09/13/2011

A recent article by Geoff Considine on Portfolioist.com discussed how PIMCO's Global Mutli-Asset (PGAIX) fund uses tail insurance (out of money put) to hedge against recent market volatility. Its conclusions are:

Using the past year as the test case, a well-designed and highly-diversified asset allocation has provided a very satisfactory defense in highly volatile markets. It is, as yet, unclear that the additional complexity of ‘tail insurance' has paid off.

Geoff used the following table to compare the fund's performance against several other benchmarks (up to 8/11/2011):

 Source: Data from Sungard’s FAME  and FolioInvesting.com

We would like to see how such a black swan insurance based fund is compared with our Six Core Asset ETFs benchmarks, up to 9/12/2011:

Five Year Chart

See complete portfolio comparison.

The Six Core Asset ETFs consists of the following six ETFs as its candidate funds:

Our conclusions are that it is essential to have diversification as the first line of defense (which is the same as Geoff's conclusion), regardless of what other hedging techniques you are using. On the other hand, both tactical and tail event (black swan) insurance can add valuable hedge as the second line of defense, as evident in the above comparison.

In retirement investments (such as 401k investments), it is impossible to implement the tail insurance (out of money stock market index put buying), not to mention the complexity of such an insurance. On the other hand, it is relatively easy to implement a dynamic asset allocation strategy such as MyPlanIQ's Tactical Asset Allocation in any 401K, IRA, 403B, 457 or variable annuity account. An asset allocation that is strategic or tactical or both in a retirement investment account is an effective way to navigate through current volatile markets.

Symbols: SPX, SPY, PGAIX, VTI, VEU, VWO, VNQ, DBC, BND, Retirement Investments, 401K Investments, 401K, IRA, Asset Allocation, Tactical Asset Allocation, Strategic Asset Allocation

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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09/13/2011

A recent article by Geoff Considine on Portfolioist.com discussed how PIMCO's Global Mutli-Asset (PGAIX) fund uses tail insurance (out of money put) to hedge against recent market volatility. Its conclusions are:

Using the past year as the test case, a well-designed and highly-diversified asset allocation has provided a very satisfactory defense in highly volatile markets. It is, as yet, unclear that the additional complexity of ‘tail insurance' has paid off.

Geoff used the following table to compare the fund's performance against several other benchmarks (up to 8/11/2011):

 Source: Data from Sungard’s FAME  and FolioInvesting.com

We would like to see how such a black swan insurance based fund is compared with our Six Core Asset ETFs benchmarks, up to 9/12/2011:

Five Year Chart

See complete portfolio comparison.

The Six Core Asset ETFs consists of the following six ETFs as its candidate funds:

Our conclusions are that it is essential to have diversification as the first line of defense (which is the same as Geoff's conclusion), regardless of what other hedging techniques you are using. On the other hand, both tactical and tail event (black swan) insurance can add valuable hedge as the second line of defense, as evident in the above comparison.

In retirement investments (such as 401k investments), it is impossible to implement the tail insurance (out of money stock market index put buying), not to mention the complexity of such an insurance. On the other hand, it is relatively easy to implement a dynamic asset allocation strategy such as MyPlanIQ's Tactical Asset Allocation in any 401K, IRA, 403B, 457 or variable annuity account. An asset allocation that is strategic or tactical or both in a retirement investment account is an effective way to navigate through current volatile markets.

Symbols: SPX, SPY, PGAIX, VTI, VEU, VWO, VNQ, DBC, BND, Retirement Investments, 401K Investments, 401K, IRA, Asset Allocation, Tactical Asset Allocation, Strategic Asset Allocation

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08/09/2011

As economy slows and the stock markets are becoming more and more hostile, many workers are getting more unpleasant news from their retirement pension programs. A recent Bloomberg article Company Pension Underfunding Jumps 38% to $351 Billion as Economy Slows reported The gap between the assets of the 100 largest company pensions and their projected liabilities has widened. Here are some details:

• The underfunding increased $97 billion in August to $351 billion, actuarial and consulting firm Milliman Inc. said today in a statement. That compares with the record $446 billion deficit in August 2010.
• Assets declined $64 billion and liabilities increased $33 billion between Aug. 1 and Aug. 8.

Americans witnessed the unpleasant event of U.S. debt rating being downgraded from AAA to AA+ by S&P last Friday. If the U.S. government, once seen as the safetest in the world, can be downgraded overnight, it is not that much inconceivable for private companies' credits deteriorate. We have heard about GM's vast underfunded pensions and the debacle of Lehman Brothers' mini bond (structured products with Lehman being the borrower/guarantor). Many state governments (Wisconsin, for example) have started to propose a hyrid pension retirement program that has a similar self managed 401K feature for future retirement benefits. Same for many companies.

