Vanguard ETF: | 7.4%* | ||
Diversified Core: | 8.1%* | ||
Six Core Asset ETFs: | 7.3%* |
Articles on IWP
- Investing with Styles Can Pay off
07/09/2010
Portfolio construction consists of the following steps
- Decide personal risk profile which determines the target allocation in risk assets.
- Decide asset allocation method: strategic or tactical or both (strategic does not change target asset allocations while tactical can alter allocations more actively)
- Decide target allocation for each asset in a strategic asset allocation
- Periodically rebalancing portfolios
For a portfolio using strategic asset allocation, with long term target allocation being fixed (and only changed when major events such as approaching to retirement and children college education spending, for example), one can further enhance a portfolio return and reduce the risk by rebalancing and fund selection in an asset class. It is reported that adopting proper timing and way to rebalance a portfolio can improve return and reduce risk (see Daryanani opportunitstic rebalancing article). In this article, we focus on fund selection.
In a well designed portfolio for retirement plans (401K or IRA), it is a popular practice to have funds with various style exposures. In a stock/equity asset, a fund style is defined as value style (growth/blend/value) and size style (large/mid/small cap). The Morningstar 9 boxes of styles are essentially the combinations of the 3 value and 3 size styles. In a fixed income asset, a fund style is a combination of credit risk (junk/investment grade) and interest rate risk (short/intermediate/long) for corporate bonds or a just interest rate risk for treasury bonds. In an actively managed portfolio, it is a well recognized and widely practiced method to select funds based on style rotation to improve a portfolio alpha or return. For example, in an article published in Journal of Asset Management (May, 2007), B. Arshanapalli , L. Switzer and K. Panju concluded that active multi-style rotation strategies can be devised to outperform the best performing buy-and-hold portfolio.
MyPlanIQ maintains an index fund based plan or an ETF based plan using candidate funds based on those in a lazy portfolio proposed by Fund Advice Paul Merriman and maintained by MarketWatch.com (called Fund Advice Ultimate Buy and Hold Portfolio) (see here for the independently tracked portfolio on MyPlanIQ.com). The candidate funds and the original allocation are as follows
Index ETF Allocation Vanguard Interm-Tm Trs (VFITX) iShares 3-7 Year Treasury (IEI) 20% Vanguard Short-Tm Trs(VFISX) iShares 3-7 Year Treasury (SHY) 12% Vanguard Intl Val (VTRIX) iShares MSCI EAFE Value Index (EFV) 12% Vanguard Dev Mkts (VDMIX) iShares MSCI EAFE Index (EFA) 12% Vanguard Inflation-Prot (VIPSX) iShares TIPS Bond (TIP) 8% Vanguard Small-Cap Idx (NAESX) iShares Russell 2000 Index (IWM) 6% Vanguard Small-Cap Val (VISVX) iShares Russell 2000 Value Index (IWN) 6% Vanguard Value Idx (VIVAX) iShares Russell 3000 Value Index (IWW) 6% Vanguard 500 Index (VFINX) SPDR S&P 500 (SPY) 6% Vanguard Emerging Mkt (VEIEX) iSharess Emerging Market Stock (EEM) 6% Vanguard REIT Idx (VGSIX) iShares Dow Jones REIT Index (IYR) 6% The funds cover five asset classes: U.S. Equity, International Equity, Emerging Mkt Equity, U.S. REIT and Fixed Income. They have various style exposures for U.S. stock market (equity), International Stocks and Fixed income.
MyPlanIQ Strategic Asset Allocation (SAA) selects funds with the best risk adjusted returns for each asset class when rebalancing. The following table compares the Strategic Asset Allocation (SAA) moderate portfolios in both index fund and ETF plans as well as the original portfolio (both MyPlanIQ SAA moderate portfolios have 40% allocation in fixed income). We also include the strategic asset allocation moderate portfolio in MyPlanIQ Five Core Asset ETF Plan that consists one fund for each asset class.
As of 7/2/2010
Portfolio 1 Yr Return 3 Yr Return 5 Yr Return Since 12/2000 FundAdvice SAA Moderate Index Funds 17% -1.0% 5.1% 7.4% FundAdvice SAA Moderate ETF 16.7% -2.2% 4.8% 7% FundAdvice Buy and Hold Index Funds 14.5% -2.4% 4.1% 5.7% Five Core SAA Moderate 16.9% -3.4% 3.93% 5.6% From the above table, we can observe:
- Diversification over styles improves return (FundAdvice Buy and Hold vs. Five Core SAA Moderate).
- Style rotation adds 1.3-1.7% returns over buy and hold (SAA Moderate ETF or Index Funds vs. FundAdvice Buy and Hold).
