May 29, 2012: Four Corner Investment Framework Applications
05/29/2012 0 comments
Re-balance Cycle Reminder
We just had a re-balance today. Based on our monthly re-balance calendar, the next re-balance time will be on Monday, July 2, 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.
Also please note that we now list the next re-balance date on every portfolio page.
Application of The Four Corner Investment Framework
Now that we finished our introduction to the four corner investment framework, we will devote this newsletter to discuss how to apply it to various investment plans.
Before we go further, for those we have missed our previous newsletters, here are the complete five articles for this subject:
- April 23, 2012: All Weather Portfolio Construction
- April 30, 2012: Inflation Hedges,
- May 7, 2012: Bonds As Deflation Hedges
- May 14, 2012: Cash Is The King
- May 21, 2012: Equity Investments
Taxable or IRA Brokerage Accounts
An investment brokerage such as Fidelity or Schwab offers many ETFs and low cost mutual funds that investors can utilize. There are numerous portfolios that are based on this four corner 'permanent portfolio' concept. Here are some of the example portfolios and plans we are tracking:
- Permanent Global Portfolio ETF Plan
- Permanent Portfolio ETF Plan
- Harry Browne Permanent Portfolio
- Permanent Portfolio ETF Version
- Permanent Income Portfolio
You also have options to buy a fund that invests based on permanent portfolio concept:
- Permanent Portfolio Fund PRPFX
- ETF Review: Global X Permanent ETF (PERM) or see the fund PERM performance.
If you are fine with the risk of a pre-built permanent portfolio, you can either purchase a fund or build your portfolios. However, knowing the structure of the portfolio gives an advantage to customize the portfolio risk to suit your situation. We have mentioned how to create a more income oriented 'permanent' portfolio in our April 23, 2012: All Weather Portfolio Construction newsletter.
On the other hand, you can further increase your risk level (if desired) by putting more weight in the equity investment category. However, please note that leaning too much on one or two corners can alter the hedging ability.
You can further work on that by using other alternatives in each category and back test them out using our Static Portfolio utility. Again, the static portfolio utility is free of charge and anyone with an account on MyPlanIQ can create one.
401K or Other Retirement Investments
Most retirement investment plans such as 401K or 403B only provide a list of pre-selected funds. This limits choices one can use to build such a permanent or four corner framework based portfolio. For example, as far as we know, no retirement plans offer gold investments (even though quite some offer gold mining stock funds, which belong to equity investments instead of inflation hedging category).
However, we can still construct our portfolios based on the properties of funds offered in a plan.
For example, many plans now offer inflation protected bond (TIPS) funds. These funds can be used in place of the inflation hedging corner as they are very much directly linked with inflation. See Permanent Income Portfolio for an example.
Furthermore, for plans that are lack of direct inflation hedge investment funds, one can use proxies such as REITs (if any) or utility stocks or even general stock funds. Certainly, as we move more and more away from the direct link, we should be careful on how much weights one should put into those investments. But the point here is that one can still work within the four corner framework if the alternatives are limited.
Taking A Holistic View
Finally, one should take a holistic view when one builds an investment portfolio: many people have multiple accounts including some taxable brokerage accounts, some IRA accounts and some 401K or retirement accounts etc.. Instead of best fitting your 401K portfolio to a permanent portfolio, for example, you can designate it as taxable bond and/or TIPS investments. Or if you are taking an active tactical investment approach, use it for equity portion as it does not have tax consequences.
In the next newsletter, we will go into more depth on how to construct sub portfolios for each category to build a composite portfolio that is under the four corner investment framework.
Portfolio Reviews
We compare tactical portfolios for variable annuity plans.
Portfolio Performance Comparison (as of 5/25/2012)
| Portfolio/Fund Name | YTD Return | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| Schwab OneSource Annuity Tactical Asset Allocation Moderate | 4% | 5% | 59% | 15% | 136% | 11% | 100% |
| Vanguard Variable Annuity Tactical Asset Allocation Moderate | 3% | 3% | 35% | 13% | 117% | 8% | 75% |
| American Legacy Shareholders Advantage Variable Annuity Tactical Asset Allocation Moderate | -1% | -1% | -25% | 8% | 120% | 8% | 96% |
| Fidelity Personal Retirement Annuity Tactical Asset Allocation Moderate | 4% | -0% | -1% | 12% | 99% | 9% | 78% |
| John Hancock Venture Vantage Variable Annuities Plan Tactical Asset Allocation Moderate | 3% | 2% | 22% | 14% | 126% | 10% | 93% |
See variable annuity tactical model portfolio performance comparison for more details.
Overall, these portfolios have done reasonably well year to date and for the past 5 years.
Market Overview
As we are now officially in the summer period, stock markets around the world have been very unsettled. As it stands, US REITs is the only risky asset that is ranked high. The way our tactical asset allocation strategy handles this situation is a good example for the difference between the TAA and an all in and all out market timing strategy. By still maintaining some REIT investments in a portfolio, we can still have some benefit from a recovery from here. On the other hand, portfolio risks have been reduced due to the weakness in other stock investments.
Though markets have priced strongly a decoupling effect between US stocks and the rest of world, it is hard to see a severe recession in Europe, one third of the global economy, would not affect US economy meaningfully, given anemic economic growth and/or struggle in the US, Japan, China and other major emerging markets.
Regardless what asset allocation strategies you are following, for users who are uncomfortable with their risk level, we again urge them to review their portfolios' risk levels. It is not too late to pare down excessive risk (if there is any) at the moment.
See MyPlanIQ 360 Degree Market View for more details.
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