It is becoming more important than ever to take care of your own retirement investments. Here are  steps you can take:

1. Consider Rollover: Consolidate your retirement accounts by studying those plans investment options and fees. You can use MyPlanIQ's RolloverIQ tool to first compare those plans' ratings. You then can rollover accounts in those underperforming (401K) plans to other better plans. If you have accounts in your previous employers' 401K plans, you can also consider roll them over to brokerage IRA accounts. We list some brokerage ETF/mutual fund plans on Brokerage ETF/Mutual Fund Portfolios page.
2. Decide Risk Profile: we quote this from our latest newsletter: "Many times, when markets are good, people tend to increase their risk or are under impression that they can take more risk. When markets tank, they start to panic and swear that they can not take the same risk they thought they could withstand in good days. Regardless of what investment methods or strategies you are using, setting up a proper risk tolerance level is the single most important step for success or failure."
3. Asset Allocation: after deciding your risk profile, choose the right asset allocation strategies such as Strategic Asset Allocation that invests in a diversified array of funds with periodical re-balancing and fund rotation (if there is any), or Tactical Asset Allocation that stays nimble to avoid big loss when times are bad. Given the current economic situations, there will be plenty of times that are challenging.
4. Be Disciplined: stay the course and do not slack off your regular (monthly or quarterly) re-balance. It might just take 10-20 minutes a month to do re-balancing but that might be one of those minutes best spent in your life, at least in your financial life. 
5. Pat Yourself on the Back on taking control of your own future in your own hands! It is better than arguing with your boss on a raise or feeling hopeless when your pension benefits are reduced.

You can always start with a simple plan to understand how the asset allocation strategies work. For example, monitor the Simple Is Better (SIB) Six Core Asset ETFs plan that uses only six representative ETFs: VTI for US Stocks, VEU for Developed Country Stocks, VWO for emerging market stocks, VNQ for REITs, DBC for commodities and BND for total bond market index. Browse the historical transactions on those portfolio pages. Even better, monitor them for a period of time, especially during this hard and difficult period.

Unlike many other services, we are open (sign up our newsletters that give timely update and explanation on what/how we do), we are free (registered users can follow up to five Strategic Asset Allocation portfolios for free) or low cost.

Symbols: VTI, VEU, VWO, VNQ, DBC, BND, SPX, COMP, EFA, EEM, IYR, AGG, Retirement Investing, 401K

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07/26/2011

According to a recent article on financial-planning.com 89% of 401(k) Investors Want Allocation Help a study by the ING Retirement Research Institute conducted by the Boston Consulting Group. more people want asset allocation help.

Here are some keypoints from the article:

• 89% the 2,600 401(k) investors surveyed would like help with asset allocation, 84% want solutions for calculating and creating retirement income, and 79% would like an annual financial checkup to set and measure their progress.
• "... consumers highly value choice, yet too much can be overwhelming. Consumers also value the control to make their own retirement-planning decisions but want detailed instructions on how to accomplish their financial objectives.”, said Lynne Ford, CEO of ING Individual Retirement.

We found ING's RetireWithING.com is useful and intuitive. In the coming months, we will release more tools and features in asset allocation such as using Guru's (lazy portfolios') asset allocation templates in your 401K plans, holistic view of multiple portfolios and retirement cash flow strategy studies.

Symbols: SPX, 401K

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07/16/2011

News Corporation (NWS) (NWSA) operates as a diversified media company worldwide. News Corp has news and entertainment offerings in the United States, Latin America, Europe, and Asia. News Corp owns Fox News, Dow Jones (Wall Street News and Barron's), along with other major newspaper, TV and film properties. News Corporation was founded in 1922 and is based in New York, New York. It is a global news media giant.

News America (News Corp) 401k Savings Plan, like any other work place retirement plans, offers a limited choice of mutual funds for its plan participants. The plan consists of six funds. These funds enable participants to gain exposure to 3 major assets: US Equity, Foreign Equity, Fixed Income.

As of Jul 13, 2011, this plan investment choice is rated as averagebased 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 poor (4%) 
Fund Quality -- Rated as average (56%) 
Portfolio Building -- Rated as average (55%) 
Overall Rating: average (40%)

The plan has a poor diversification rating as it lacks of emerging market stocks and Real Estate Investment Trusts (REITs) coverage. Three out of six funds are U.S. small cap value, mid cap value and large cap blend stock funds. These are more or less value tilted, missing some of other important styles such as growth. In fixed income asset, it has one PIMCO total return bond fund, managed by famed bond manager Bill Gross. Though this fund is considered to be one of the best bond funds, it is desirable to offer some other bond funds such as inflation protected funds. 

The lack of diversification does show its dificiency: Currently Real Estate, US Equity and Commodities are doing well. Only US Equity is available to News America (News Corp) 401k Savings Plan participants. The following are the trend scores of major asset classes. 

Portfolio Building

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 Jul 13, 2011)

Performance table (as of Jul 13, 2011)

To summarize, News Corp's 401K plan, unlike its sponsor company's global and diversified reach, can be extended to allow its participants to have exposures in other assets such as emerging market stocks (EEM) (VWO) and REITs (IYR) (VNQ). Experienced participants can also consider choosing its self-directed brokerage option which has more diversified fund choices. 

Symbols: NWS, EEM, VWO, IYR, VNQ, PTTRX, Retirement Investing, 401K

Exchange Tickers: (NWSA), (NWS), (EEM), (VWO), (IYR), (VNQ), (PTTRX)

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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