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.

New Features

We have been working non-stop to improve our system. We finally replaced the ugly and incomprehensible ‘My Portfolios’ with the newly introduced ‘Dashboard’ page. Expect to see more substantial changes and improvements in the coming weeks. 

Trends Can Be Fickle

As usual, John Hussman had a nice discussion on trend following strategies in his latest weekly commentary The Trend is Your Fickle Friend. He discussed his back testing results on using moving averages as timing indicators. Taking slippage and/or tax into account, he showed the following chart: 

So indeed, the trend is your fickle friend: from 1950 to now, the strategy with various parameters did not beat the buy and hold. 

He further noted that the 8-week moving average strategy has the largest maximum drawdown: 45%! This can be seen better in the log scale chart: 

His conclusion:

Does all of this suggest that trend-following measures should be ignored? Not at all – but it does emphasize that simple trend-following schemes (like moving-average crossover rules) are unlikely to be very effective in isolation, and are not usefully applied as a top-level filter in the hope of catching market rallies without being vulnerable to downside risk. Typically, the best that can be achieved with popular moving-average crossover systems is a moderate reduction in drawdown risk, but zero or negative incremental long-term return versus a buy-and-hold.

He further went on to discuss his multi-sensor approach to trend following. 

This is consistent with what MyPlanIQ has stated repeatedly: an all-in/all-out stock timing does not work effectively. However, when trend following technique is used for multiple assets that are not much correlated (such as stocks, bonds, commodities, real estate), it has been shown to be much more effective. The Tactical Asset Allocation(TAA) is a show case for this type of  ‘relative strength’ strategies. 

Fortunately, there have been many studies on the relative strength strategy that go back to many years. We cite the following two studies: 

Mebane Faber’s Relative Strength Studies

In the study titled as Relative Strength Strategies for Investing, Faber did back testing using 1,3,6,9 and 12 month relative strength individually and their combination. He showed the following chart for the combination strategy: 

This clearly shows the relative strength strategy is working well in the period studied. 

Gary Antonacci’s Relative Strength Studies

Gary Antonacci further improved the multiple asset class relative strength strategy but applying the momentum to efficient frontier finder for asset allocation. In the latest study, his improved method performed very well in the period between 1974 to 2011 (similar to Faber’s period). 

Finally, a classic study on this subject by Clifford Asness, Tobias Moskowitz and Lasse Pedersen Value and Momentum Everywhere. 

Fickle Trends Can Be Your Friends

From  Hussman’s study on all-in/all-out single indicator (moving average) based timing to several ‘impressive’ relative strength studies, we can conclude that Trends Can Still Be Your Friends, though Fickle. 

However, even the trend following in a diversified list of assets, there is no guarantee that it will achieve consistent market beating result all the time. This is evident for the TAA portfolios’ performance in 2011 and even year to date in this year (2012). What it counts, however, is that through market cycles such as a full bull-bear period, one can expect this type of strategies excel while in the bull period, it still works reasonably well (not necessarily beating market indices). 

It also leads to our long standing position: the best investment strategy should have both core (strategic) and satellite (dynamic) components (so called core satellite portfolios). We discussed this in our previous newsletter February 27th 2012: Core Satellite Portfolios And Static Portfolios. The newsletter lists several previous articles we wrote on this subject. 

Market Overview

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

From 360° Market Overview, one can see the current major asset classes are very divergent: the last week’s weakness of emerging market stocks (VWO) has again pushed its ranking to the bottom position, even below the Treasury Bills (SHV)’s ranking.  Market trends are not uniform at all. 

We again 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. 

Portfolio Review

The following reviews the performance of several advanced portfolios on ‘Advanced Users‘ page: 

Portfolio Performance Comparison (as of 8/27/2012)

*: NOT annualized

**YTD: Year to Date

See more detailed and latest comparison >>

Latest Articles

• Tax Loss Harvesting: Five Tips to Keep More of What’s Yours
• The False Promises of Annuities and Annuity Calculators
• Economic Data Continues to Refute ECRIs Recession Call by Doug Short of Advisor Perspectives (dshort.com)
• Fine Wine Price Continues To Decline While Stocks Rise
• For Marc Faber The Iron ‘Ore’ Lady Has Sung
• The End of ‘The Cult of Equity’?
• The Disciplined Pursuit of Less
• Paulson’s & Soros’ GLD Blunder
• Baltic Dry Ship Index At 2008-2009 Low Since May
• AAII Asset Allocation Model Portfolios Review
• The Power of Effective Diversification: Part II
• PIMCO’s Scot Mather & Dirk Jeschke: Japanification
• AAII Bullish Sentiment Surges to Highest Level Since March
• What Will Be Obvious 20 Years From Now? (With a Sharpe of 0.76)?
• Tax Loss Harvesting: Share Your Pain with Uncle Sam
• Mexico: The Forgotten Emerging Market
• Richard Russell – Something Evil And Bearish In The Guts Of This Market
• Ten Charts That Show Sentiment Is Anything But Bearish
• Permanent Portfolio Shakedown Part 1 by Adam Butler, Mike Philbrick of Butler|Philbrick|Gordillo & Associates
• The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation
• August 20, 2012: Financial Crises, National Crises, World Crises And Diversification

How can we improve this newsletter — we value your inputs –Thanks to those who have already contributed — we appreciate it.

RSS Feed 

Disclaimer:

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.