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As a result, future returns are more likely, in my opinion, to be somewhat subdued. Here are my overall allocation recommendations, as subdivided into 3 rough categories based on one's self-estimated tolerance for risk. Asset Current Last Qtr. Growth Categories Okay, fans of Large Growth funds, you've been consistently beating Large Value funds when looking at annualized past five year returns every January going all the back to Jan.

That's quite a string. This means if you overweighted the average Large Growth fund as early as Jan. What gives, and can the streak continue? Large Growth funds tend to contain heavy doses of Technology stocks as well as Consumer Cyclical stocks.

Large Value funds are particularly attracted to Financial Services stocks, with more of a commitment toward Energy and Utility stocks. Both Technology and Consumer Cyclical have done quite well over the last 10 years, Utilities, Energy, and especially Financials, have not.

As you probably are aware, Energy stocks have done particularly poorly over the last two years, while Financials took a particularly severe beating during the financial crisis and have been much slower to recover strongly since then compared to stocks as a whole.

I have been overweighing Large Value over Large Growth for several years now which, up to now, hasn't paid off. But, according to my proprietary research see article in left column on page 1 , while both categories should do adequately in the years ahead, Large Growth still comes out a little better on my list of most recommended US stock categories.

The biggest question mark for value funds appears to be whether financial stocks, often their biggest component, can bounce off a relatively underperforming , not to mention whether energy and utility stocks held in lesser amounts, can get back to anywhere near positive returns.

In light of the continuing somewhat iffy prospects for Large Value funds, I am dropping my recommended allocation to I am also dropping my allocation to Vanguard Financials since our Large Value holdings already cover this sector.

Given the stronger prospects for most international funds as described in the companion article page 1 as compared to U. So, it might appear that I am running the risk of acting "prematurely" by going to an even higher international recommendation than before.

This is always the chance one takes when one starts to favor underperforming categories under the assumption that they are "due" to turn things around.

But my research suggests that more frequently than not, it is usually more important to recognize potential undervaluation in a category than to always wait for strong positive momentum trends before investing. Thus, while emerging market stocks currently have strong negative momentum, my research suggests that they offer among the best prospects for longer-term investors along with some badly beaten up sector funds , but both mainly for Aggressive investors.

However, for US investors, the increase in the value of the dollar vs. Our bond fund recommendations remain highly similar to last quarter's recommendations. We are increasing our allocation to the Vanguard Intermediate-Term Tax-Exempt Fund as muni bonds seem to be one of the best options for both safe and decent after-tax yields.

Since gradually rising interest rates could potentially hurt bond fund prices, we are sticking with short and intermediate term maturity funds. Long-term bond funds have generally done a little worse in than short and intermediate term funds.

The two funds are the same but have different minimums; select DBLTX if possible because of lower expense ratio. Let me summarize what that Sept. Since we are soon approaching overvaluation of almost all stock fund categories, the above recommendations should be considered valid for the short-term only.

Once overvaluation of a fund category is reached, likely as soon as Oct. Investors who wish to avoid potential underperformance of stock categories, or who wish to potentially find "safer" investments, might consider re-allocating away from the most overvalued categories and into less potentially dangerous categories; however, investors who intend to hold their current fund choices for the next five years or longer should consider staying put.

Just as there are hardly ever any totally right vs. So how did things turn out? Foreign stock funds, especially emerging market funds, have performed negatively over the period, with the exception of those investing in Japan. However, it did have an apparent negative effect starting the second year.

Since the end of Sept. If you review the Sept. It is interesting to note, though, that stock markets in Europe have actually done well since we made our recommendation. And, two of the fund categories I expected to do relatively worst, namely -mid-cap -real estate didn't underperform the pack as I expected. However, small-cap stocks did underperform. I still believe, with several exceptions, that as more time passes, many of the above predicted trends will play out more in line with the expectations expressed my in my Oct.

This brings me to a more detailed look at which stock fund categories look the most and least promising right now , along with my specific new Stock and Bond Model Portfolios, which are all discussed beginning in the right hand column on page 1.

I wish everyone a Happy New Year and hope that it is a better year than when it comes to investing. Tom Madell, Publisher If not currently a subscriber and wish to sign up to receive notification of new Newsletter postings as well as infrequent, but crucial, investment Alerts, click here.

Most and Least Promising Stock Funds Categories, continued from page 1 My most favored and least favored stock category selection procedures do not employ the use of economic variables, such as GDP, level of interest rates, etc. Your registration may take up to 15 seconds to process.

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