Re-balance Cycle Reminder
Based on our monthly re-balance calendar, the next re-balance time will be on Monday, September 10, 2012. You can also find the re-balance calendar of 2012 on ‘My Portfolios’ page.
As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.
Also please note that we now list the next re-balance date on every portfolio page.
Safe Harbor: Cash & Short Term Investments
As one of the four pillars in the four pillar investment framework (see August 6, 2012: Four Pillar Foundation Based Portfolio Review)
, cash & short term investments play an essential role in portfolio construction and overall personal finance. However, they are often considered boring. Many believe that they can not do much on these investments (or savings). Moreover, given today’s extremely low rate environment, investors almost give up how to maximize returns on them.
Let’s first take a look at why cash & short term investments are important:
- You have to maintain a portion of cash to fund your immediate spending for a minimum one month period, often several months or up to several years.
- Cash is called safe harbor in portfolios for the reason that it is the last resort to fight against uncertainties when you face an uncertain economic direction call on inflation, deflation and/or growth.
- Cash is the great stabilizer for portfolio re-balancing.
At MyPlanIQ, we advocate a balanced and somewhat conservative approach in portfolio construction. For example, we never believe that 100% in stocks or equities is the best way to grow your wealth, even in a very long term investment horizon. Many great investors, even equity investors, are not afraid to accumulate cash when opportunities are rare and good investments are hard to find.
- Bank checking: In general, checking accounts pay the least interests. We recommend that you find a savings account with check writing capability. Even if your bank does not offer saving accounts with check writing, you should just maintain a minimum balance for the checking account and use electronic payment for your credit card and other payments, if it is possible.
- Savings accounts. In general, many banks offer savings accounts that have higher interests than checking.
- Money market accounts (MMA): these are the products offered by banks. The difference between a savings account and MMA is that some MMAs do not offer or limit number of checks per month (such as 6 checks per month). Since the interest difference among MMAs or savings accounts offered by various banks can be as high as 0.5% to 1% (see, for example, bankrate.com’s MMA rates), it is worth trouble to find a bank that offers high interests, especially given today’s easy electronic money transfer (ACH). If you have relatively large sum of cash (For example, 1% of $10,000 would give you $100 a year, good enough to pay for your MyPlanIQ’s basic subscription).
- Short term CDs (< one year) and long term CDs (up to 5 years): in general, one year or shorter maturity CDs are still worth trouble. But given other short term investments that can offer much higher interest payments, one should avoid using CDs with longer than one year maturity.
- Brokerage or retirement plan money market funds: these funds usually offer similar rates as MMAs. But these days, this is no longer true. For example, Schwab’s money market funds have miserable 0.01% (taxable treasury money market) to 0.06% interest rates (money market sweep funds). Even for higher yield money market funds (with $100,000 minimum), the rate is still a pitiful 0.13%.
- Stable value funds: many retirement (401k, 403b) plans offer stable value funds. These funds usually invest in bonds but have a guarantee contract with insurance companies for a minimum return. One of the well know stable value funds is G Fund in the Thrift Savings Plan (TSP) offered to federal employees. This fund invests a specially issued (non-marketable) short term Treasury security that offers long term (4 or more years) Treasury interest payments. In general, stable value funds offer higher returns than short term cash.
- Short term bond funds: they can be further broken down to taxable U.S. government and agencies bond funds, tax exempt municipal bond funds and broad base short term bond funds and investment grade bond funds. In general, you can purchase these bond funds in a brokerage account. Typically, if you only need a portion of cash beyond 2 years, you can consider using short term bond funds, especially short term federal (government & agencies) and/or short term bond index funds. See more detailed explanation and performance comparison below.
- Target maturity individual bonds or bond funds (ETFs): for investments with more than one year horizon, you can purchase individual bonds with target maturity. However, not only this requires large cash amount, it also incurs various risks and efforts such as how to select these individual securities. Enter the target maturity bond ETFs such as Guggenheim BulletShares ETFs. See article Compare CD Interests And Yields From Defined Maturity Bond ETFs. The good news for the BulletShares ETFs is that they offer both investment grade and high yield target maturity bond funds. A simple and somewhat aggressive strategy is to invest shorter term (such as 1 or 1.5 year) cash to high yield bond ETFs with similar target maturity while invest longer term (2-3 years) cash in investment grade bond ETFs with the same maturity. We feel target maturity bond ETFs are good choices longer term cash investments and hope we will see more such offerings with lower expenses in the future.
