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Articles on DBC)

  • Dow Jones, Shiller And Momentum Approaches Compared


    While the disaster is Japan will take many years to be put right, there is a very important lesson that can easily be overlooked in the rush to stop radioactive leaks and repair the damage. Like New Orleans where the leveeswere known to be a problem area, Japan's nuclear reactors were living on borrowed time, having had their life extended -- just another year. The temptation to delay until next time is very seductive until disaster strikes and the cost to repair, dwarfs the cost to prevent.

    Retirement investing is a "hair on fire" problem -- especially for baby boomers for whom retirement is a near and present danger. Retirement investing cannot be left -- just a little longer.

    We are looking at a variety of trigger mechanisms to signal when to make a change in your portfolio.

    1. Dow Theory
    2. Shiller's CAPE
    3. Momentum Based Asset Allocation

    The Dow Theory -- the grand-daddy of all portfolio strategies can be compared with more modern approaches. We will look at Shiller, a long term but newer approach and then modern portfolio theory which is based on asset allocation.


    The Dow Theory is one of the most venerable strategies. It uses the price trends of the Dow Jones Industrial index (^DJI) and the Dow Jones Transportation Index (^DJT) to decide whether to invest in the stock market.

    The Dow Theory has been around for almost 100 years, yet even in today’s volatile and technology-driven markets, the basic components of Dow theory still remain valid. Developed by Charles Dow, refined by William Hamilton and articulated by Robert Rhea, the Dow Theory addresses not only technical analysis and price action, but also market philosophy. Many of the ideas and comments put forth by Dow and Hamilton became axioms of Wall Street.

    Today, there are a variety of strategies.

    There are multiple interpretations of the original Dow Theory. This strategy represents a typical version: all the buy and sell signals are confirmed by both the Dow Jones Industrial Average and Dow Jones Transportation Average.

    The Dow Jones Transportation Average is used to triangulate the Dow Jones Industrial Average to ensure that an upward or downward trend is not just a localized phenomenon.

    The buy signal

    • A primary low is established

    • A secondary bounce

    • A pullback of around 3% but above previous lows

    • Both averages hold above the prior lows

    • Both averages exceed the secondary bounce

    The sell signal

    • A primary high is established

    • A secondary drop

    • A rally of over 3% but falls short of the previous high

    • A drop of both averages below the previous drop

    The funds in the portfolio are (ETF alternatives):

    • Wilshire 5000 total return index ^DWC (VTI, SPY, IWM)

    • Cash (BND)

    Yale Professor Robert Shiller devised and maintained a ‘Cyclically Adjusted Price Earning’ ratio (CAPE10) as an alternative to the popular PE ratio to value the US stock market. CAPE10 is defined as the ratio of price to the average of last 10 year trailing S&P 500 annual earnings. We capture this strategy called Shiller Cyclically Adjusted PE 10 Stock Market Timing Strategy. This strategy characterizes the stock market valuation into the following five categories based on the ratio of the current CAPE10 to the long term average CAPE10:

    • Significantly Overvalued (SO): such as if the ratio >= 150%
    • Modestly Overvalued (MO): such as if   117% <=  ratio < 150%
    • Fairly Valued (FV): such as if 83% <= ratio < 117%
    • Modestly Undervalued (MU): such as if 67% <= ratio < 83%
    • Significantly Undervalued (SU): such as if ratio < 67%

    We implement a simple strategy that makes a switch to cash once the market is significantly overvalued and back to equities when the market is modestly undervalued.

    The funds in the portfolio are (ETF alternatives):

    • Wilshire 5000 total return index ^DWC (VTI, SPY, IWM)

    • Cash (BND)

    Finally we take the tactical asset allocation which uses a 200 day rolling average.


    Click here for the interactive graph.

