On countless past occasions the stock market fools not only the average emotionally driven investor but also the seasoned professional. It's happening again in an asset class that has fooled everyone; not just this year but for decades!


Investing in real estate may not seem like something you need to do within your standard “stock and bond” portfolio. Some may argue that your house is enough exposure to real estate and for most individuals it’s their largest investment so it should suffice. Your home is actually considered a “consumption good” instead of a pure investment. Although it’s likely to appreciate over time you will not receive income from it, it most likely has a mortgage attached to it, and if you need to sell 10% of it tomorrow you’re out of luck. Additionally there are many areas within real estate aside from what’s happening on your residential street. Commercial real estate, for example, makes up about 13% of the U.S. economy.

In 2013 almost every expert pounded the table and made intelligent sounding comments calling for investors to reduce exposure to REITs. These words of caution came after it was first announced the Fed would slow down its bond-buying program (Quantitative Easing). Conventional wisdom tells us that when interest rates rise REITs (and other asset classes like Bonds) won’t perform well. Unfortunately most of the comments came after the fact and REIT investors were hit hard in May of 2013. Those who listened to the stale news proceeded to sell their REITs as that “wasn’t the place to be”.

Even die-hard passive investment pros like Larry Swedroe, who is the director of research at Buckingham Asset Management, sold REITs in 2013. Why did this action grab our attention? Mr. Swedroe makes some of the most convincing arguments for passive investing and the use of indexes. If you’re a proponent of Modern Portfolio Theory and aim to stay true to asset allocation, you ideally trim the asset classes that have risen the most and reallocate towards the ones that have been hit. Is that what all the experts like Swedroe did? Nope…not this time! He (they) panicked and got fooled just like the rest of the investment herd.

The challenge, but ironically perhaps the true appeal, to owning REITs in a portfolio is that they give stock market-like returns but don’t always do so in perfect correlation. In other words, REITs provide you with some unique characteristics that earn them the right to be considered as a different asset class thereby enhancing your diversification. People often inherently confuse REITs as being highly correlated to the residential real estate market in their immediate area. Not only can you get attractive returns in a variety of different geographies but you’re also gaining exposure to areas of real estate that normally have barriers to entry for the average investor. Here’s an excellent resource to get you familiar with REITs. Click here and watch the video and then bounce back here to finish this article.

Buying REITs is not just about diversifying your portfolio. We advocate using them due to how well they perform! Most investors don’t realize this but over 30 years they have beat the stock market and they’re doing it again this year. The core investment we use to track REITs is the Vanguard REIT ETF (VNQ) and it’s not only giving us 3.64% in dividend yields but as of this writing it’s up +20.18% YTD compared to the S&P 500 which is currently up +7.04%.

Speaking of performance, how might that look like over time?


We’re headed into the last quarter of the year but in case you’ve missed why we’re running a series of articles around the topic of a “60/40 benchmark”, here’s a refresher:

Click here to revisit the first edition of the MPG Core Tactical 60/40 Portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (October 6, 2014).

Click here to compare our portfolio against the benchmark.

It’s finally happening. Yes…it appears the stock market is correcting. As a matter of fact for the second time this year alone the Small Cap asset class has endured a correction of -10% or more. What’s puzzling (and actually quite worrisome) is the divergence between what Large Caps and what Small Caps are doing. In a healthy and rising stock market, “as the tide rises so do all the boats”. We’ve had warnings before but the alarm bells are ringing louder since not all asset classes are moving in tandem as they once were. What we’re seeing now are perhaps the final signs of the rally peaking out.

What adjustments did we make?

The following moves were made during the month of September:

9/2/14:          Added to our position of DXMIX (Direxion Indexed Managed Futures) 280 shares @ $35.71 (~$10k total)

9/23/14:       Added to our position of GLD (SPDR Gold Trust) 200 shares @ $117.56 (~$23k total)

9/25/14:       Added to our position of VB (Vanguard Small Cap Index) 100 shares @ $111.35 (~$11k total)

If you read last months update the nugget we put on the table was the “alternative investment story”. In short…this market environment is one that deserves caution in both stocks and bonds. Where do you go? In our opinion


They say all news gets priced into the stock market. Proponents of the Efficient Market Theory believe that there is “perfect information” in the stock market. Any information or insight that is available is there for all to see therefore negating any possible edge in beating the market. All that being said, no matter how clear your crystal ball is, nobody expected the shocking news we received on Friday.

