Model Portfolios: An all-stock strategy pays off big

August 9, 1999

Ten months ago, three investment pros told us where they'd put $50,000. The most aggressive approach is way out front.

An all-stock strategy pays off big

Ten months ago, three investment pros told us where they'dput $50,000. The most aggressive approach is way out front.

Since July 1998, we've been following the investments of three financialplanners who each put "play" money into two portfolios: one witha five-year time frame, the other with a 20-year horizon.*

Our last update showed Fred Dowd's aggressive, all-stock portfolios wellahead of the other pros' portfolios, which include bonds and invest throughmutual funds almost exclusively. Dowd's picks have pulled even further aheadof the competition's since then. They've handily outpaced the Standard &Poor's 500 Stock Index, too. That benchmark rose 17.6 percent from July31, 1998, through May 31, 1999. Some of the credit for stomping the S&P500 goes to Dowd's emphasis on supercharged technology stocks such as AmericaOnline and Cisco Systems.

So far, neither of our other experts has come close to matching the S&P500. Both of Paula Hogan's portfolios have risen faster than inflation,but only one of Robert Venezia's has--and then only slightly.

Of course, these are only short-term returns. Moreover, Dowd's narrowlyfocused portfolios involve greater risk than the diversified ones of Hoganand Venezia. Some investors will be willing to take a roller-coaster ridefor a shot at Dowd's results, while others will prefer the much smoother,albeit considerably less exhilarating journey offered by the other featuredportfolios. Most of you, we suspect, will be somewhere in between.

In our Oct. 25 issue, we'll wrap up our model-portfolio series with alook at one full year's results. Since July 1998, we've been following theinvestments of three financial planners who each put "play" moneyinto two portfolios: one with a five-year time frame, the other with a 20-yearhorizon.*

Our last update showed Fred Dowd's aggressive, all-stock portfolios wellahead of the other pros' portfolios, which include bonds and invest throughmutual funds almost exclusively. Dowd's picks have pulled even further aheadof the competition's since then. They've handily outpaced the Standard &Poor's 500 Stock Index, too. That benchmark rose 17.6 percent from July31, 1998, through May 31, 1999. Some of the credit for stomping the S&P500 goes to Dowd's emphasis on supercharged technology stocks such as AmericaOnline and Cisco Systems.

So far, neither of our other experts has come close to matching the S&P500. Both of Paula Hogan's portfolios have risen faster than inflation,but only one of Robert Venezia's has--and then only slightly.

Of course, these are only short-term returns. Moreover, Dowd's narrowlyfocused portfolios involve greater risk than the diversified ones of Hoganand Venezia. Some investors will be willing to take a roller-coaster ridefor a shot at Dowd's results, while others will prefer the much smoother,albeit considerably less exhilarating journey offered by the other featuredportfolios. Most of you, we suspect, will be somewhere in between.

In our Oct. 25 issue, we'll wrap up our model-portfolio series with alook at one full year's results.

*See "Where the pros would put $50,000," Nov. 9, 1998 (availableat www.memag.com)

Robert Venezia, EVEREN Securities Inc. Encino, CA

*MFS Massachusetts Growth Stock Fund--Class A was substituted for MFSMassachusetts Investors Trust--Class A on 3/1/99. In the five-year portfolio,$4,982 was initially invested in the substitute fund; in the 20-year portfolio,the initial investment totaled $7,474.

What happened?

These portfolios' poor performances might make you question Venezia'schoices, but generally he stands behind them.

"Overall the long-term investor is receiving diversification andlow risk," he says. "And the long-range performance history andmakeup of these funds speak for themselves.

"However, the bond and international stock funds in the portfoliosstill haven't recovered completely from the financial meltdown that hurtAsian and other emerging markets last year. And since foreign markets remainuncertain, I'd reduce exposure to them. To do so, I'd replace BT InvestmentInternational Equity Fund in both portfolios with Janus Worldwide, whichhas about a third of its money in American companies.

"It's important to remember," Venezia adds, "that youneed to give your investments years, not months, to work."

*See "Where the pros would put $50,000," Nov. 9, 1998 (availableat www.memag.com).

Paula Hogan, Hogan Financial Management, Milwaukee

What happened?

While Hogan's returns were far from spectacular, she points out that"the tax-exempt bond funds continued to grow more rapidly than inflation,with little risk, and free of federal income tax. As a result, the five-yearportfolio is maintaining purchasing power for its high-tax-bracket owner.

"The stock funds in the long-term portfolio reflected world markets.Large-cap domestic stocks again moved ahead. Small-cap and internationalstocks have begun to rebound, perhaps indicating a change in market favorites.Because the long-term portfolio is diversified, the investor is well-positionedfor whatever the markets bring, including continued outperformance by large-capdomestic stocks, faster growth in a different sector, or even a worldwidedecline in stocks.

"Diversified portfolios will never do as well as the best-performingasset class," Hogan notes, "but they'll never sink as low as theworst-performing class. By protecting against downdrafts, diversified investorsmuffle volatility and increase long-term returns. This is tough to rememberduring a bull market, but it's important to understand that the only predictablepart of markets is unpredictable change. That's why I don't recommend concentratingyour bets on a narrow market segment."

Fred L. Dowd, The Fred L. Dowd Co., Casper, WY

*Dividends paid through 5/31/99 are held in a cash account awaitinginvestment.

What happened?

Many companies in Dowd's portfolio dramatically outperformed the market,because "their management teams continue to effectively execute theirbusiness plans, and thus gain market share," Dowd says. "Thesecompanies consistently innovate products and services. The managements aresuperb at developing better versions of their current products before anothercompany does so.

"The worst performer, Windmere-Durable Holdings, has trudged backup since the last update," Dowd notes. "The company had an earningsdisappointment that caused its share price to drop, but has made some improvementsthat have impressed investors.

"I still advocate an all-stock--or at least an 80 percent stock--portfoliofor nearly all investors," Dowd says. "Our economy's fundamentalsare strong, which should keep the market climbing. Investors will benefitfrom buying high-quality growth companies."

Totals for some holdings in all portfolio tables are approximate, dueto rounding. All dividends are reinvested.Sources: Morningstar, Dow Jones

By Leslie Kane, Senior Editor

Editor's Note: Additional research for this series has been providedby Fact Checker Vicki F. Brentnall.

Leslie Kane. Model Portfolios: An all-stock strategy pays off big. Medical Economics 1999;15:100.