11/15/2011

Morgan Stanley Smith Barney published its latest November viewpoints on portfolio strategies. It stated that the odds of a recession in the U.S. and beyond are “uncomfortably high.”  Here are its tactical changes for portfolios:

The global cash represents dollars and other currencies. This itself should be treated as an asset class that needs careful management.

Compared with MyPlanIQ's Tactical Asset Allocation(TAA), we are cautious and about 1/3 to 1/2 of full risk asset exposure. Some of our plans reduced risk asset exposures in September, helping to even preserve some gains from risk assets.

See Six Core Asset ETFs that consists of six major asset classes US Stocks (SPY, VTI), International Stocks (EFA, VEU), Emerging Market Stocks (EEM, VWO), REITs (IYR, VNQ), Commodities (DBC, GSG) and Total US Bonds (AGG, BND).

More details here.

Symbols: SPX, COMP, SPY, VTI, EFA, EEM, VWO, VNQ, IYR, DBC, AGG, Investment Management, Asset Allocation

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11/08/2011

The following is the newest October hot shot hedge fund performance data:

HedgeWeekly2011_No45

More specifically,

Our Tactical Asset Allocation(TAA) is similar to Global macro hedge fund strategy. We can see that both Strategic Asset Allocation and Tactical Asset Allocation model portfolios are compared favorably with the hedge fund averages. 

For more information, see Six Core Asset ETFs plan that has ONLY 6 broadbase ETFs (Vanguard low cost ETFs VTI, VEU, VNQ, VWO, BND and one Poweshares DB Commodities ETF DBC).

Permanent Global Portfolio ETF Plan uses Gold (GLD), silver (SLV) and other ETFs to form a diversified hedging portfolio.

Symbols: SPX, COMP, VTI, VEU, VNQ, VWO, BND, DBC, GLD, SLV, TLT, IYR, Retirement Investments, Hedge Funds, Asset Allocation

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11/07/2011

 BY DAVID JOHN MAROTTA

Just because something costs a lot doesn’t mean it is an investment. An investment is something that pays you money.

For most families the largest purchase they make will be their house. It is crucial to understand how to consider real estate holdings in every aspect of wealth management, from asset allocation to retirement planning.

An investment is something that pays you money. Therefore the house you and your family live in is not an investment. Neither is the vacation home you rent occasionally. Nor that piece of land next to your house you bought to preserve your view. It is human nature to justify a purchase by calling it an “investment,” but if it doesn’t pay you money, it shouldn’t be treated as an investment in financial planning.

Historically, equities appreciate at a rate of about 6.5% above inflation. If inflation has historically been 4.5%, equities average about 11%. Equities include stocks, stock mutual funds and stock exchange-traded funds (ETFs). Your portfolio should be invested mostly in equity investments to appreciate at a rate greater than inflation.

Fixed income is more stable, but averages interest payments of 3% over inflation. If inflation averages 4.5%, fixed-income investments average 7.5%. Fixed income includes bonds, bond mutual funds and bond ETFs.

Real estate as an investment falls somewhere between stocks and bonds. On average commercial real estate produces a real return of about 4.9% over inflation. If inflation averages 4.5%, commercial real estate averages 9.4%.

Commercial real estate as property with no income does not appreciate at the rate of inflation. It actually depreciates against inflation by about 1% a year. Fortunately, it should produce 5.9% in profit to overcome this depreciation and produce a real return of about 4.9% over inflation.

Handling commercial real estate privately requires more work. If your commercial real estate isn’t generating a lot more income than it costs to maintain it–including depreciation–it isn’t pulling its weight. Only if it can produce significant income and grow at a real return of 4.9% over inflation will a $100,000 investment in real estate grow to $331,000 after 25 years.

Similar equations can be used for residential real estate. On average it produces slightly less income, giving a real return of 4.1% and growing to have a buying power of $273,000. Obviously all real estate is subject to the increasing desirability of the area where it is located. Some excellent school districts have experienced appreciation significantly greater than inflation. But many rural communities have barely kept up.

These historical averages provide benchmarks as a way to judge the investment worthiness of a particular piece of property. If you own a $300,000 rental home, you should expect to average at least $3,000 each year in repairs and upkeep. One year it might be lower only to have major bills the next. Your benchmark is a real return of 4.1%. After repairs and all other expenses, you should have a profit of $12,300, or 4.1% of your investment. That means you have to have a profit of at least $15,300 (5.1%) or more for your investment to pay you the appropriate amount.

Real estate that pays you appropriately can be considered an investment for the purposes of wealth management. But you need to run it like an investment and track your return after all of your expenses.

