8% surge of the S&P 500 Index ($INX).
In the first nine months of this year the model advanced 8.7%, easily outpacing the market's 7.3% return. The outperformance came mainly from foreign stocks, particularly those of emerging markets, and from real estate. The only laggard was natural resources, as some air was let out of the speculative bubble that had formed in that sector.
I have been very conservative this year, fearing a downdraft that in fact occurred in the second quarter, when both the market and this portfolio were lower. The third quarter was far stronger than I expected, and since few danger signs continue to worry me, I'm becoming bolder in the three months to come.
Rally time
I think results of November's elections have already been discounted by the market, eliminating that headache. A big bond rally in the third quarter doesn't face any big obstacles in the fourth, although the economy seems stronger than I feared it might be. So I am putting more cash to work, in both the equity and the income sides of my model.But I'm making no major shifts, because I'm accomplishing my goal of providing above-market returns without excessive risk. The portfolio design I'm using is analogous to Morningstar's "moderate allocation" category, meaning it invests across all asset classes but tilts toward equities.
That category rallied 4.6% in the quarter to finish the year to date ahead 4.8%, so I'm beating it handily. Since the model was launched in November 2003, it has advanced at an annualized rate of 11.7%, compared with 8% for the average moderate allocation mutual fund, according to Morningstar. It has also consistently beaten the S&P 500.
More from MSN Money
| Holding | Shares | Price | Value | Weight | 3-mo. gain | YTD gain |
|---|---|---|---|---|---|---|
Schwab Value Advantage Money Fund | 36,310.96 | $36,310.96 | $39,310.96 | 26.21% | 1.10% | 2.10% |
97 | $82.10 | $7,964 | 5.86% | 15.00% | 25.80% | |
152 | $91.75 | $13,946 | 10.26% | -0.40% | 1.50% | |
63 | $97.59 | $6,148 | 4.52% | 3.30% | 2.10% | |
315 | $62.76 | $19,769 | 14.55% | 8.20% | 12.80% | |
87 | $89.25 | $7,765 | 5.71% | 13.80% | 11.50% | |
189 | $68.49 | $12,945 | 9.53% | 8.90% | 10.30% | |
323 | $38.68 | $12,494 | 9.19% | 6.20% | 0.00% | |
154 | $125.01 | $19,252 | 14.17% | 6.80% | 7.30% | |
PORTFOLIO TOTAL | $136,628 |
Note: As of Sept. 20, 2006. Income funds in italics. Sources: MSN Money, Morningstar
The portfolio finished the third quarter with only 43% of assets in domestic equities, reflecting my concern the market would be weak for most of this year. It now appears that weakness was confined to the second quarter.
I think stocks are rallying for a host of reasons. Despite a softening market for housing, the overall economy remains strong, with gross domestic product advancing 2.9% in the second quarter and the unemployment rate unchanged in August at 4.7%.
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