(PUB) Investing 2015

and a cautious and systematic Federal Reserve raises rates slowly. As Treasury bonds are the most sen- sitive to changes in interest rates, I’m still leery of bond index funds. As I’ve highlighted several times over the past few years, government bonds dominate in Total Bond Market. Treasury and agency bonds make up 45% or so of the portfolio, and government-backed mortgage bonds soak up another 15% or so. With about 60% of the portfolio in the most interest-rate sensitive bonds, there could be more risk here than inves-

closer to its 2.51% year-end SEC yield than its 25.3% return in 2014. Rising interest rates aren’t all bad, of course. The silver lining is that investors who are reinvesting their income yields in bond funds month after month are buying more shares at lower prices. Just be aware that, given how low yields are today, it will take more time than most investors are used to for those higher yields to make up for falling prices. At the same time, however, I don’t see yields rising quickly or prices dropping precipi- tously in 2015 as inflation remains muted

OUTLOOK FROM PAGE 7 >

which plots the yield of Total Bond Market against its annualized return over the next five years. It’s not per- fect, but that starting yield is pretty darned close—and it’s even closer for returns over 10-year periods. With an SEC yield of just 1.99% at year-end, it is more reasonable to expect bond market returns closer to 2% over the next five years than the 5.8% gain of 2014. And for Long-Term Treasury, future returns are more likely to be

PUNDITS A Collective Shudder

Let’s start with the Barron’s collection of 10 strategists who forecast a 10-year Treasury yield of anywhere from 2.90% to 3.75% for year- end 2014. And we can add in Schwab’s Liz Ann Sonders, who gave herself plenty of room predicting a yield of 3.00% to 3.50%, as well as FTAdvisors’ Brian Wesbury, who said the 10-year would move to 3.65% and that the Dow and S&P would earn gains of 17.6% and 16.3%, respectively. (They came in with much more muted gains of 7.5% and 11.4%, while the 10-year ended 2014 at 2.17%.) Ned Davis, founder of Ned Davis Research, gets a lot of ink for his data-crunching, and because he says Presidential second terms have seen average declines of 21%, he posited that 2014’s correction was “more likely to be in the 20% range.” The worst decline we saw all year was in early February, when the Dow fell to 7.3% below its then all-time high. I always wonder about those pundits who profess to be able to choose one or two funds or indexes that you should own for a calendar year. Matt Hougan, from Index Universe, picked three ETFs, includ- ing one that hedged foreign markets (DBEF), one that tracked African stocks (AFK) and one that tracked muni bonds (MUB)—not exactly a balanced portfolio by any means. Averaging the performance of those three picks leaves investors who took his advice with a 2.4% loss. In one of the more convoluted explanations for January 2014’s stock market decline of more than 3% and a further rationale for why the rest of the year would see even more selling pressure, the Townsend Group’s Red Jahncke, a management consultant, explained in Barron’s that after taking gains in late 2012 to grab hold of lower tax rates, investors who replaced their shares had to wait until late 2013 or early 2014 to sell those new shares, which had by then gone “long- term” and would continue to do so as the year progressed, making 2014 “more volatile” as well. Let’s just say that this theory, like the one that says January’s performance predicts the year’s performance, came up lame. Finally, January’s loss so rattled some investors that Mark Hulbert took to MarketWatch to give credence to a chart that showed “eerie paral- lels between the stock market’s recent behavior” and its behavior before the 1929 crash. Hulbert cited the oft-quoted Doug Kass of Seabreeze Partners as being a big believer. Needless to say, it was hooey.

“We don’t like their sound, and guitar music is on the way out.”

— Decca Recording Co. rejecting the Beatles, 1962

AS ALWAYS, I’VE DONE MY BIT, on page 5, to show you where some of my thinking went astray in late 2013 and early 2014. Now it’s time to see who else might have been just a bit “off” in their prognostications. Amazingly, you won’t find too many media outlets going back and reviewing all the blather that counts for news and is foisted upon inves- tors as the year turns. Believe me, I have my eye out for what’s being said right now, but what about those “experts” we heard from a year ago? Let’s start with last year’s winner of the inaugural Roubini Award , named after the famed playboy economist from NYU who has predict- ed more recessions than the Boston Red Sox have won World Series (in a shorter period of time). First, I should mention that Nouriel Roubini almost grew a pair of bull’s horns last year as he backed away from some of his most bearish comments. Maybe he’s afraid of winning his namesake prize. In the meantime, 2013 Roubini Award winner, A. Gary Shilling, stuck to his guns and misfired again, claiming that “corrected for inflation [the S&P 500] remains in a secular bear market that started in 2000” and that in 2014 we’d be in for “more of the same, dull, slack 2% real GDP growth.” Well, I’m pretty sure Shilling isn’t a weather forecaster, so he couldn’t have known about the 2.1% decline in GDP in Q1. But even if we give him that one, real GDP has advanced at close to 2.5% over the past 12 months, including that disastrous, weather-induced first-quarter pullback. And as for the S&P 500 index, well, it closed the year up 11.4%, and at 2058.90, it’s just 24 points, or 1.2%, below August 2000’s inflation-adjusted high of 2080 or so. I wouldn’t call that a bear market. Now, as for the 2014 Roubini Award winner, I have to say that while no one individual stood out last year, the collective of Wall Street pun- dits who, almost to a man and woman, whether due to recency bias or simply bad strategizing, conjured up higher and higher interest rates for 2014 should take home the prize. Yes, I join that esteemed group, but I am in unbelievable company.

12 • Fund Family Shareholder Association

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