For years, Sheldon Jacobs built up a treasure trove of investment rules to help small investors beat Wall Street professionals. These rules proved so valuable that the newsletter he founded, The No-Load Fund Investor, won a first-place ranking over a 15-year period for risk-adjusted performance.

In the past decade, the rules have changed dramatically because of the wrenching transformation of stock markets and the global economy. Here’s how Jacobs has adjusted his rules for today’s investment climate…


First you have to realize that no matter how giddy investors get from time to time, we’re currently in a long-term bear market that is stifling the overall performance of stocks. This bear market may include cycles of bull markets, but they are followed, and then dominated, by larger bear markets. This easily could last another decade as we slowly work off the excesses of a 20-year bull market that ended in 2000 and a staggering housing bubble that peaked in 2007.

For the next decade, I expect plenty of extreme volatility and annual returns that average perhaps 6% for US stocks. You can smooth out the ride and beat those returns if you follow my new rules.


The old rule: Look at long-term returns, such as 10-year periods or longer, to judge actively managed funds (those that rely on a manager’s decisions rather than tracking an index).

My new strategy: Focus on shorter-term performance periods—three months, six months and one-, three- and five years.

Why it’s necessary: You want to find funds that have excelled in comparison to their peers under the challenging conditions of the past few years. That’s because these types of conditions are likely to continue for some time. They have included the market collapse of 2008…the bullish rallies of 2009 and 2010…and the grinding, volatile markets of 2011 and 2012.

It’s largely irrelevant to look at longer time periods, such as 10 years. In many cases, the current manager was not there for the entire period…or the fund has grown from millions of dollars in assets a decade ago to less manageable billions of dollars now…or one terrific year early on has covered up many years of mediocrity.


The standard rule: Rely on target-date mutual funds, which have been around since the early 1990s, to automatically shift your asset mix to a more conservative stance as you approach and live through your retirement years. These funds have grown tremendously popular in recent years, especially in retirement accounts such as 401(k)s and IRAs.

My new strategy: There are better alternatives that allow you to adjust to changing conditions.

Why it’s necessary: Target-date funds, which theoretically decrease risk by lowering the proportion of stocks in your portfolio and increasing the proportion of bonds and other conservative investments as you grow older, have inherent weaknesses in this extended bear market. First, many fund companies, striving to maintain high returns so they can beat the competition, keep as much as two-thirds of the typical target-date portfolio in stocks even as investors are just a few years from retirement. That’s too aggressive if the market has a big down year. Second, the funds ignore current market conditions when deciding on allocations.

Better: “Asset-allocation” funds own both stocks and bonds but have more flexibility to vary allocations depending on market conditions. For example, many of these funds are positioned heavily in stocks now because the managers consider this a better environment for stocks than bonds. But the funds can make changes if the outlook shifts—for instance, if the managers sense that the market is likely to tank soon. This makes a lot more sense to me and exposes you to less risk over the long run.

Important: Asset-allocation funds are best suited for tax-deferred or tax-exempt retirement accounts rather than taxable accounts because they tend to generate large amounts of taxable income.

Attractive asset-allocation funds now…

Fidelity Four-In-One Index (FFNOX). This fund shifts allocations among four Fidelity index funds that give you broad exposure to large- and small-cap US stocks, foreign stocks and bonds. Its recent allocations lean heavily toward US stocks and keep just about 15% of the portfolio in bonds and cash. Performance: 10.5%.*

T. Rowe Price Balanced (RPBAX) invests in a mix of stocks as well as actively managed in-house funds such as T. Rowe Price Real Assets and T. Rowe Price High Yield. The fund has about one-third of its portfolio in bonds and cash and the rest in US and foreign stocks. Performance: 10.6%.


The old rule: Use foreign stock funds to diversify your portfolio and reduce your overall risk. The idea was that domestic and foreign funds moved independently of each other.

My new strategy: Continue to use foreign funds—especially those focusing on emerging markets—as potential growth engines in your portfolio, but don’t expect to get as much diversification benefit as before or to reduce your overall portfolio risk.

Why it’s necessary: As the world continues to grow more economically interconnected, returns in the US and overseas tend to move in the same direction. But annualized returns of emerging-market stocks, although more volatile, have been double those of developed-market stocks over the past 10 years, on average, and will continue to do better. I keep about 10% of my overall portfolio in developed-market foreign stocks and 5% in emerging-market stocks.

Attractive now…

iShares MSCI EAFE ETF (EFA) invests in nearly 1,000 stocks from 22 developed markets outside Canada and the US. Performance: 3.2%.

Vanguard Emerging Markets Stock Index Fund (VEIEX) tracks more than 800 stocks. Performance: 6.9%.


The old rule: Use traditional index funds as the core of your portfolio because of their unbeatable low costs.

My new strategy: If you want to use index funds, switch 50% of the assets that you hold in them to “fundamental” index funds.

Why it’s necessary: These new index funds perform better in bear markets because they are relatively light on high-flying stocks that can easily plummet. If you own a traditional fund that tracks a well-known major index such as the Standard & Poor’s 500 stock index, it is “capitalization-weighted,” which means that companies whose overall stock market values are greatest and rising quickly tend to dominate the index. That’s great in bull markets because the more that a stock price goes up, the bigger its presence in the index. But it can be risky in bear markets or when a particular stock that dominates the index goes sour. Apple, for instance, whose stock price has soared, takes up a hefty 4.9% of the entire S&P 500 stock index.

Capitalization-weighted indexing can get swept up in manias, bubbles and overreaction to good news. Fundamental indexes, on the other hand, weigh stock holdings by measures of a company’s value that include dividends, cash flow, sales, book value and price-to-earnings ratio. The index weightings don’t change dramatically just because a company’s stock price rises rapidly.

Attractive now…

PowerShares FTSE RAFI US 1000 ETF (PRF) is a large-cap index fund that currently is dominated by stocks such as AT&T and Exxon Mobil and allocates just 0.6% to Apple. Performance: 13%.

PowerShares FTSE RAFI US 1500 Small-Mid Portfolio ETF (PRFZ). Performance: 14.6%.

Schwab Fundamental International Large Company Index (SFNNX). Performance: 0.1%.

Schwab Fundamental Emerging Markets Index (SFENX). Performance: 4.7%.

*All performance figures are three-year annualized returns as of August 15, 2012.