Re-balance Cycle Reminder
We had our monthly re-balance today. The next re-balance time will be on next Monday, March 4, 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.
Latest Re-balance Issues
We encountered several issues in today’s re-balance. One of the major issues was that we recently updated the brokerage specific mutual fund plans using the brokerages’ latest fund lineups. However, in the process of doing so, funds that brokerages no longer have in their lists were removed. Unfortunately, some of these removed funds were already held in our model portfolios and were only purchased last month. Since these funds were removed, our algorithm erroneously decided to sell them. This results in possible short term redemption fee charge. We have since modified that. We are looking for a long term solution for these removed but already held funds. We apologize for the trouble and appreciate your understanding regarding this issue.
Valuation Matters
MyPlanIQ furnishes two types of portfolio strategies: Strategic Asset Allocation and Tactical Asset Allocation. Strategic asset allocation is based on Modern Portfolio Theory, advocating diversification and buy and hold and regular re-balance. Tactical allocation is based on relative strength (or trend following) among a diversified set of assets, dynamically adjusting asset mixes to manage (reduce) risk. Both are based on returns (price and dividends). It does not seem that they are related to economic or market fundamentals.
However, valuation still matters, even in our strategies. Put simply, we are value investors at heart but pragmatic in spirit. As ordinary investors who have business background, we understand that. at the end of the day, value matters. A business is only worth as what its income garners. Markets swing back and forth to try to figure out this. As Benjamin Graham is often quoted as saying “in the short run the market is a voting machine and in the long run it is a weighing machine.”
When a market (such as the stock market) has high valuation level, it is becoming more likely to reverse to its mean, that is, to experience bigger drops in the future. Similarly, when valuation is low, markets will stage more powerful rise in the future. The question is when. Unfortunately, nobody can predict this. Regardless, this really means valuation does matter to our day to day portfolio management.
However, we are also pragmatic in terms of dealing with markets’ irrational exuberance. As Keynes said “The market can remain irrational longer than you can remain solvent.” That is why we are fully invested, even at an elevated valuation level. That is why we are using trend following strategies over a diversified array of assets.
Currently, investors’ sentiment towards risk assets such as stocks is at all time high. Here are some of the data:
From Markets->Market Indicators:
- Shiller CAPE10: Currently it is 23.89 vs. long term average 16.46. 45% overvalued.
- Hussman Peak PE: Currently it is 15.11 vs. long term average 11.97. 35% overvalued.
- Buffett’s Total Stock Market Value to GNP Ratio: currently it is 96%, modestly overvalued.
- AAII Sentiment Survey: 52.3% Bullish vs. 24.3% Bearish on 1/23/2013, A two year high.
- S&P 500 more than 50% above its 4-year low (see Hussman)
So what to do in such an overvalued and overbought market, even for us who use asset allocation strategies? Here are 5 ways:
- For new investments, regardless of whether SAA or TAA, you need to be aware of market valuation so that you don’t invest at the highest level. However, as a poor man’s (and rich man’s too?) incapability of predicting future events perfectly, we advocate a simple approach that does Dollar Cost Average (DCA): you divide the new money into several (such as 3 chunks) and invest each chunk in a period such as monthly.
- For existing investments, investors should be getting more cautious when markets are reaching high levels, not the opposite. It is not the time to increase your risk profile as markets are doing well: we have observed that several users have tried to increase their risk profile in a portfolio recently. In fact, it is the time to review your risk profile and see whether you can handle 10-20% loss at the current level. It is actually a perfect time to reduce your risk level if that is too high. For those who are under investing, again, you should adopt a DCA approach to gradually scale back to your target level. Be patient. Be systematic.
- For TAA portfolios, keep on a tight leash and be prepared to make adjustments to reduce risk exposure if markets start to tank (also, after that, be prepared to engage back, thus follow the strategies consistently). This is not the time to slack off. In a word, this is the time to be actively engaged and on high alert.
- For SAA portfolios, be prepared for possible correction or downturn. Do a psychological dry run on possible market correction. See whether you can withstand 20-30% drop. At the moment, given the high valuation and overbought markets, this is the time to imagine the worst, not the best.
- However, stay on course. Don’t make second guess. No one can outsmart markets in the short run. Ignore noises and if you really need to, treat them as entertainment.