Bill Gross, the co-founder of Pacific Investment Management (PIMCO) in Newport Beach, quit and packed his bags to join Janus Capital this past Friday. Gross has long been known as the “King of Bonds” and considered to be the nation’s most prominent bond investor. Until last year he was responsible for managing the largest mutual fund in the world – the PIMCO Total Return Bond Fund (PTTRX). That title now goes to the Vanguard Total Stock Market Index but PTTRX is still the world’s largest bond mutual fund. So…what happened here and was the writing on the wall?

As alluded to above PTTRX, and PIMCO in general, has been suffering for quite some time. PIMCO isn’t the only bond fund manager who has struggled with outflows but the sheer volume has opened some eyes. From May to August of 2014 PIMCO has had over $70 billion in assets liquidated and withdrawn. Over the past 72 hours (only 1 trading day including the weekend) the firm has already seen $10 billion bolt for the door!

Investors were already pulling money from bond funds due to fears of increased interest rates. As the Federal Reserve scales back its stimulus of $85 billion in monthly bond purchases, there simply has to be an eventual end to the bond party.

Read the following sentence carefully:

PIMCO and most of its mutual funds will get absolutely blasted in the near future.

The hemorrhaging has already begun but you can expect further massive outflows, which will have a major impact on performance. Several hundreds of billions of dollars are likely to leave the firm. If you own PIMCO funds now you would be wise to quickly reassess. You won’t be alone as many pension funds and their respective consultants will be putting these funds on close watch and likely place them on their sell list. In this instance you, as an individual investor, can likely move much quicker than the larger institutional money managers. Get out now if you haven’t already.

Without patting ourselves on the back we sold PIMCO funds long ago and in our opinion the ‘writing was on the wall’ for quite some time. Even before Friday’s news there were problems at PIMCO. Gross and former CEO Mohamed El-Erian did not see eye to eye and El-Erian left the firm in January. Aside from news like this our main issue was the relative lack of performance in their flagship fund. (PTTRX)

When is the right time to sell a mutual fund?



As always it’s important for both our new readers and in some cases…our existing ones to revisit what we are doing here with this series of articles:


Click here to revisit the first edition of the MPG Core Tactical 60/40 Portfolio.

Here’s the current summary of the MPG Core Tactical 60/40 Portfolio mix, which is updated as of this writing (September 2, 2014).

Click here to compare our portfolio against the benchmark.

The expression of “the writing is on the wall” could not be more appropriate as we inch closer to wrapping up 2014. We work and interact with countless people in the financial services industry ranging from those who manage billions in the most sophisticated manners available, all the way to a retired blue collar worker who wants straight forward investor education and service on how to invest smarter.

What each of these two parties have in common is that they don’t trust tomorrow and all of the warnings about a frothy and dangerous investing environment are as documented as they’ve perhaps ever been.

What adjustments did we make?

The moves we made were as follows:

8/18/14:       Sold entire position of LSOFX (LS Opportunity Fund) @ $118.20 (~$50k total)

8/19/14:       Sold 100 shares of TSLA (Tesla Motors) @ $254.87/share (~$25k total)

8/25/14:       Bought 8,260 shares of MABFX (Merk Absolute Return Currency Fund) @ $9.08/share (~$75k total)

8/26/14:       Bought 1,569 shares of FTGC (First Trust Global Tactical Commodity Fund) @ $31.85 (~$50k total)

With the exception of the Tesla sale our moves this month were all in line with reallocating our exposure to alternative investments. We’ll touch on this more later but let’s first address the sale of a market darling that we haven’t owned for all that long.

The simple rationale behind this move was to take profit on a stock that has returned north of 40% for us since the time we bought it. The reality and likelihood of it running even higher is actually strong but in a case like this it’s critical to maintain some “sell side discipline”. Holding on a trendy stock for a few more months while the broader markets are also closer to the side of overheating is just asking for trouble. We may buy it back but even if takes off for the races again…this old adage will be applicable, “ You never go broke taking a profit.”


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