The following table compares the performance of Vanguard short term bond funds:
Portfolio Performance Comparison (as of 8/10/2012)
| Portfolio/Fund Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|---|
| VFISX | -0.1% | 0.4% | 0.5% | 43.5% | 2.0% | 131.3% | 3.6% | 141.1% |
| VBIRX | -0.1% | 1.4% | 1.5% | 101.5% | 3.3% | 167.8% | 4.5% | 144.6% |
| VFSTX | 0.1% | 3.0% | 2.8% | 191.2% | 4.5% | 251.8% | 4.3% | 144.5% |
| VSGBX | -0.1% | 1.0% | 1.3% | 106.7% | 2.8% | 162.7% | 4.2% | 161.3% |
| VWSTX | 0.0% | 0.8% | 1.1% | 213.6% | 1.3% | 232.4% | 2.4% | 234.5% |
*: NOT annualized
**YTD: Year to Date
| VSGBX (As of 08/10/2012) | Vanguard Short-Term Federal Inv |
| VFSTX (As of 08/10/2012) | Vanguard Short-Term Investment-Grade Inv |
| VBIRX (As of 08/10/2012) | Vanguard Short-Term Bond Index Adm |
| VFISX (As of 08/10/2012) | Vanguard Short-Term Treasury Inv |
| VWSTX (As of 08/10/2012) | Vanguard Short-Term Tx-Ex |
Five Year Chart
For year by year complete history of these bond funds, visit this link and click on ‘+ More Performance Analytics Comparison‘.
The following table shows the rolling 2 year performance for these bonds funds, courtesy of soundmindinvesting.com:
Market Overview
We are still very cautious on current market environments. Even though markets continued to exhibit risk on up trends (for risk assets), we would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.
Based on 360° Market Overview, U.S. REITs had over -2% loss last week while general U.S. stocks rose more than 1%, an apparent sector rotation from winners to runner-ups. With the hope of another QE diminishing every day, U.S. stocks are now left on its own while gold (GLD) is still at the bottom of the table.
Allocation funds listed on SmartMoneyIQ Managers usually have excellent long term records. These funds are again very steady in the current uncertain markets. On the bond fund side, we see good bond funds such as PIMCO total return (PTTRX) still maintains steady and high exposure in intermediate term Treasuries. This contrasts with risk assets (stocks) rising trends.
Portfolio Review
We now revisit our tactical featured ETF portfolios:
Portfolio Performance Comparison (as of 8/10/2012)
| Portfolio/Fund Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|---|
| Vanguard ETFs Tactical Asset Allocation Moderate | -0.3% | 7.5% | 13.1% | 187.4% | 11.1% | 92.6% | 8.7% | 63.6% |
| Permanent Global Portfolio ETF Plan Tactical Asset Allocation Moderate | -0.1% | 3.0% | 1.7% | 19.9% | 11.0% | 88.9% | 8.6% | 65.0% |
| Six Core Asset ETFs Tactical Asset Allocation Moderate | -0.3% | 4.8% | 4.5% | 70.9% | 7.6% | 65.5% | 8.4% | 68.1% |
| Retirement Income ETFs Tactical Asset Allocation Moderate | -0.8% | 3.9% | 9.7% | 121.3% | 12.4% | 109.2% | 8.0% | 66.5% |
| MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate | -0.6% | 5.2% | 4.7% | 67.7% | 9.0% | 76.0% | 9.4% | 77.1% |
*: NOT annualized
**YTD: Year to Date
All portfolios lost some nominal amount last week, mostly due to bond and REITs weakness. See Latest Featured ETF Tactical Portfolios Performance Comparison >>
Latest Articles
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How can we improve this newsletter — we value your inputs –Thanks to those who have already contributed — we appreciate it.
Diversified Asset Allocation Portfolios For Your Plans
