Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.
For regular SAA and TAA portfolios, the next re-balance will be on Monday, July 22, 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.
Major Trends Are Down Everywhere
It came as no surprise to us (see May 13, 2013: Preparing To Take A Loss) that the ‘tapering talk’ by Fed chairman Ben Bernanke has been developing rapidly into a financial crisis for the past week. First, some market stats:
Market Overview
As of Friday June 21, 2013, all major market indices other than US equity have fallen under their 10 month simple moving average. These include
- International stocks such as Vanguard total international stock index VGTSX
- Emerging market stocks such as Vanguard emerging market stock index VEIEX
- Commodity index such as Powershares DB Commodity index DBC
- US REITs index such as Vanguard REITs index VGSIX (along with international REITs such as VNQI)
- Long term Treasury bond index such as Vanguard fund VUSTX (or even total bond index such as BND)
Major Asset Classes Trend
06/24/2013
| Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
|---|---|---|---|---|---|---|---|
| US Stocks | VTI | -4.45% | -4.9% | 1.12% | 11.08% | 22.65% | 5.1% |
| International Developed Stks | EFA | -5.98% | -7.19% | -2.71% | 1.19% | 21.72% | 1.4% |
| Treasury Bills | SHV | -0.01% | 0.0% | 0.01% | 0.01% | 0.04% | 0.01% |
| US High Yield Bonds | JNK | -4.02% | -5.71% | -4.19% | -1.91% | 5.26% | -2.11% |
| Mortgage Back Bonds | MBB | -2.17% | -2.72% | -3.28% | -3.16% | -2.79% | -2.82% |
| International REITs | RWX | -7.01% | -11.25% | -9.97% | -6.55% | 19.69% | -3.02% |
| US Equity REITs | VNQ | -6.68% | -11.99% | -5.58% | 0.88% | 7.78% | -3.12% |
| Total US Bonds | BND | -2.45% | -3.36% | -3.32% | -3.55% | -2.96% | -3.13% |
| Commodities | DBC | -3.95% | -2.99% | -6.84% | -7.69% | 2.76% | -3.74% |
| US Credit Bonds | CFT | -3.42% | -5.21% | -4.69% | -5.01% | -1.44% | -3.95% |
| Intermediate Treasuries | IEF | -3.15% | -4.23% | -4.48% | -4.59% | -4.38% | -4.17% |
| International Treasury Bonds | BWX | -4.98% | -2.49% | -3.72% | -7.54% | -2.47% | -4.24% |
| Municipal Bonds | MUB | -5.29% | -8.23% | -7.16% | -7.38% | -5.57% | -6.73% |
| Emerging Market Stks | VWO | -8.91% | -14.79% | -13.59% | -15.65% | -1.44% | -10.87% |
| Emerging Mkt Bonds | PCY | -9.1% | -12.91% | -12.06% | -15.7% | -5.35% | -11.03% |
| Gold | GLD | -7.36% | -7.35% | -20.17% | -22.84% | -19.4% | -15.42% |
| Frontier Market Stks | FRN | -7.15% | -12.86% | -19.47% | -22.7% | -16.42% | -15.72% |
Even though major trend scores using 52 weeks for US stocks and developed market stocks are still above cash, our internal trend scores using 13 weeks for these two assets are negative now. In fact, US stocks are rapidly declining to make its 26 week trend scores just a fractional percentage point positive.
To summarize, market trends are down visibly. The last standout, US stocks, is also turning to a down trend.
Risky bonds
We stated in June 3, 2013: Total Return Bond Fund Portfolios For Major Brokerages:
Last week’s correction happened to almost all asset classes (other than Gold and precious metals). The main concern is that Federal Reserve’s Quantitative Easing (QEs) might taper off and interest rates might rise. Even though we don’t know whether such a concern is justified or not, the market actions are very indicative and should offer insights when such situation (i.e. stopping loose monetary measures or even reverse them) indeed materialize: virtually, all assets (stocks, REITs, bonds) have been inflated and they will be deflated all together. Even for a global diversified portfolio, this scenario is very challenging and at that time, there might be only one stable asset: cash.