This analysis helps explain why property that you do not rent is not an investment. Every $100,000 of equity put into property that lies fallow costs you $1,000 in expenses just to keep up with inflation. And although keeping up with inflation is good, without the 4.1% income there is no way your $100,000 investment will grow to have the increased purchasing power of $273,000.

In financial planning, therefore, we consider fallow property as simply keeping up with inflation and holding its purchasing power. In reality it deteriorates about 1% a year, but we assume your costs of upkeep are factored into your standard of living expenses. Whenever you decide to sell fallow property that money can be invested either in bonds earning 3% more than inflation or stocks earning 6.5% more than inflation.

A family’s home, however, is not even worth that much. Some couples sell a large expensive home, purchase a smaller house and invest the difference. Many believe they will, but when the time comes, their downsized house is so much nicer that little is left over to invest.

Additionally, for many couples the value in their home is used as equity toward an assisted living arrangement. The larger their home, the more expensive the retirement community they buy into. For these and other reasons, we usually do not assume that the equity in a family’s home will be available during retirement.

To reiterate, just because something costs a lot doesn’t mean it is an investment. Investments should appreciate at a rate that grows faster than inflation and gains purchasing power. And spending your money on noninvestments can jeopardize a plan to reach your goals of financial freedom. Investments should work for you, paying you money that you can spend or reinvest elsewhere.

Symbols: SPX, COMP, Retirement Investments, IYR, VNQ

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10/17/2011

Strategic Asset Allocation(SAA) and Tactical Asset Allocation(TAA) can complement to each other. The following is a recent article Core Satellite Portfolios For Long-Term Investments published on SeekingAlpha.com that discussed this issue:

"Recent market swings and weakness have proven to be difficult for both strategic and tactical asset allocation strategies. For a long-term investor who is concerned about his/her retirement investments, such as 401(k)s, IRAs, 403(b)s and variable annuity accounts, it is thus important to understand the strength and weaknes of the two common strategies.

The concept of core satellite portfolio construction has been adopted for several years by many investment advisers, wealth managers and financial planners. The EDHEC has collected several papers detailing this concept."

......

Read more on Core Satellite Portfolios For Long-Term Investments. 

See the Core Satellite Six Core Asset ETFs 25 Core 75 Satellite portfolio and the comparison with strategic asset allocation and tactical asset allocation.

Symbols: SPX, COMP, AGG, BND, DBC, EEM, EFA, GSG, IYR, SPY, VEU, VNQ, VTI, VWO, Retirement Investments, Portfolio Management, Asset Allocation

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09/16/2011

University of California systems is the largest public university system in the nation. It provides its faculties and staff 457(b) deferred compensation, defined contribution and 403(b) tax deferred plans with UC Core Funds and a set of supplemental low cost funds from Vanguard, Dimensional Funds and Dreyfus. Please refer to its annual report of June 2010 for more information.

This report reviews University of California Retirement Savings Program plan. We discuss its investment options and presents the plan rating by MyPlanIQ. Asset allocation investment portfolios are examined. We then show how plan participants in University of California Retirement Savings Program can achieve reasonable investment results using portfolio management and risk management strategies for their 401k investments.

We form University of California Retirement Savings Program using funds reported in the annual report. UC Core funds are represented by corresponding Vanguard index funds as proxies.

The plan consists of 15 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity, Fixed Income.

As of Sep 15, 2011, this plan investment choice is rated as average based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:

Diversification -- Rated as above average (84%)
Fund Quality -- Rated as below average (24%)
Portfolio Building -- Rated as above average (78%)
Overall Rating: average (64%)

The plan has a good diversification score as it covers the five major asset classes. In the US stock asset class, it has small and large cap style funds. All of these are low cost index funds.

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 5 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: SPY or VTI
Foreign Equity: EFA or VEU
REITs: IYR or VNQ or ICF
Emerging Market Equity: EEM or VWO
Fixed Income: AGG or BND

Performance chart (as of Sep 15, 2011)

Performance table (as of Sep 15, 2011)

In the last 5 year time span, the UC Plan beats the SIB 5 core portfolios in both strategic and tactical asset allocation categories. This indicates that extra minor asset classes (such as small/large cap) do provide additional opportunities for better portfolio management and risk management.

To summarize, participants in University of California Retirement Savings Program plan can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles. Diversification and proper risk management are the two major key factors in retirement investments (in this case, 403b investments).

