Re-balance Cycle Reminder
We had our monthly re-balance today. The next re-balance time will be on next Monday, January 28, 2013. You can also find the re-balance calendar of 2013 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.
Please note that we now list the next re-balance date on every portfolio page.
New Year Resolutions
Now that we are entering 2013, a new year that is full of promises or uncertainties, depending on how you view it, you are getting bombarded by pundits and main stream media alike, trying to vie for your attentions. Articles titled as ‘Conviction Buy List for 2013’, ‘Top 10 Stocks for New Year’, ’15 Gigantic Trends in 2013′ etc. are everywhere. Some of noticeable ones are:
- GOLDMAN: Here Are Our Top 7 Trades For 2013 Goldman Sachs is predicting a major economic upturn in 2013
- UNVEILED: Morgan Stanley’s 10 Smartest Trades For 2013 Morgan Stanley believes Non-US assets are better bets for 2013
- David Rosenberg’s 35 Charts For 2013 David Rosenberg at Gluskin Sheff and Associates has a more subdue 2013 outlook.
Entertaining aside, these publications certainly make investors head spin and arose their animal spirits to make bets.
But is this really what you would like to do with your core long term investments that you and your family rely on to fund your retirement and/or daily financial support? Our answer is ‘No’.
In the following, we offer a brief flow chart for an investor who is looking for a solution that offers reasonable returns with managed risk for their long term core investment capital.
Step 1. Understand and define a reasonable financial/investment goal
Many people are carried away by various financial sources that are advocating ‘beat the market’. Remember your ultimate goal is your finance needs, not some beauty contest or sprinting competition titles.
Examples of reasonable financial goal would be ‘I want to retire in 10 years and send two kids to colleges’. From these, you derive your investment expectations.
Step 2. Look for time proven investment strategies that have strong intuition backing.
This step is perhaps the biggest challenge for many starters. Remember as a human with limited life span and financial resource, you can’t afford to experiment with numerous solutions using your real capital. Unfortunately, as we stated many times before, investing is a statistical process that can only be validated over a large sample data (i.e. a long period of time). It is thus important to look for something that is well researched. It also needs to be intuitively simple.
For us, portfolios using diversification and dynamic asset allocation based on major asset (i.e. large economic segment) trends are the two key winning strategies that can be implemented by ordinary investors like us. For a starter, we strongly suggest that you take time to perform due diligence and fully understand a strategy’s pros and cons.
Remember, no strategy can win all the time. It is thus important to under its pros and cons. This is akin to buying and driving a car or a boat. You don’t just turn on and go. You’ll need to understand it and set your expectation right. Without that, you’ll eventually encounter a setback and that can result in your giving up on it at a worst time.
Step 3. Proper risk allocation
People tend to change their risk allocation based on how well their investments have been doing, not based on how much risk they can accept in reality. When markets are good, they tend to forget the peril and become less risk averse. When markets are bad, they do opposite, scaling down dramatically out of fear, not based on a predefined strategy.
We would like to emphasize that Step 1 to Step 3 are the most important foundations for your investments. Without properly going through them, you will not be able to carry through your investments in a long period of time that can be full of surprises and disasters.
Step 4. Consistent implementation and execution.
Unfortunately, humans including your humble writer all have guilt of inconsistent performance over the course of time. We tend to forget or ignore what we need to do, even once a month or so. This can be due to other distractions or implicit avoidance (for example, if the portfolio hasn’t perform well for over a meaning period of time, it can be a frustrating or dejecting experience to look at the portfolio, let alone making re-balance trades). Like a farmer, he has to do the work day in and day out, even in a bad year. On the other hand, it is also very true that you reap what you sow.
Each step may deserve a much much longer discussion. Reviewing and improving these steps so that we can be a better investor is perhaps the best bet for our New Year Resolutions.
Portfolio Performance Update
The following shows how tactical portfolios in our brokerage specific ETFs plans have performed so far:
Portfolio Performance Comparison (as of 12/28/2012)
| Ticker/Portfolio Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| Vanguard ETFs Tactical Asset Allocation Moderate | -0.5% | 11.2% | 11.5% | 198.6% | 9.1% | 83.3% | 7.0% | 56.4% | 10.4% | 79.8% |
| Etrade All Star ETFs Tactical Asset Allocation Moderate | -1.0% | 7.7% | 7.9% | 129.3% | 8.5% | 76.3% | 10.1% | 89.9% | 12.4% | 102.9% |
| Fidelity Commission Free ETFs Tactical Asset Allocation Moderate | 0.3% | 7.8% | 7.8% | 155.4% | 7.3% | 72.1% | 5.9% | 55.9% | 9.9% | 81.9% |
| TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate | -1.4% | 6.2% | 6.5% | 103.9% | 5.6% | 51.6% | 2.8% | 20.3% | 8.3% | 63.1% |
| Schwab Commission Free ETFs Tactical Asset Allocation Moderate | 0.1% | 6.5% | 6.7% | 134.9% |
*: NOT annualized
**YTD: Year to Date
Market Overview
Markets have behaved exactly as they are supposed to be in the holiday season, even amid the uncertainties in the US Fiscal Cliff situation. For now, we will monitor our asset trend table on Asset Trends & Correlations or more detailed ones on 360° Market Overview.
Our SAA and TAA portfolios are positioned well going into the New Year. Looking ahead, we are cautious optimistic in short term but remain very cautious in the longer term.
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.
We wish everyone a Happy New Year!
Latest Articles
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- How To Market Time The Fiscal Cliff
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- December 24, 2012: Season’s Greetings
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