Again, from the trend score table for fixed income on 360° Market Overview, all bond segments other than short term Treasury bills (cash) have negative trend scores now:
Fixed Income Assets Trend
06/24/2013
| Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
|---|---|---|---|---|---|---|---|
| Treasury Bills | SHV | -0.01% | 0.0% | 0.01% | 0.01% | 0.04% | 0.01% |
| Short Term Treasury | SHY | -0.26% | -0.24% | -0.2% | -0.1% | 0.07% | -0.15% |
| Short Term Credit | CSJ | -0.73% | -0.86% | -0.66% | -0.15% | 1.25% | -0.23% |
| High Yield | JNK | -4.02% | -5.71% | -4.19% | -1.91% | 5.26% | -2.11% |
| Intermediate Term Credit | CIU | -2.57% | -3.77% | -3.28% | -2.86% | 0.29% | -2.44% |
| MBS Bond | MBB | -2.17% | -2.72% | -3.28% | -3.16% | -2.79% | -2.82% |
| US Total Bond | BND | -2.45% | -3.36% | -3.32% | -3.55% | -2.96% | -3.13% |
| Intermediate Treasury | IEF | -3.15% | -4.23% | -4.48% | -4.59% | -4.38% | -4.17% |
| International Treasury | BWX | -4.98% | -2.49% | -3.72% | -7.54% | -2.47% | -4.24% |
| Long Term Credit | LQD | -4.39% | -6.42% | -5.83% | -6.29% | -1.53% | -4.89% |
| International Inflation Protected | WIP | -5.18% | -6.07% | -6.79% | -8.47% | 0.78% | -5.15% |
| 10-20Year Treasury | TLH | -3.34% | -5.09% | -5.12% | -6.31% | -7.06% | -5.39% |
| National Muni | MUB | -5.29% | -8.23% | -7.16% | -7.38% | -5.57% | -6.73% |
| Inflation Protected | TIP | -3.58% | -6.69% | -8.46% | -9.22% | -7.06% | -7.0% |
| New York Muni | NYF | -4.97% | -8.71% | -7.95% | -8.06% | -6.14% | -7.16% |
| California Muni | CMF | -5.37% | -9.4% | -8.4% | -8.12% | -5.94% | -7.45% |
| 20+ Year Treasury | TLT | -3.86% | -6.58% | -6.52% | -9.61% | -12.13% | -7.74% |
| Emerging Mkt Bonds | PCY | -9.1% | -12.91% | -12.06% | -15.7% | -5.35% | -11.03% |
What to do
With all major trends turning down and stocks are still at the elevated valuation levels (at least for US and international stocks), we strongly suggest to adjust your overall portfolio risk to a level you are comfortable with, even assuming stocks and/or bonds might undergo another 20% downfall from here. This has been our consistent message throughout the last 2 years. But it becomes even more critical at this juncture. It is no time to catch a falling knife when markets are expensive or at least not cheap.
For strategic portfolios, our fund selection algorithm correctly paired down bond exposure in last Monday’s rebalance and now they are mostly in either short term bonds or money market (cash). For these portfolios, the key here is to stick to your allocations and ride through the storm. However, if you are not comfortable with the upcoming violent ride, you might want to consider reducing risk exposure: being stocks or bonds (long term or even intermediate term bonds).
For tactical portfolios, our fund selection again correctly picked cash or short term bonds in the bond/fixed income portion in last Monday’s rebalance. However, we narrowly missed the risk asset exposure reduction since the final tapering talk by Bernanke happened on last Wednesday.
For new money, we suggest that you use ‘customize a new portfolio‘ instead of simply following an existing portfolio. A customized portfolio will use the latest trend scores to find portfolio suggestions, they are more relevant and more closely reflecting the rapidly changing market conditions.
