Saturday, November 03, 2007

October 2007 Returns For My Model Long-Term Portfolio

My Hypothetical Model Portfolio had its second strongest performance (on a % basis) of 2007 during October. Although the month was volatile, the Portfolio rallied on October 31st when the Federal Reserve cut its benchmark overnight interest rate by 25 basis points to 4.50%. The FED released a statement indicating that it now thinks the risks of recession and higher inflation are in "balance," a signal that the FED is less likely to make another cut down the road.

As of the market close on October 31, 2007, the Hypothetical Model Portfolio was up $5637, or about 3.56% during October. The Hypothetical Model Portfolio is now up about $18567 in 2007, a gain of 12.76%, as shown on the table below (click for a larger image of the table). Based on the strong October returns, the 2007 returns for the Hypothetical Model Portfolio are now ahead of the 10.83% return of the Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index.

International stocks generally led the way again in October, most likely due to the FED's interest rate cut, which devalues the U.S. Dollar, and consequently increases the value of foreign-denominated assets such as international equities. The iShares Emerging Markets ETF (EEM) was my best performing holding, rising about 11.87%. The Templeton Russia closed-end fund (TRF) rose about 8.74%, and the Vanguard Developed Markets Index mutual fund (VDMIX) rose about 4.41%.

Tech stocks were also strong performers during October - the Nasdaq 100 ETF (QQQQ) rose an impressive 7.09%. Small caps also performed well, with the Vanguard Small Cap Index mutual fund (NAESX) rising 2.62% and Vanguard Small Cap Value Index (VISVX) returning about 1.34%.

Financials were laggards again - the SPDR Financial components ETF (XLF) dropped 0.97%, whereas the iShares Dow Jones U.S. Select Dividend Index Fund (DVY) rose a scant 0.93%.

The results of the holdings in the Hypothetical Model Portfolio have been very disparate through the first 10 months of 2007. EEM, QQQQ, and VDMIX are leading the way with phenomenal returns of 46.44%, 27.71%, and 18.62%. Four of the holdings, on the other hand, have had abysmal returns - TRF, XLF, DVY, and VISVX have returns -9.92%, -6.54%, 0.49%, and 1.03% respectively for the year. The winners have more than made up for the weak performance for the poor performers, and the portfolio is currently nearly a full two percentage points ahead of the 10.83% return of the Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index, as discussed above.

Three of the holdings in my Hypothetical Model Portfolio paid dividends during October. As I mentioned in a previous post, I reinvest the dividends from mutual fund holdings when distributed. I allow dividends from closed end funds or the ETFs to accumulate in the "CASH" column until it reaches at least $100, at which point I invest the CASH in the mutual funds lagging my benchmark asset allocation by the largest amount at the time. The reason why I wait until $100 is accumulated is because that is the minimum amount required to invest in a Vanguard mutual fund at a time.

At the end of September, the CASH column totaled $66.05. On October 1st, DVY paid a dividend of $0.59722/share (a total of $59.72). This dividend payment was immediately moved into CASH, and the CASH column accumulated a total of $125.77 as of October 1, 2007. As of that date, the most underperforming mutual fund holding was VISVX. Accordingly, on the following date, October 2, 2007, $125.77 was invested in VISVX to purchase an additional 7.207 shares at $17.45/share.

Two other holdings paid dividends in October. On October 3, 2007, XLF paid a dividend of $0.2554/share (a total of $25.03), which was moved to "CASH" on the table shown below. QQQQ paid a dividend of $0.026/share (a total of $5.46) on October 31st, which was also moved to "CASH" on the table shown below.

I anticipate that the portfolio returns will continue to be volatile for the rest of 2007 and will probably be slightly higher by the end of December, 2007.

*The Hypothetical Model Portfolio was created with an investment of $100,000 in securities as of the closing values on December 30, 2005 and an additional $25,000 was invested n securities as of the closing values on December 29, 2006. The reason why the total cost in the chart is greater than $125,000 is because the total cost accounts for the value of distributions reinvested into the mutual funds in the portfolio.

September 2007 Returns

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