Happy 2013 dear readers!

I’m pleased to report that Pro-Folio Original returned 9.68% for the year ending December 31, 2013, contributing to a 13-year average of 8.26% per year. Dividends from SPY, EFA, IEF, and IYR during the periods in which these investments were held, accounted for 1.31% in 2013. Market value increases accounted for the remainder of the return.

The S&P 500 index alone (as represented by SPY) returned 32.2% for the year, while the “buy-and-hold” portfolio holding the exact same investments as Pro-Folio returned 7.79% for 2013, about half a percent less than Pro-Folio.

table of 2013 returnsOver the last 13 years, Pro-Folio Original has averaged 8.26% annual return versus 5.92% average annual returns for the identical “Buy and Hold” portfolio. Pro-Folio has delivered an average 2.0%+ better performance every year, with almost no downside risk. While the Buy and Hold portfolio had 3 down years with two of those being very painful (-30%,  -10%, and -0.07%), Pro-Folio had only two slight down years (-0.06% and -0.35%).

Pro-Folio is designed to reduce or eliminate the effects of market downturns while performing well in “bull” market periods. Don’t let your financial advisor tell you to “stay invested” while you ride the market to the bottom. You can follow the Pro-Folio model to avoid down-market heartaches and sleep well at night.

Pro-Folio PLUS returned 3.0% for the year, contributing to a 5-year average of 3.24%. (Pro-Folio PLUS is a paid service that offers a more international, less US Dollar-centric portfolio.) Pro-Folio PLUS has underperformed Original over the past few years because the US Dollar has remained strong. In an environment where the value of the US Dollar is declining, Pro-Folio PLUS is designed to outperform Pro-Folio Original.

The end of 2013 marks 41 years of back-tested data for the Pro-Folio Original strategy, during which time the portfolio experienced only 2 years of loss, 2008 and 2011. In each year, the strategy lost less than 1%.

13-Year Chart

In evaluating Pro-Folio performance, as with any investment, it is important to look at performance over time, in both up markets and down markets. The chart below compares growth of $10,000 from 2000 through 2013. The methods compared are Pro-Folio Original, Pro-Folio Plus (since 2009), the S&P 500 (SPY), and a “buy and hold” portfolio holding the exact same investments as Pro-Folio Original, but never selling them:

2013 Pro-Folio Returns GraphSince 2000, Pro-Folio Original has significantly exceeded the performance of the “buy-and-hold” portfolio of the exact same investments. As you can see in the above chart, Pro-Folio tends to perform much better than buy-and-hold in down markets because the strategy prevents your portfolio from “riding down to the bottom” when markets turn ugly. On the other hand, Pro-Folio sometimes may miss out on some of the early-phase growth immediately after an asset class “bottoms out” in price. This happens because the model requires the asset class to demonstrate a certain amount of upward momentum before signaling a buy to “get back in.”

In years like 2012 when the US stock market turned positive early on and had a strong run in January before the Pro-Folio method signaled a buy, the Pro-Folio return for that asset class may be lower than the buy-and-hold return.

Remember to Re-balance!

Because different investment funds perform differently each year, their relative size in your portfolio may get out-of-whack over time. It is important to rebalance annually, which means selling a little bit of the funds that have done better, and buying a little bit of the funds that have done worse, so that each investment remains an equal portion of your portfolio. You don’t want to end up with a portfolio that is 60% SPY and 40% everything else! That exposes you to too much risk if SPY takes a hit.

Divide your total portfolio value by 5, and that is the amount that should be invested in each asset class after your rebalancing trades are completed. The dollar difference between your current amount invested in each class and that rebalanced target amount, is the dollar value of what needs to be bought or sold to make each investment about equal with the others.

Signing Off

Keep a close eye on your money this year! Bond investments are not likely to do well as the Fed continues to try to find a way to exit its quantitative easing strategy without cratering the markets. Unfortunately it is already too late: whenever the Fed stops or slows buying bonds, bond prices are going to decline and the risk markets (stocks) are not going to respond well either.

Fortunately for us, the Pro-Folio model has proven its worth over 41 years including the 2008 market crash, so we can continue to follow it precisely and expect that the value of our holdings will be preserved.

If you want to get the PDF booklet showing you how to implement the Pro-Folio Original trading model on your own, click here.

If you want to learn more about the Pro-Folio PLUS upgrade portfolio, click here.

I wish you a very joyful and prosperous 2014!

Matt Willson

Leave a Reply

Your email address will not be published. Required fields are marked *