March 5, 2012: Multiple Strategies Using Portfolio of Portfolios

03/06/2012 Share 0 comments

Re-balance Cycle Reminder

Based on our new monthly re-balance calendar, the next re-balance time will be on Monday, March 19, 2012. You can also find the re-balance calendar of 2012 on 'My Portfolios' page.

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.

Portfolios of Portfolios for Mutliple Strategies

We have alluded portfolios of portfolios (or composite portfolios) in several previous newsletters and articles. Last week's newsletter showed how to use portfolios as sub components to construct a two part core satellite portfolio. In fact, portfolio of portfolios are very powerful and flexible ways to help you to search for a suitable portfolio.

Fixed income portfolios

Many people have asked for a better fixed income portfolio for retirees or for a portion of assets that are supposed to be less volatile. It is also known that, compared with stocks, bond managers tend to deliver a more consistent performance. PIMCO's Bill Gross (for PIMCO total return bond fund) and Loomis Sayles' Dan Fuss (for Loomis Bond fund) are two well known consistent managers. On the other hand, any bond fund or manager can be still subject to idiosyncratic risk. So the question is whether one can use a strategy to regularly rank bond funds and still achieve reasonable or better performance. The answer is yes.

Users can use Tactical Asset Allocation(TAA) fund selection to choose one or two bond funds in a given plan. Many brokerage specific mutual fund plans do give a pre-selected list of bond funds. For example, a basic subscriber can customize a fixed income portfolio Fixed_Income_RP100_Fidelity Extended Fund Picks_Tactical Asset Allocation for Fidelity Extended Fund Picks that has a good list of fixed income funds. To do so, all you need is to set the risk profile to be 100 (meaning 100% should be in fixed income).

The following compares this portfolio, the fixed income portfolio Fixed_Income_RP_100_Schwab OneSource Select List Funds_Tactical Asset Allocation from Schwab OneSource Select List Funds and PIMCO total return bond fund:

Portfolio Performance Comparison (as of 3/2/2012)

See complete detailed comparison>>

It is remarkable that the Fidelity fixed income portfolio actually beats the PIMCO total return bond fund in the last 11 years! This is done just through shifting funds in the Fund Picks bond fund list.

Risk asset/stock portfolios

On the other hand, as stocks and commodities are more volatile and it has been proved again and again that actively managed funds do not necessarily deliver better performance, investors should use low cost indexed ETFs for this portion of investments. For example, a basic subscriber can construct a pure risk profile 0 (meaning target fixed income percentage is 0) portfolio from MyPlanIQ Diversified Core Allocation ETF Plan.

All_Stocks_RP0_MyPlanIQ Diversified Core Allocation ETF Plan_Tactical Asset Allocation

Portfolio of Stock and Fixed Income

Now we can construct a portfolio using our static portfolio concept (again, you can invoke this on 'My Portfolios' page) to construct a portfolio using the above two portfolios. For illustration purpose, we use Risk Profile 40 (thus, 60% in stocks and 40% in bonds) to construct a moderate risk portfolio  . You simply use a portfolio symbol (with a format P_xxxx where xxxx is the portfolio ID that you can find in the portfolio's URL ID section). For example, http://www.myplaniq.com/LTISystem/jsp/portfolio/ViewPortfolio.action?ID=36922 is the portfolio URL for Fixed_Income_RP100_Fidelity Extended Fund Picks_Tactical Asset Allocation. thus this portfolio's symbol is P_36922. All_Stocks_RP0_MyPlanIQ Diversified Core Allocation ETF Plan_Tactical Asset Allocation's portfolio symbol is P_36962.

The following shows the composite portfolio's performance.

Composite Moderate Portfolio Fidelity Fund Pick Fixed Income MyPlanIQ Diversified Core Stocks (click the link and then 'Performance Analytics' button to see the more detailed performance)

Annualized Return

To summarize, one can use portfolio of portfolios (or composite portfolios) to construct various portfolios to suit to your own preference.

Market Reviews

Last week, stocks started to show some weakness. Emerging market bonds (PCY) showed considerable strength in our major asset trend table on 360° Market Overview. Commodities and Gold are weaker than the total bond index (BND) now while the international stocks (EFA) has pretty much the same ranking as the totla bond index (BND). This is an uneven market at best and we continue to hold a very cautious stance.

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