    Historical Returns for Dow Theory, Shiller and 6SIB TAA

    Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    P Shiller Cyclically Adjusted PE 10 Stock Market Timing Strategy Monthly 5% 94% 4% 30% 3% 23%
    Six Core Asset ETF Benchmark Tactical Asset Allocation Moderate 11% 83% 9% 79% 13% 91%
    P Dow Theory DJI 0% 20% -0% -7% 2% 9%

    The Dow Theory has not been effective in the last ten years given the prevailing market conditions. It is possible that a different investment portfolio would perform better but given that Shiller is using similar funds, Shiller appears to be a better choice.



    • Both the Dow Theory and Shiller are based on long term indices and both of them outperform the market

    • Shiller performs better as we recover from the nightmare of the last few years -- it is bipolar in terms of volatility -- depending whether it is in cash or equities.

    • Modern portfolio theory based on diversification and tactical asset allocation has good returns and reasonable volatility – within the measurement timeframe


    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned



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  • Earthquakes and Wars Call for Diversification and Tactical Asset Allocation in Investing


    Investing for wealth preservation and growth or for retirement purpose is by definition a long term process. In a long term period, experiencing wars, natural disasters and political or social unrests is a fact of life. How to deal with and navigate through these threatening events is pertinent to the success to achieve financial goals. 

    As baby boomers are exiting or getting ready to exit the work force, this year suddenly saw many dramatic events unfolding: Japan's earthquake and the still unfolding nuclear power meltdown events, the middle east violence with fear of radical islamic involvement and, this weekend's airstrike by allied forces on the Libyan regime are all pointing to certain tipping points in the world economic and political landscape. The new generations and the baby boomers suddenly find themselves in a world with entangled dangerous events. 

    The events certainly made their marks on financial markets: the big swings of the Dow Jones Industrial stocks (DJI) and S&P 500 stocks (SPY) left a dent on the otherwise stubborn euphoric markets. Most risk assets including U.S. stocks (SPY) (VTI), international stocks (EFA) (VEU), emerging market stocks (EEM) (VWO) and REITs (IYR) (VNQ) (RWX) lost ground in the last week. The only standout in the group is commodities (DBC) (GSG). For the week, DBC actually gained 0.78% while gold (GLD) gained 0.11%. For more detailed performance information, please refer to here. 

    The key to succeed in long term investing lies in adopting sound and consistent (thus long term) strategies in managing one's portfolios. Buy and hold of a basket of major assets with properly calculated risk tolerance is one way. A more maverick way can enhance return with lower risk by adopting some tactical moves in asset allocaiton. Let's first review the following portfolios using a strategic asset allocation (buy and hold among equal weights on risk assets): 
    A. Three Core Asset ETF Benchmark Strategic Asset Allocation Moderate (US Equity (VTI) (SPY), International Equity (VEU) and Fixed Income (BND))
    C. Five Core Asset ETF Benchmark Strategic Asset Allocation Moderate (additional US REITs (VNQ) (IYR) added)
    D. Five Core Asset ETF With Commodity Benchmark Strategic Asset Allocation Moderate(additional commodities (DBC) added to the four asset portfolio)
    E. Six Core Asset ETFs Strategic Asset Allocation Moderate (include US Equity, International Equity, Emerging Market Equity, REITs, Commodities and Fixed Income)

    For the week, Six Core Asset ETFs Strategic Asset Allocation Moderate lost 0.34% compared with 0.66% loss of Five Core Asset ETF Benchmark Strategic Asset Allocation Moderate or 0.68% loss of Three Core Asset ETF Benchmark Strategic Asset Allocation Moderate. With the smaller loss of REITs and the commodity performance, diversification does show its advantage during the market stress. 
    The last ten years experienced two major economic downturns: the technology bubble burst in 2000-2002 and the financial bubble burst in 2008-2009. The pure buy and hold strategy, even with proper diversification, does not shield its portfolios from big loss. A more active portfolio strategy such as this tactical asset allocation strategy (TAA) can be used. The following again compares the five portfolios with 3,4,5,6 assets using TAA. All of them are moderate risk portfolios. 

