Consistency = Powerful Gains for
SMI's Upgrading Portfolios

A key investing verse our friends at Crown Financial Ministries integrate into their small group studies is Proverbs 21:5—"Steady plodding brings prosperity" (TLB). I was reminded of this verse as I reviewed the historical performance of SMI's investing strategies in preparing to write this report. Every quarter we review how our model portfolios have fared and present the results in the SMI Performance Table. It's often a challenge to decide exactly which numbers to include in the table, as there is a lot of data to choose from.

Looking at the full picture—quarterly and annual returns, cumulative returns over a broad range of periods, dollar gains and annualized percentages—what really stood out this time was the steady consistency of what the SMI portfolios have accomplished over the last several years. Quarter after quarter, year after year, these strategies have been able to improve on the market's return each period. When those steady gains compound over a period of time, the differences in results become pretty amazing.

But before looking at our first quarter results in detail, let's review for the benefit of newcomers how the performance data that appears here is organized. Across the top of the SMI Performance Table, the portfolio allocations are shown. As you move to the right, the portion of the portfolio devoted to stocks decreases. During good market years this hurts performance; during weak years this helps performance. Over the long haul, higher stock allocations should prove more profitable due to the historical (1) upward bias of the U.S. economy and (2) performance superiority of stocks versus bonds.

The "100% Stocks" section of the table below shows how the results of our two model portfolios compare with the overall market. We expect our Just-the-Basics (JtB) indexing strategy to track the market closely. This passive strategy is particularly attractive to readers looking for a simple set-it-once-a-year-and-forget-it approach. The fact that JtB includes a higher percentage of small company stocks than make up the overall market helps our performance when small company stocks outperform the larger Fortune 500 type companies. That's been the case the past several years, which is the primary reason JtB's recent performance has been better than the overall market, particularly since the market bottom three years ago.

Now, on to our all-stock Fund Upgrading portfolios. These portfolios are more active, clearly attempting to "beat the market." The first quarter of 2006 was very strong for the market as a whole, yet Upgrading was able to more than double the market's performance. How? As the table below shows, SMI's recommended funds outperformed their peer group in each of the five stock risk categories.

Again, this demonstrates the "steady plodding" nature of Upgrading. The superior track record isn't due to just the occasional hot quarter, or a few really strong funds once in a while. Rather, that performance differential is built by the steady, regular outperformance of our recommended funds vs. their peers.

It's interesting to note that in the first quarter, the growth categories really assumed leadership. This is a reversal from the pattern we've seen over most of the past several years with value leading the pack, but it's not totally unexpected. As we noted in the SMI Editors' Weblog last October , Forbes columnist Ken Fisher saw this change coming well in advance. He noted last year that 9-12 months after the yield curve flattens (meaning when short-term interest rates and long-term rates get very close together as they did in the second half of last year), growth stocks typically start beating value stocks and continue to do so until the yield curve returns to normal (meaning there's once again a large difference between short- and long-term interest rates). That was one reason we shifted our 2006 allocations from favoring the value categories, as we did a year ago, to now favoring the growth categories. So far, so good on that score.

Upgrading's long-term track record is a reflection of its ability to gain more than the market during up years, while losing less than the market in down years. Measuring from two important market benchmarks illustrates this vividly. The end of the first quarter marked six years since the market peaked in March of 2000. Looking at the second line in the first table above (100% Stock portfolio), we see that the broad stock market has only barely regained that prior level (using the broader Wilshire 5000 to measure; the S&P 500 is still down roughly 15% from its March 2000 peak).

However, by losing less than the market during the subsequent bear market, then gaining more in the bull market that has followed, Upgraders are a whopping 70.1% ahead of where they stood at the previous market peak. Glancing one line below, we see that since the current bull market really kicked into gear three years ago, overall stock prices have advanced sharply, but Upgrading's gains have been a full 50% higher.

Coming back to the steady plodding idea, the market's advance over the past three years has also fit that description. In fact, we've gone over 800 days now without a 10% correction. The market is closing in on the distinction of being the 2nd longest rally ever without such a pullback. Given that the market normally has that type of correction about once per year, the lack of volatility in the current bull market run has been quite unusual. However, given the long-term track record of Upgrading that we've been discussing, particularly its ability to weather both up and down markets, we can face the prospect of the inevitable correction—whenever it comes—with a great deal of confidence.

If you haven't yet implemented Upgrading into your personal investment strategy, it's worth asking whether you have that type of confidence in your current plan. If not, maybe it's time to give Upgrading a try with at least part of your portfolio. See Upgrading: Easy as 1-2-3  for pointers on how to begin Upgrading on your own, or see Introducing the Sound Mind Investing Fund to learn how to have Upgrading handled for you automatically via the Sound Mind Investing fund.

• SMI Upgrading Beats The Market For 7th Straight Year
• Performance History
• How to Upgrade in Your Retirement Plan 
• Fund Upgrading FAQ
• Editors' Weblog: Overdue for a Correction? 

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