Symbols: SPX, QQQQ, IWV, EFA, VTI, VEU, VWO, VNQ, BND, VSMAX, DFEMX, VGSLX, VFTSX, VBISX, VBTLX, VFINX, VIPSX, CFUNX, FSLBX, Retirement Investments, 403b Investments, Portfolio Management, Risk Management

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09/14/2011

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12/03/2010

This report reviews Apartment Investment and Management Company 401(k) Retirement Plan plan. We will discuss the investment choices and present the plan rating by MyPlanIQ. Current economic and market conditions are discussed in the context of the investment portfolios in the plan. We will then show how participants in Apartment Investment and Management Company 401(k) Retirement Plan can achieve reasonable investment results using asset allocation strategies.

Plan Review and Rating

Apartment Investment and Management Company 401(k) Retirement Plan's 401K plan consists of 22 funds. These funds enable participants to gain exposure to 4 major assets: US Equity, Foreign Equity, REITs, Fixed Income. The list of minor asset classes covered:

Foreign Large Growth: EFG
Inflation-protected Bond: TIP
Intermediate-term Bond: AGG, CIU, BIV, BND
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
Large Growth: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
Large Value: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
Mid-cap Blend: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
Real Estate: IYR, ICF, VNQ
Retirement Income:
Small Blend: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
Small Value: IJS, IWN, JKL, VBR, DSV, PWY, RZV, UVT
Target Date 2000-2010: TZD
Target Date 2016-2020: TZG
Target Date 2026-2030: TZL
Target Date 2036-2040: TZV
Target Date 2050+:

As of Dec 2, 2010, this plan investment choice is rated as based on MyPlanIQ Plan Rating methodology that measures the effectiveness of a plan's available investment funds. It has the following detailed ratings:

Diversification -- Rated as (76%)
Fund Quality -- Rated as (36%)
Portfolio Building -- Rated as (87%)
Overall Rating: (68%)

Current Economic and Market Conditions

We have experienced an uncertain 2010: plenty of worries on whether the US economy will climb out of the great recession and recover.

• The Federal Reserve embarked on Quantitative Easing II (QE2) to stimulate the economy.
• The housing market is still at its low but largely stabilized.
• The unemployment rate is stuck at 9%.

Americans continue to face an uncertain future, given (among others) the high unemployment rate, large federal and local government debts and global trade imbalance. With such an economic backdrop, the stock and debt markets are going to be volatile. Despite this, markets have been resilient and appear positioned to rebound.

In this market it is even more critical to properly diversify and respond market changes. MyPlanIQ offers two asset allocation strategies: strategic and tactical asset allocation strategies ( SAA and TAA for participants in Apartment Investment and Management Company 401(k) Retirement Plan).

Strategic Asset Allocation is based on well known modern portfolio theory and its key features include: diversification, proper fund selection and periodically re-balancing.

Tactical Asset Allocation works on a diversified array of assets provided by funds in a plan and adjusts asset mixes based on market conditions such as asset price momentum utilized by TAA.

Portfolio Discussions

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies. For comparison purpose, we also include the moderate model portfolios of a typical 4 asset SIB (Simpler Is Better) plan . This SIB plan has the following candidate index funds and their ETFs equivalent:

US Equity: (SPY or VTI)
Foreign Equity: (EFA or VEU)
REITs: (IYR or VNQ or ICF)
Fixed Income: (AGG or BND)

Performance chart (as of Dec 2, 2010)

Performance table (as of Dec 2, 2010)

Currently, asset classes in US Equity (SPY,VTI), Foreign Equity (EFA,VEU) and REITs (IYR,VNQ,ICF) are doing relatively well. These asset classes are available to Apartment Investment and Management Company 401(k) Retirement Plan participants.

To summarize, Apartment Investment and Management Company 401(k) Retirement Plan plan participants can achieve reasonable investment returns by adopting asset allocation strategies that are tailored to their risk profiles.

Symbols: AIV , SPY , VTI , EFA , VEU , IYR , VNQ , ICF , AGG , BND , CIU , BIV , EFG , IVE , IWW , JKF , VTV , ELV , PWV , RPV , SCHV , TZD , TZG , TZL , TZV , IVV , IYY , IWV , VV , DLN , RSP , SCHX , IVW , IWZ , JKE , VUG , ELG , QQQQ , RPG , SCHG , IJH , IWR , JKG , VO , MDY , EMM , PJG , DON , EZM , MVV , IJS , IWN , JKL , VBR , DSV , PWY , RZV , UVT , IJR , IWM , JKJ , VB , DSC , PJM , DES , SAA , UWM , SCHA , IJT , IWO , JKK , VBK , DSG , PWT , RZG , UKK , TIP

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