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November 2014 Performance Review

December 3, 2014

The U.S. stock market, fueled at least partially by (what now seems like) permanently low interest rates and a lack of investment opportunity abroad, is on to new highs again. The strange thing is that oil is plunging, non-U.S. economies are weak, and recent Black Friday sales were lackluster. You'd almost think we were in another global recession.

Our Conservative portfolio was up 1.37% in November. Our Aggressive portfolio gained 2.50%. Benchmark Vanguard funds for November 2014: Vanguard 500 Index Fund (VFINX) up 2.68%; Vanguard Total Bond Market Index Fund (VBMFX) up 0.65%; Vanguard Developed Markets Index Fund (VTMGX) up 0.08%; Vanguard Emerging Markets Stock Index (VEIEX) down 1.00%; Vanguard Star Fund (VGSTX) a total global balanced portfolio up 1.62%.

These recent bad economic indicators can largely be dismissed. The commodity bubble is re-popping while investors run and actual oil production rises from past high prices. Neither OPEC or Russia wants to cut production; the latter needs the money badly. It's also possible post-Thanksgiving sales are going to be a slowly dying concept as many high-spending consumers prefer to click for deals whenever they come up, not get in fights over deep discounts on TVs in stores.

And it's really just the U.S. market at this point doing well. We're even caught a little off guard by how poorly everything you are supposed to add to a portfolio to diversify away from U.S. stock and bond risk has done. It's been several years now of foreign stock market underperformance to U.S. markets. And that's the good part of the diversification. The 'alternative investments' popular over the last decade to protect against the collapse of civilization have been a bust.

Oil is the most noteworthy of the sullied commodities, plunging around 40% from the relatively recent highs of around $100 a barrel (and far more from the 2008 commodity bubble peak). This of course boosted our double short oil ETF PowerShares DB Crude Oil Dble Short (DTO), 33% this last month alone. We will have to get out of this ETF at some point because these short funds are terrible longer term holdings. If we could be short oil forever with no price erosion we'd do it, but the way these funds work, if the price of oil remains stable, in three years we'll be down 50% or more. The same goes for long commodity funds as well. There is no good long-term way to invest long or short in commodities.

From mining stocks and the underlying commodities, the pendulum should be swinging back to the 1990s mentality where no good investor or investment advisor would ever want any commodities (from the recent position that all portfolios need some 'real' assets). We'll know when we reach that point because all the commodity funds and ETFs will close for lack of interest.

Right now we're still in the 'well, everything can't go up at once, commodities are doing poorly now but someday when the stocks are down they will be great' phase. That won't last long. What's stunning is the irrationality of the commodity (notably precious metal) investor. Unlike past slides in formerly hot investments that crashed, gold investors simply won't bail out, even after years of terrible returns.

Stock Funds1mo %
PowerShares DB Crude Oil Dble Short (DTO)33.19%
PRIMECAP Odyssey Growth (POGRX)4.17%
Vanguard MegaCap Growth (MGK)3.09%
[Benchmark] Vanguard 500 Index (VFINX)2.68%
Vanguard European ETF (VGK)2.07%
Artisan Global Equity (ARTHX)1.23%
Gold Short (DZZ)1.17%
Vanguard Telecom Services ETF (VOX)0.88%
American Century Utility Income (BULIX)0.70%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)0.08%
Vanguard Europe Pacific ETF (VEA)0.00%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-1.00%
iShares MSCI BRIC Index (BKF)-1.31%
Satuit Capital Micro Cap (SATMX)-1.33%
Wasatch Long/Short (FMLSX)-1.67%
Wasatch Frontier Emerg Sm Count (WAFMX)-2.15%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)4.34%
Vanguard Long-Term Bond Index ETF (BLV)1.70%
Vanguard Mortgage-Backed Securities (VMBS)0.72%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.65%
DoubleLine Floating Rate N (DLFRX)0.43%
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