Re-balance Cycle Reminder
Based on our monthly re-balance calendar, the next re-balance time will be on Monday, October 15, 2012. You can also find the re-balance calendar of 2012 on ‘Dashboard‘ page once you log in.
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.
Strategic Asset Allocation Optimized
We are pleased to announce that our premium Strategic Asset Allocation – Optimal (SAA-Optimal) strategy is now released. Now basic subscribers can customize and follow model portfolios using this strategy. There is no extra or separate charge for these portfolios. As of now, a basic plan subscription entitles you to access up to a combination of 5 portfolios using SAA-Optimal or Tactical Asset Allocation (TAA) or free Strategic Asset Allocation – Equal Weight (SAA-Equal Weight).
The original FREE Strategic Asset Allocation strategy is now renamed to Strategic Asset Allocation – Equal Weight to distinguish from the premium one. SAA-Equal Weight is still free to registered users.
See our new subscription plan comparison page for more information.
Why Strategic Asset Allocation Strategy?
First, as stated in many articles and newsletters, we advocate core-satellite portfolio management that uses both strategic and tactical portfolios. We have illustrated how such an approach works best for both psychological and risk control purposes. See, for example,
September 10, 2012: Taxonomy Of Momentum, Relative Strength And Trend Following
Core Satellite Portfolios For Long-Term Investments
February 27th 2012: Core Satellite Portfolios And Static Portfolios
Why Another Strategic Asset Allocation Strategy?
Though as what has been shown in many academic studies that equal weight asset allocation is very competitive, compared with many other ‘optimized’ strategies (ex., see July 18th 2011: Equal Weight or Not Equal Weight in Strategic Asset Allocation?), we believe that there are several important reasons why an ‘optimal’ strategic asset allocation strategy is called for:
- Even though portfolio allocations should not be changed frequently in a strategic asset allocation setting, aligning portfolio allocation to secular economic trends such as ‘the current new normal’ we believe in can be beneficial, especially for a not-so-long-term-human-investor (Keynes’ ‘in the long run, we are all dead’). Long term secular economic trends are a lot easier to predict. It is thus possible to take advantage of such long term trends to adjust your portfolios.
- However, as we stated elsewhere many times, the key here is to ask the question: what happens if the long term prediction goes wrong. It is thus important to have asset allocations that can not inflict serious damage if, by any chance, the thesis turns out to be wrong. We believe as long as diversification and risk profile are controlled properly, this is doable.
- Psychologically, humans have ‘do something’ attitude. It is very hard to see your portfolio is not aligned with current secular or fundamental trends for such a long period of time, even though maybe in a long enough period, the equal weight allocation is just as good as your ‘optimal’ one. Providing such a portfolio is beneficial to investors.
What is behind SAA-Optimal
From the page Strategic Asset Allocation – Optimal, we state:
Unlike Strategic Asset Allocation – Equal Weight, Strategic Asset Allocation – Optimal uses long term historical performance data, asset class correlation, secular economic trends and other quantitative data of asset classes to determine optimal weights of major asset classes among risk assets and fixed income assets. It strives to balance risks in growth/recession and inflation/deflation scenarios. These allocations will be changed only when secular major economic and market trends change.
More specifically, SAA-Optimal derives allocations based on
- Mean Variance Optimization (MVO): we use MVO to derive reasonable allocation weights for each major asset class as references for each risk profile category such as very conservative, conservative, moderate and growth.
- The weights are then adjusted based on long term secular economic trends. In the current settings, we believe the global economies have been going through a long period of deleveraging process.
- They are further adjusted based on our four pillar foundation (see August 6, 2012: Four Pillar Foundation Based Portfolio Review). We are also influenced very much by David Swensen’s portfolio theory (see David Swensen Six ETF Asset Individual Investor Plan and his book Unconventional Success: A Fundamental Approach to Personal Investment).
SAA-Optimal Back Tested Performance
The following compares SAA-Equal Weight with SAA-Optimal for the five featured ETF plans:
Portfolio Performance Comparison (as of 10/1/2012)
*: NOT annualized
**YTD: Year to Date
From the above, one can see that SAA-Equal Weight is very competitive in the last 10 years: it only under performed SAA-Optimal in the MyPlanIQ Diverisifed Core plan. However, if you look at the last 1-5 year performance, you will see that SAA-Optimal is very compatible with SAA-Equal Weight. As the world economy is going through a long period of anemic growth, we expect SAA-Optimal will out perform SAA-Equal Weight in the coming decade since equity market wise, we expect the US will actually do better. This leads to more allocation weights in the US equity in SAA-Optimal. Furthermore. as the long term bond yields are approaching to extremely low level, their hedging effect is diminishing. We have thus reduced long term bond exposures, compared with SAA-Equal Weight. This also explains part of the back testing performance difference.
The following table shows similar performance difference for 401k and mutual fund plans:
Portfolio Performance Comparison
| Portfolio/Fund Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| Ford Motor 401K Strategic Asset Allocation – Optimal Moderate | -1.0% | 12.0% | 18.1% | 161.1% | 10.5% | 88.2% | 3.6% | 20.6% | 8.4% | 57.7% |
| Ford Motors 401K Strategic Asset Allocation – Equal Weight Moderate | -0.7% | 8.3% | 12.7% | 141.6% | 8.8% | 88.1% | 3.9% | 25.3% | 8.6% | 68.6% |
| FundAdvice Ultimate Buy and Hold Lazy Portfolio Strategic Asset Allocation – Equal Weight Moderate | -0.6% | 8.5% | 15.3% | 127.0% | 8.3% | 59.3% | 2.8% | 14.9% | 9.5% | 60.0% |
| FundAdvice Ultimate Buy and Hold Lazy Portfolio Strategic Asset Allocation – Optimal Moderate | -1.0% | 7.8% | 13.8% | 120.6% | 8.2% | 68.4% | 3.3% | 17.2% | 9.0% | 59.9% |
| Hewlett Packard 401K Strategic Asset Allocation – Equal Weight Moderate | -0.4% | 10.0% | 16.5% | 170.6% | 10.9% | 103.0% | 3.6% | 23.5% | 10.2% | 80.6% |
| Hewlett Packard 401K Strategic Asset Allocation – Optimal Moderate | -1.0% | 13.4% | 19.5% | 175.7% | 10.1% | 86.8% | 4.6% | 25.9% | 9.9% | 69.3% |
*: NOT annualized
**YTD: Year to Date
Market Overview
Markets were virtually unchanged in the last week of the last quarter. Risk appetite is still strong, even though many economic indicators had weak showing. On the other hand, investors such as John Hussman and ECRI have maintained their position that the US economy has entered a recession.
See 360° Market Overview for more asset class trends.
We remain deeply skeptical on this rally.
We again copy our position statements (from previous newsletters):
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.
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.
Latest Articles
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- Target-Date Fund-mageddon
- Harvard, Yale, Ivy League Endowment Returns Vs. Your Portfolios
- Sector Watch: Spotlight on Defensive Strategy
- Danger: Pundits Ahead
- Are 401k Investors Making a Mistake with Hybrid Funds?
- How are foreign stocks doing compared to stocks in the United States? Fall 2012
- Millionaire Status Is Fleeting
- The Challenge of Long-Term Income: Part II
- September 24, 2012: Tax Efficient Investing
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