To us, it does not seem that difficult to reconcile the two seemingly conflicting methods, value based or market returns based. They actually blend with each other.
To summarize, we are value investors at heart but pragmatists in spirit.
Portfolio Performance Review
In a previous newsletter
July 30, 2012: Strategic Asset Allocation & Lazy Portfolios Review
we compared many strategic asset allocation portfolios. Here is the part that compares lazy portfolios and their strategic counter parts:
Portfolio Performance Comparison (as of 1/28/2013)
| Ticker/Portfolio Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| 7Twelve Original Portfolio | 0.4% | 2.9% | 6.5% | 68.8% | 8.8% | 61.2% | 4.0% | 20.4% | ||
| David Swensen Six ETF Asset Individual Investor Plan Strategic Asset Allocation – Equal Weight Moderate | -0.3% | 1.4% | 8.4% | 120.5% | 10.7% | 89.8% | 5.7% | 31.2% | 8.7% | 54.3% |
| Fund Advice Ultimate Buy and Hold Lazy Portfolio | 0.3% | 2.4% | 7.9% | 98.7% | 8.3% | 69.3% | 4.5% | 26.8% | 8.6% | 60.5% |
| FundAdvice Ultimate Buy and Hold Lazy Portfolio Strategic Asset Allocation – Equal Weight Moderate | 0.3% | 1.8% | 9.1% | 124.3% | 8.8% | 73.0% | 5.3% | 28.7% | 9.8% | 63.1% |
| Harry Browne Permanent Portfolio | -0.6% | 0.3% | 2.8% | 55.7% | 9.6% | 152.8% | 7.0% | 86.0% | 8.5% | 105.6% |
| Israelsen 7Twelve Strategic Asset Allocation – Equal Weight Moderate | -0.1% | 1.0% | 5.6% | 73.5% | 9.0% | 78.5% | 5.3% | 30.8% | 9.1% | 60.3% |
| P David Swensen Yale Individual Investor Portfolio Annual Rebalancing | 0.2% | 2.5% | 11.2% | 142.7% | 12.7% | 101.4% | 6.5% | 33.4% | 10.3% | 62.0% |
| Permanent Portfolio ETF Plan Strategic Asset Allocation – Equal Weight Moderate | -0.0% | 1.7% | 5.2% | 78.2% | 12.8% | 112.6% | 7.4% | 47.7% | 10.2% | 75.1% |
| The Coffee House Lazy Portfolio ETF Version Strategic Asset Allocation – Equal Weight Moderate | 0.5% | 2.6% | 9.1% | 119.7% | 10.2% | 76.3% | 5.6% | 26.9% | 7.9% | 44.7% |
| The Coffee House Lazy Portfolio ETFs | 0.6% | 3.1% | 9.0% | 116.4% | 10.5% | 88.2% | 5.9% | 35.0% | ||
| Wasik Nano Plan Strategic Asset Allocation – Equal Weight Moderate | 0.6% | 2.6% | 9.5% | 122.7% | 10.6% | 84.2% | 5.1% | 26.1% | 7.7% | 46.2% |
| Wasik`s Nano | 0.6% | 2.8% | 9.0% | 117.1% | 9.4% | 74.8% | 3.9% | 20.5% |
*: NOT annualized
**YTD: Year to Date
See the latest and year by year comparison >>
Overall, Our free strategic asset allocation equal weight has done a similar or better job than the original lazy portfolios.
Market Overview
Markets continued to ascend but we do observe a big warning sign: for the week, Emerging market stocks had a negative return and it is showing weak sign. Gold and long term Treasuries experienced further weakness and now ranked at the bottom on the major asset trend ranking table on Asset Trends & Correlations or more detailed ones on 360° Market Overview.
Consistent with what we stated above, 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
- Disclosure won’t help money fund investors
- Forecasting Follies
- 401k Abuse
- Marotta 2012 Review: Economy & Markets
- From the Archives: The 80/20 Rule in Action
- Five red flags for municipal bond investors: Wasik
- 2012 Asset Allocation in Review
- Stocks and the Economy: It’s Complicated
- The Soul of the S&P 500: Durable stocks over time
- January 21, 2013: Year End Review Of Brokerage Specific ETF and Mutual Fund Portfolios
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
