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You'd never know from my model portfolio of exchange-traded funds that these past few months have been the wildest of the past five years.
We had a full-scale correction -- a 10% decline -- in the domestic stock market between October and November, and a couple of weeks' worth of 300-point gyrations in the Dow Jones Industrial Average ($INDU). Yet the portfolio finished the fourth quarter basically unchanged. Excellent gains from bonds and emerging markets were erased by blowups in the telecommunications sector and real estate.
It could have been worse. Since the end of the third quarter SPDR S&P 500 Trust (SPY, news, msgs) has slumped 4.2%, leaving it with a gain for the year of 4.3%. My ETF model, by contrast, advanced 11% this year.
Not all of the news is bad
The natural reaction to excessive tumult is to seek refuge. But despite all the gloom in the business section these days, I'm feeling oddly optimistic about the months ahead. We're getting inured to bad news because there's been so much of it, and I think the argument of the moment -- are we headed into a recession, or are we already there? -- is getting too much attention.The fact is, the U.S. looks so attractive to investors in the rest of the world that they're falling all over themselves to snatch up bargains. Foreign-government investment pools called sovereign-wealth funds have grabbed major positions in Morgan Stanley (China) (MS, news, msgs) and Citigroup (Abu Dhabi) (C, news, msgs).
And two famed value-oriented mutual funds, Tweedy, Browne Global Value (TBGVX) and First Eagle Overseas (SGOVX), announced last week that they would reopen to new investors in January. Both cited increasingly attractive valuations of global equities.
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So I'm going to stay aggressive in 2008, and I think you should, too. I'm going to add to my positions in real-estate and small-cap stocks, which should be among the first to turn when things improve.
I don't know whether it will take three months or 12 or 24 for normality to be restored to financial markets, but it will happen eventually. And the shares of small-caps and real-estate stocks I'm buying now will be worth a good deal more then.
| Fund | Shares | Price | Value | 3-month return | % of total assets |
|---|---|---|---|---|---|
370 | $63.75 | $23,587.50 | -0.2% | 14.9% | |
1005 | $23.94 | $24,059.70 | 1.7% | 15.2% | |
214 | $70.29 | $15,040.99 | -4.6% | 9.5% | |
83 | $129.07 | $10,712.81 | -0.1% | 6.8% | |
94 | $73.80 | $6,937.20 | -10.4% | 4.4% | |
349 | $76.28 | $26,621.72 | -0.6% | 16.8% | |
83 | $103.35 | $8,578.05 | 4.3% | 5.4% | |
198 | $51.75 | $10,246.50 | 18.0% | 6.5% | |
210 | $76.99 | $16,167.92 | 3.6% | 10.2% | |
84 | $79.63 | $6,688.92 | -13.1% | 4.2% | |
Schwab Money Market Fund | $9,363.29 | 5.9% | |||
Totals | $158,004.60 | 0.1% | 100.0% | ||
2007 return (as of Dec. 19) | 11.0% |
Two positions in the model scream out for attention: Vanguard Telecommunication Services (VOX, news, msgs) and iShares Cohen & Steers Realty Majors (ICF, news, msgs).
Trading telecom for utilities
I ventured into telecom after writing about the sector in June in a column headlined "Telecom has risen from the dead." With the Vanguard fund down 10.4% in the fourth quarter, it should have read "Telecom's obituary not premature." This is a cyclical business, and the business cycle is murdering it.I am eliminating the position and using the proceeds, along with a bit of cash, to add a 5% stake in Utilities Select SPDR (XLU, news, msgs), which amounted to 184 shares at the close Dec. 19. I wrote about this group a couple of weeks ago in "Recession-proof ways to make money." You visit Starbucks less often during tough times, but you don't turn off the lights.
The hottest ETFsAs for real estate, it is cyclical as well, and it could languish for a long time to come. But the iShares fund pays a hefty dividend, currently 3.4%, and it has only a 30% correlation to stocks. Real estate is what asset allocators call an alternative asset class, neither stock nor bond. So I'm taking a bit from cash to purchase an additional 15 shares to bring iShares back to the 5% allocation I regard as suitable for this asset class.
Similarly, I'm going to bring Vanguard Small Cap Growth (VBK, news, msgs), yet another economically sensitive group, back up to 10% by buying 11 shares. When all of these changes have been made, the portfolio as it starts the new year will look like this:
| Fund | Shares | Price | Value | % portfolio |
|---|---|---|---|---|
370 | $63.75 | $23,587.50 | 14.93% | |
1005 | $23.94 | $24,059.70 | 15.23% | |
225 | $70.29 | $15,814.13 | 10.01% | |
83 | $129.07 | $10,712.81 | 6.78% | |
184 | $43.05 | $7,921.20 | 5.01% | |
349 | $76.28 | $26,621.72 | 16.85% | |
83 | $103.35 | $8,578.05 | 5.43% | |
198 | $51.75 | $10,246.50 | 6.48% | |
210 | $76.99 | $16,167.92 | 10.23% | |
99 | $79.63 | $7,883.37 | 4.99% | |
Schwab Money Market Fund | $6,411.70 | 4.06% | ||
Totals (as Dec. 19) | $158,004.60 | 100.00% |
The dollar blipped up in December, reversing five years of nearly continual decline. I don't think this rally will be sustained, however. In part, it's happening because of $1 billion in U.S. currency purchases daily by the Bank of China to keep its own currency from appreciating further. So I remain wedded to foreign securities -- and willing to let my profits there run.
Continued: Portfolio in top 2%
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