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Re-balance Cycle Reminder

We had a re-balance today. The next re-balance will be on Monday, June 17, 2013. You can also find the re-balance calendar for 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.

Preparing To Take A Loss

Now that we are in May and just did portfolio re-balance, it is a good time to review where we are. 

Fundamentals

In a broad base statement, economies around the globe are still weak. There are several green shoots here and there but other than a somewhat consistent declining unemployment rate in the US (which itself is controversial), nothing has been consistent. Furthermore, market valuations are high (and have been persistently high for a year or so now):  

• Shiller CAPE 10 (Average Price/Earnings ratios in the trailing 10 years) is 47% higher (overvalued) than its long term average. Other valuation metrics are also showing high valuations: Warren Buffett’s total stock market valuation over GNP ratio is 1.04, modestly overvalued while Hussman Peak PE ratio is 43% overvalued. See Markets->Market Indicators for more details. 
• John Hussman, in his latest newsletter, estimates a nominal total return for the S&P 500 of just 3.2% annually over the coming decade.  As we indicated elsewhere, it is much easier to estimate the 10 year return and Hussman’s work shouldn’t be ignored. 

Technical Market Conditions

Meanwhile, stock markets have been on a persistent elevated level. The following shows the Bollinger Bands of S&P 500 ETF SPY with 50 days moving average and 2.5 standard deviation: 

One can see that SPY has been near the upper band (2.5 standard deviation from its 50 days moving average) for quite some time now. Furthermore, other than a shallow correction in April 15 to April 22, SPY has been on a tear. 

Traditionally, we are also in a seasonally weak period for stocks. The ‘Sell in May and Go Away’ adage has been proved to be of some predictive values in the long term. Even though a MACD trigger has not been fired yet in the STS Seasonal Timing Using DWC portfolio (see its description here), it is just a matter of time for such a condition to occur. 

Current Portfolio Positioning

With the reasonable trends being in place, our portfolios have done well. In SAA (Strategic Asset Allocation – Optimal or Strategic Asset Allocation – Equal Weight), our fund selection favors more traditionally ‘defensive’ sectors such as healthcare, consumer staples, dividend paying stocks or somewhat value tilted style funds.  Similarly, in TAA (Tactical Asset Allocation), the portfolios are fully invested (i.e. fully invested in its target allocations for risk assets). They are mostly in global REITs, US REITs, dividend paying stocks, US stocks, high yield bond funds and international stocks. The portfolios have safely avoided exposure in emerging markets and commodities. On the fixed income side, the portfolios are more into corporate bonds (both credit and long term). 

Put simply, our portfolios are in high performing sectors right now, fully taking advantage of the recent rally. Another point worth mentioning: our TAA portfolios have started to out perform their SAA counter parts since the beginning of the year:

The following table shows the comparison for the 3 featured plans listed on What We Do -> ETF, Mutual Fund Portfolios: 

Portfolio Performance Comparison (as of 5/13/2013)

*: NOT annualized

**YTD: Year to Date

This is usually an indication of a late stage bull market. See the discussions in the following two newsletters: 

• December 10, 2012: How Asset Allocation Strategies Performed In Secular Market Trends
• October 8, 2012: Asset Allocation Strategies Have Cycles Too

We have no idea whether that is the beginning of the late stage bull market or just a blip in a market that will have a correction very soon. Furthermore, even if we are in a late stage bull market, there is no telling when this will end. However, one should take observable evidences to make sure their portfolios’ risk level are probably adjusted. 

What To Do

For existing portfolios, we repeat our usual position statement with more emphasis on making sure your portfolio risk level is at a comfortable level. For those portfolios that are out of your risk level, it is a good time to trim them down. 

For new money, for lack of better technique, we recommend you gradually scale into markets. However, for those who have invested and are just switching to a new strategy by following one of our portfolios, you can consider doing so called ‘in-kind’ risk exposure swap: say if you have 60% stock exposure currently and your risk profile is 40% (i.e. target stock allocation is 60%), if all you want to do is to switch to a MyPlanIQ portfolio, you can simply switch your risk asset (stock) exposure in one shot instead of doing it in several steps. By doing so, you will be still at the same risk level as right now.  There are many scenarios to consider in switching to a new portfolio (or adopting a new strategy) but the essence is the same: you want to make sure you don’t increase your risk exposure to a level you can not accept. 

Regardless of which scenarios, be prepared for taking a loss in the coming months. Remember MyPlanIQ has no claim or power to foresee near term future. Our investment strategies are long term strategies. They rely on statistical properties that can be only observed in a sufficiently long time frame such as 5-7 years that cover a full market bear-bull cycle.  At any particular time, our portfolios might not show any advantage over whatever other strategies you use.  Moreover, given current market conditions discussed above, they will be subject to loss when the eventual correction occurs. 

Portfolio Performance Review

Let’s look at some conservative and income portfolios mentioned in October 22, 2012: Income And Conservative Portfolio Review:

Portfolio Performance Comparison (as of 5/13/2013)

*: NOT annualized

**YTD: Year to Date

latest and detailed comparison >>

Given the above discussion, long time MyPlanIQ readers should be familiar by now that we are more risk averse. We believe that even in the coming bond bubble bursting hoopla, a good total return bond fund manager can still deliver very reasonable returns without incurring too much risk. We would like to let our readers know that we are also working on similar portfolios for both bond manager of the year and the conservative mutual fund upgrading strategies to make sure they are readily usable for specific brokerages such as Schwab, Fidelity and Etrade. Please keep an eye on our announcement. 

Market Overview

The uniform risk on mode continues: all major stock assets including emerging market stocks remain above US bonds in the major asset trend ranking table on Asset Trends & Correlations (for other detailed ranking, see 360° Market Overview).  Commodities and gold are still at the bottom, indicating a weak pricing environment or something else?

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. 

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