The above observations are consistent across thousands of plans MyPlanIQ maintains. We should also point out that better fund/style selection does not alter the overall portfolio risk allocation, which is a major advantage over an actively managed tactical asset allocation portfolio.
At the moment, for U.S. stocks, MyPlanIQ SAA favors small cap (IWM), small cap value (IWN). For fixed income, it favors Inflation-protected treasury (TIP).
labels:investments,IRA,401K,
Symbols:vti,spy,veu,efa,vwo,eem,iyr,icf,vnq,dbc,gsg,bnd,agg,tlt,lqd,tip,iwb,oef,iwd,iwo,iwm,ijr,iwn,iwp,iwr,ijh,iws,dvy,iwc,efv,iww,iwv,iwz,VFITX,VFISX,VTRIX,VDMIX,VIPSX,NAESX,VISVX,VIVAX,VFINX,VEIEX,VGSIX,
- Aflac Incorporated 401(k) Savings and Profit Sharing Plan Report On 12/03/2010
12/03/2010
This report reviews Aflac Incorporated 401(k) Savings and Profit Sharing Plan plan. We will discuss the investment choices and present the plan rating by MyPlanIQ. Current economic and market conditions are discussed in the context of the investment portfolios in the plan. We will then show how participants in Aflac Incorporated 401(k) Savings and Profit Sharing Plan can achieve reasonable investment results using asset allocation strategies.
Plan Review and Rating
AFLAC Inc (Ticker:AFL) has the "Aflac Incorporated 401(k) Savings and Profit Sharing Plan".
Aflac Incorporated 401(k) Savings and Profit Sharing Plan's 401K plan consists of 11 funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income. The list of minor asset classes covered:
Foreign Large Blend: EFA, VEU, GWL, PFA
Intermediate-term Bond: AGG, CIU, BIV, BND
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
Large Growth: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
Large Value: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
Mid-cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW
Moderate Allocation: AOM
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
As of Dec 2, 2010, this plan investment choice is rated as based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:
Diversification -- Rated as (35%)
Fund Quality -- Rated as (33%)
Portfolio Building -- Rated as (36%)
Overall Rating: (35%)Current Economic and Market Conditions
We have experienced an uncertain 2010: plenty of worries on whether the US economy will climb out of the great recession and recover.
- The Federal Reserve embarked on Quantitative Easing II (QE2) to stimulate the economy.
- The housing market is still at its low but largely stabilized.
- The unemployment rate is stuck at 9%.
Americans continue to face an uncertain future, given (among others) the high unemployment rate, large federal and local government debts and global trade imbalance. With such an economic backdrop, the stock and debt markets are going to be volatile. Despite this, markets have been resilient and appear positioned to rebound.
In this market it is even more critical to properly diversify and respond market changes. MyPlanIQ offers two asset allocation strategies: strategic and tactical asset allocation strategies ( SAA and TAA for participants in Aflac Incorporated 401(k) Savings and Profit Sharing Plan).
Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.
Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.
Portfolio Discussions
The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 3 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:
US Equity: (SPY or VTI)
Foreign Equity: (EFA or VEU)
Fixed Income: (AGG or BND)
Performance chart (as of Dec 2, 2010)Performance table (as of Dec 2, 2010)
Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Aflac Incorporated 401(k) Savings and Profit Sharing Plan Tactical Asset Allocation Moderate 4% 34% 5% 64% 8% 81% Aflac Incorporated 401(k) Savings and Profit Sharing Plan Strategic Asset Allocation Moderate 10% 100% 2% 8% 6% 31% Three Core Asset ETF Index Funds Tactical Asset Allocation Moderate -4% -35% 1% 9% 4% 27% Three Core Asset ETF Index Funds Strategic Asset Allocation Moderate 9% 60% -0% -3% 4% 13% Currently, asset classes in US Equity (SPY,VTI), Foreign Equity (EFA,VEU) and Fixed Income (AGG,BND) are doing relatively well. These asset classes are available to Aflac Incorporated 401(k) Savings and Profit Sharing Plan participants.
To summarize, Aflac Incorporated 401(k) Savings and Profit Sharing Plan plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles.
Symbols: AFL , SPY , VTI , EFA , VEU , AGG , BND , AOM , CIU , BIV , GWL , PFA , IVE , IWW , JKF , VTV , ELV , PWV , RPV , SCHV , IVV , IYY , IWV , VV , DLN , RSP , SCHX , IVW , IWZ , JKE , VUG , ELG , QQQQ , RPG , SCHG , IJK , IWP , VOT , EMG , PWJ , RFG , UKW , IJT , IWO , JKK , VBK , DSG , PWT , RZG , UKK
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