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, January 13, 2014. 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.

New Features

Retirement calculator: We have released a retirement calculator. You can access this on Dashboard or through this link Retirement Calculator. Just for fun to educate youngsters to save and invest early, the following is for a 22 year old who just graduated from college and have a $50,000 annual salary job. The following shows the settings: 

The above settings assume a 3% inflation and 12% annualized investment return. The result will surprise you: 

By the time this young gal or boy retires in 2057, she or he has accumulated $8.7 million dollars!  We encourage you to try out to see the power of the compounding and how the savings and the annual return impact the retirement fund. You’ll be very surprised to see also how a tiny 1% difference in annual return makes!

Specific rebalance dates: per many user requests, we now allow users to specify a specific day of a month to rebalance. You can even specify at least 30 days apart between two consecutive rebalances. This feature is available to expert subscribers only. 

Lessons Learned in 2013 

It is always beneficial to review what we have learned from the past. Now that 2013 is fully behind us, let’s take a look at some of the most important lessons we have learned in 2013. 

Diversification has a cost

One thing unique for diversification is that there’s always something to complain about it. By definition, diversification is to  spread out your bets in many assets, thus some under performing assets will drag down (or balance out) the out performance of other assets. However, over time, as all of these assets deliver positive average returns, one can expect the portfolio delivers positive average returns too. We discussed this in our previous newsletter December 30, 2013: How To Benchmark Portfolios but we think it is still an important for readers to grasp. 

The following table shows how the six core assets (US stocks, international stocks, emerging market stocks, REITs, commodities and bonds), five core assets, four core assets, three core assets and two core assets (VBINX) fared in 2013: 

Portfolio Performance Comparison (as of 1/6/2014)

Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 6.2% 6.1% 10.1% 0.78 5.8% 0.36
Five Core Asset Index ETF Funds Strategic Asset Allocation – Optimal Moderate 7.3% 6.2% 11.1% 0.82 6.2% 0.37
Four Core Asset ETFs (EM) Strategic Asset Allocation – Optimal Moderate 9.4% 7.1% 11.0% 0.86 5.4% 0.34
Three Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 12.2% 8.5% 11.5% 0.96 5.5% 0.37
Two Core Asset VBINX (Vanguard Balanced Index Inv) 15.2% 10.4% 12.8% 1.07 6.7% 0.47

See the detailed year by year comparison >> 

It is telling to see that the less the number of core assets is, the higher return in 2013. This is again due to the strong performance of US stocks, followed by international developed country stocks and then all other assets with mediocre performance.

We also caution that since all of the above portfolios are using Vanguard ETFs, performance older than 3 years might be questionable as some of these ETFs have very short history.  

Permanent portfolios suffer but still resilient

2013 also saw the famed permanent portfolios suffer. These portfolios diversify among stocks, gold (silver), long term Treasury bonds and cash (or short term investments). With two major pillars (gold and long term Treasury bonds) being hit hard, it is actually surprising to see that these portfolios have done relatively well: 

Portfolio Performance Comparison (as of 1/6/2014)

Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Harry Browne Permanent Portfolio -3.0% 4.4% 7.0% 0.99 6.8% 0.81
Harry Browne Permanent Portfolio Without Cash -3.0% 6.7% 9.9% 1.05 9.1% 0.84
Permanent Global Portfolio ETF Version -5.6% 0.9% 7.4% 0.7    
Permanent Income Portfolio -0.7% 6.5% 8.6% 1.42 6.2% 0.85
Permanent Global Portfolio ETF Plan Tactical Asset Allocation Moderate 8.7% 7.8% 10.1% 0.93 10.1% 0.82
PRPFX (Permanent Portfolio) -11.6% -1.0% 6.6% 0.52 6.9% 0.5
PERM (Global X Permanent ETF) -8.5%          

See detailed year by year comparison >>

In 2013, Harry Browne Permanent Portfolio lost -3.8%, compared with GLD’s -28.3% and TLT’s -13.4%.  

For the comparison purpose, we also show how these buy and hold portfolios are compared with the TAA portfolio Permanent Global Portfolio ETF Plan Tactical Asset Allocation Moderate. However, even though in general, the TAA portfolio has done better, we do recognize the value of buy and hold as they are tax efficient, less error prone and easier to manage. 

See Long Term Harry Browne’s Permanent Portfolio Performance

Momentum trend following across multiple assets continues to deliver

Though not being able to beat S&P 500 or a simple 60/40 US stocks and bonds balance fund VBINX, our  Tactical Asset Allocation (TAA) continues to deliver.  The strategy uses absolute momentum to pick top performing major assets to invest. This strategy suffered in 2011 but since has done better than Strategic Asset Allocation (SAA).

The following shows the comparison between the two strategies (as of 1/6/2014): 

Portfolio 2013 2012 2011 2010 2009 2008 2007 2006
Six Core Asset SAA Equal Weight Moderate 4.9 10.2 -0.5 13.2 22.9 -23.2 9.8 17.2
Six Core Asset SAA Optimal Moderate 8.2 11.3 -0.1 12.8 22.3 -23.2 8.9 12.4
Six Core Asset TAA Moderate 12.7 7.8 -0.2 10.2 17.0 -0.1 19.3 21.2
 
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate 3.1% 4.5% 9.2% 0.71 6.2% 0.39
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 6.2% 6.1% 10.1% 0.78 5.8% 0.36
Six Core Asset ETFs Tactical Asset Allocation Moderate 10.8% 6.5% 9.3% 0.92 9.9% 0.82

One can see that the TAA started to out perform SAA in 2013. This is not surprising as strong trends in US stocks and international stocks were present throughout the year, especially in the second half of the year. 

The TAA strategy invested in US equities and REITs at the first half of the year and then (correctly) switched to international equities and US equities in June: 

It is also noticeable that throughout the year, there were only two rebalances. 

As an additional note, just for an apple to apple comparison, the momentum in US stocks was strong in 2013. Our US stock style ETF rotation portfolio out performed SPY (S&P 500): 

Portfolio Performance Comparison (as of 1/6/2014):

Ticker/Portfolio Name   1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
P Momentum Scoring Style ETFs   32.1% 15.8% 19.5% 0.89 8.2% 0.32
P Momentum Scoring Style ETFs and Treasuries   32.5% 13.2% 13.5% 0.78 11.3% 0.67
P Momentum Scoring Sector ETFs   24.4% 12.1% 10.9% 0.57 9.3% 0.41
SPY (SPDR S&P 500)   28.0% 15.3% 16.9% 0.88 7.2% 0.3

Detailed comparison >>

All of these portfolios have done better in the 10 year time frame. Furthermore, the style rotation portfolio has done better than S&P 500 in the last 1, 3, 5 and 10 years . Our data continue to support the argument that, in addition to other factors such as size, styles (value/growth) and markets for portfolio construction, momentum is definitely another strong factor. 

Summary

To summarize, our goal is to deliver reasonable returns in bull markets and avoid big loss bear markets. Now that we are approaching the end of the bull market (or maybe not, but for sure this market has stretched quite far), it is the show time for the strategy to safe guard us through a more treacherous environment: No one knows when the bear market arrives: maybe it will be this year or maybe it will be next year or 2 years from now. One thing is for sure: it will come. The key here is that the strategy should deliver good returns if the party continues but should protect our capital if the bubble is burst. 

For that, we will continue to stick to our strategies in 2014. 

Market Overview

Stocks began with the New Year with weak performance. Again many major risk assets have sunk into negative trend score territory. It is also indicative that  bonds have crawled back a bit. 

For more detailed asset trend scores, please refer to  360° Market Overview

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

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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