For existing portfolios, we will stay on course. However, for those who are leveraged or overly exposed to risk assets, we suggest again to pair down the risk or use ‘customize a new portfolio‘ as hints on how portfolios should be positioned right now.
Don’t be afraid of holding cash
Many investors loathe cash right now due to its meager interest. However, we would like to point out that cash is still the king during a financial crisis, especially in one that is caused by rising interest rate. Holding cash is a short term ‘tactical’ move.
In MyPlanIQ, our fund selection among an asset class such as bonds or fixed income can be considered ‘tactical’: it picks high performing funds regularly. Last Monday’s rebalance in fixed income is a great example: it now favors ultra short term bonds or cash.
Investors are often confused with the notion of risk profile in the current low yield environment: their reason is: if bonds are risky, why bother fixed income? As a result, some opts to more exposure to stocks in their portfolios.
Aside from the normal correlation and diversification argument to have fixed income (it includes cash) in a diversified portfolio, we want to point out that even in a rising rate environment, bonds are not going to go down in a straight linear fashion: there will be periods of strength in certain segments of bonds. Holding cash or short term bonds is only a short term tactical move during a stressful environment. We will wait till bond market stabilizes and then invest in segments that exhibit good strength. There will still be pockets or even plenty of opportunities to make profits in fixed income, even in the coming years.
The bottom line is that high yield dividend stocks, REITs and/or utility stocks are not substitutes for bonds. Though we are a fan of high dividend stocks, but we are more interested in high quality stocks that can deliver consistent earnings and increase dividends, not necessary dividend hogs. Though high yield funds can be used tactically, but they function quite differently from bond funds. Furthermore, holding cash short term is not a statement that a portfolio will forever hold cash.
Portfolio Performance Review
The following table shows how brokerage specific mutual fund tactical portfolios listed on Brokerage Mutual Fund Portfolios have performed:
Portfolio Performance Comparison
| Ticker/Portfolio Name | YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|
| Fidelity Extended Fund Picks Tactical Asset Allocation Moderate | -0.5% | 8.2% | 1.68 | 7.4% | 0.93 | 10.7% | 1.18 | 14.9% | 1.52 |
| Schwab Income Mutual Fund Select List Tactical Asset Allocation Moderate | 2.3% | 8.2% | 1.81 | 8.8% | 1.07 | 9.8% | 1.09 | 9.5% | 1.06 |
| Schwab OneSource Select List Funds Tactical Asset Allocation Moderate | -0.5% | 6.3% | 1.25 | 5.7% | 0.61 | 4.0% | 0.4 | 10.7% | 0.98 |
| TD Ameritrade Premier List No Transaction Fee Mutual Fund Plan Tactical Asset Allocation Moderate | -1.3% | 2.9% | 0.69 | 5.7% | 0.64 | 4.9% | 0.5 | 12.4% | 1.19 |
| Etrade All Star Funds Tactical Asset Allocation Moderate | 3.6% | 8.8% | 1.78 | 10.2% | 1.22 | 13.1% | 1.49 | 15.0% | 1.51 |
*: NOT annualized
**YTD: Year to Date
See year by year and more detailed performance comparison >>
Apparently, Etrade All Star Funds Tactical Asset Allocation Moderate has done much better than the rest of the portfolios. This is due to some of holdings that have done better.
Market Overview
Please refer to 360° Market Overview or Asset Trends & Correlations for various asset class trend rankings. Other than gold miner stocks (maybe a few others), at the current levels, we see no substantial values among all asset classes including bonds and stocks although some of them are approaching to reasonable value level.
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
- (Really) Long-Term Perspective on Interest Rates
- Overspending Retirement Income
- Risky bonds require tactical management
- Leading Indicator Breaks Support, Perfect Portfolio Storm Nearing?
- Covered Call ETFs Continued To Be Lackluster
- June 17, 2013: Well Known Asset Allocation Fund Review
Enjoy Newsletter
How can we improve this newsletter? Please take our survey
–Thanks to those who have already contributed — we appreciate it.
Diversified Asset Allocation Portfolios For Your Plans
