Sunday, November 27

Week 21 - Recent Performance of Growing Perpetuity Index

Situation: A new business cycle started on Oct 1, 2009 (when the S&P 500 Index 250-day moving average started moving up). We’re 8.5 quarters into the new cycle, long enough to assess total returns for the 12 companies in our Growing Perpetuity Index (Week 4).

We’ll examine the outcome from investing $100 at the start of each quarter to buy XOM, WMT, PG, CVX, IBM, JNJ, KO, MCD, UTX, MMM, NSC, NEE and re-invest dividends received from each. We’ll also assume those investments are cost-free, to allow us to compare our investment with the essentially cost-free Vanguard Admiral S&P 500 Index Fund (VFIAX) that is used by Warren Buffett as the benchmark for all asset classes. We will assess raw returns, unadjusted for management expenses, trading commissions, inflation, or taxes. The Vanguard fund has an expense ratio of merely 0.06%/yr because it requires a large initial investment of $10,000. We will also compare those returns with two balanced funds we have assessed previously, i.e., the Blackrock Global Allocation A (MDLOX) and Vanguard Wellesley Fund (VWINX).

Calculating our results as of 11/15/11, the attached <spreadsheet> is a summary of returns. Only 4 stocks under-performed the S&P 500 Index (PG, JNJ, MMM, and NEE) but all 4 showed positive returns for the ~2 yr period we examined. A total of $10,800 was invested ($900 in each of the 12 stocks), which grew to $12,797 representing a total return of 16.0%/yr (vs. 9.32%/yr for VFIAX and 2.73%/yr for the Consumer Price Index). That out-performance is not surprising given that the Growing Perpetuity Index includes iconic brands that are long-term dividend growers and typically yield more than the S&P 500 Index. Moving forward, we have no way of knowing which of the 12 will disappoint but we do know from back-testing that it is unlikely to be these same 4 stocks. For example, during the decade prior to the recent recession the under-performers were Coca-Cola (KO), Norfolk Southern (NSC), and 3M (MMM). After the recession ended, KO and NSC became strong performers. The performance of MMM is likely to improve if more international markets, like Japan’s, emerge from recession. Therefore, the ITR investment recommendation we will make is that you should regularly invest the same amount in every stock of the Growing Perpetuity Index, even if it only happens once a year. If that’s not practical, we encourage you to research the companies in the ITR Master List and purchase at least 4 DRIPs. Keep in mind that new companies will move onto the list (while others may be removed) on a quarterly basis, whereas the 65 companies in the Dow Jones Combined Average (from which the Growing Perpetuity Index companies are selected) rarely change. If your first 4 DRIPs are XOM, WMT, MCD, and IBM, you will have a solid investment.

Of the funds we mentioned earlier, one (MDLOX) under-performed the S&P 500 Index while the other (VWINX) more than kept up. Treasury notes (VFIUX) also did well.

Bottom Line: Investing regularly in as many of the Growing Perpetuity Index stocks as possible is almost certainly a way to “beat the market”. But a low-cost, bond-centric balanced fund like VWINX will also allow you keep up with the market without all the fuss and worry.

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