Mid Year Review

Let me one of the first to wish you a Happy and Safe Independence Day. This newsletter will review performance for the first half of 2010 and look at the second half. The first paragraph is the Vanguard weekly recap. The last paragraph is a brief message about Independence Day.

Vanguard Weekly Recap

If the recent reports are any indication, the economy has developed a limp in its stride in its jog toward a slow recovery. The number of employed workers fell for the first time this year despite a small drop in the unemployment rate. Also in a reversal of recent trends, consumer confidence, manufacturing growth, construction spending, and factory orders were all down. The news wasn't all bad, as personal income, saving, and spending rose. It was an even more dismal week for the financial markets. For the week, the S&P 500 Index fell 5.0% to 1,023 (for a year-to-date total return—including price change plus dividends—of about -7.4%). The yield of the 10-year U.S. Treasury note declined 12 basis points to 3.00% (for a year-to-date decrease of 85 basis points).

Mid-Year Review Mutual Fund Performance

I have researched and selected 6 mutual funds as core holdings that I believe to be top performing funds. These funds fall in the categories of Corporate Bond, Mortgage Bond, International Stock, Canada Stock, Mid-Cap Value Stock, and Mid-Cap Growth to provide a diversified portfolio. So how did they do relative to a broad index like the S&P 500? I am pleased to report that overall the funds did very well.

The bond funds did great, gave a positive yield and easily beat the S&P 500. However, it is not fair to compare a bond fund to stocks as they are in different categories.

The stock funds that more compare with the S&P 500 are the Canada, Mid-Cap Value, and Mid-Cap Growth funds. I am very pleased to report that each of these funds did beat the S&P 500 index.

The international fund was beaten by the S&P 500 index as it was hurt by currency valuations. However, it is not fair to compare an international fund to this stock index as they are in different categories.

Mid-Year Review Volatility Index

I am disappointed in my performance relative to this metric. The good news is that I did discover a linkage between the Volatility Index, VIX, to stock performance. The bad news is that I discovered it in the midst of the storm.

The disappointing thing is that when the VIX returned to a normal level, so that I returned accounts to a normal position, the Wall Street Spin Doctors went into over-drive. The message changed over-night from everything is good and getting better to things are terrible and get out now. This shift in sentiment drove the VIX higher and stock prices lower, very frustrating for me.

During May, the VIX level hit a level only surpassed during 2008. In June, it returned to normal value of about 25, then jumped to 35 in a little over a week and is now about 30 and going down.

Second Half Strategy

So now what do we do; buy, sell, or hold? I am holding current positions and continue to buy on a routine basis to take advantage of the lower prices. This looks like things are on sale, a good buying opportunity for a longer term investor, and I like buying on sale. The reasons are:

* I perceive that stock prices are driven by performance of corporations, rather than job numbers, and larger corporations seem to be doing better. As earnings are reported, starting next week, this will become clear.
* I perceive that this recovery is acting fairly normally and this was also stated this week by former Fed Chairman Greenspan.
* For this phase of an economic business cycle these portfolios make sense and typically have rewarded longer term investors.

With this said, I have no crystal ball and can not predict the future. I look at data and try to make the best possible decisions. My goal is to buy good performing mutual funds that also have a minimal amount of fees, to give the best result.

Independence Day Message

Thank you to all of the Veterans and members of the Armed Forces. We owe our freedom to your efforts and we need to remember them and thank them.

We get to celebrate because 230+ years ago a bunch of dedicated people took on the best soldiers and sailors in the world, the British Army and Navy, and beat them. In theory, we should not have won the Revolutionary War. The British military viewed us as a bunch of 2nd class nobodies to be crushed. It is incredible what a person can do with dedication, integrity, and a faith in God.