    Portfolio Performance Comparison

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Three Core Asset ETF Benchmark Tactical Asset Allocation Moderate -3% -32% 2% 16% 4% 28%
    Six Core Asset ETFs Tactical Asset Allocation Moderate 9% 67% 10% 78% 14% 96%
    Four Core Asset ETF Index Funds Emerging Markets Tactical Asset Allocation Moderate -2% -16% 7% 62% 10% 64%
    Five Core Asset ETF With Commodity Benchmark Tactical Asset Allocation Moderate 2% 18% 5% 43% 10% 64%
    Five Core Asset ETF Benchmark Tactical Asset Allocation Moderate 6% 42% 7% 60% 10% 63%
    The six asset portfolio with TAA  actually had a slight gain in the last week and it is also positive in the last month. This clearly illustrates that tactical asset allocation over a diverse array of major assets can be effective. 
    The following table shows the trend scores of major assets ending 3/18/2011. 


    Assets Class Symbols 03/18
    Commodities DBC 14.15% 12.94% ^
    Gold GLD 8.86% 9.46% v
    US Equity REITs VNQ 5.89% 8.03% v
    US Stocks VTI 5.55% 8.03% v
    International Treasury Bonds BWX 5.07% 4.04% ^
    International REITs RWX 4.27% 6.89% v
    US High Yield Bonds JNK 3.74% 4.13% v
    Emerging Market Stks VWO 2.97% 4.64% v
    Intermediate Treasuries IEF 1.82% 1.16% ^
    US Credit Bonds CFT 1.71% 1.71% v
    Total US Bonds BND 1.12% 0.97% ^
    International Developed Stks EFA 0.87% 3.28% v
    Emerging Mkt Bonds PCY 0.57% 1.18% v
    Mortgage Back Bonds MBB 0.23% 0.12% ^
    Treasury Bills SHV 0.05% 0.05% v
    Municipal Bonds MUB -0.9% -1.22% ^
    Frontier Market Stks FRN -3.22% 1.01% v
    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

    In conclusions, no one has a crystal ball to predict the future. The effective way to cope with major risks for mankind is to adhere to sound portfolio strategies such as asset allocation with diversification and tactical allocation based on prevailing events. 



    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.

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  • RWO, RWR Replace VNQ in the Six Asset Portfolio


    We are working through a series of articles to help improve returns for retirement investors. Aging boomers highlight the major retirement crisis as they come to the end of their working careers. They don’t have enough money. There is no money to bail out retirement – it’s already been spent on salvaging the economy for the working. It is going to be up to the individual to make the most of what they have. They will have to accept less or work longer or achieve better returns from their investments

    We believe that it is possible for the individual to be more involved with their retirement investing and to see better results. These articles are intended to help build the foundational understanding that will enable better returns, lower risk and less angst in our lives.

    What we have seen is:

    • Increasing diversification from three areas to six can make a significant impact on simulated historical returns
    • Only a few retirement plans (~4%) have six asset classes but  it may be possible to create a holistic portfolio with the combination of IRA and 401K plans
    • We have added a managed bond fund in this critical area at a time when fixed income is under pressure and that part of the portfolio would benefit from active management. Note that we have picked what is probably one of the gold standards of recent years and not all managers are created equal
    • The current set of funds we have developed are VTI, VEU, BND, VNQ, VWO, DBC, PTTDX
    • We replaced VTI with LargeCap Blend RSP,  MidCap Value IJJ SmallCap Growth VBK
    • (NYSEArca: VTI ), (NYSEArca: VEU), (NYSEArca: BND), (NYSEArca: VNQ), (NYSEArca: VWO), (NYSEArca:  DBC), (MUTF:PTTRX), (MUTF: PTTDX),  (NYSEArca: RSP), (NYSEArca: IJJ), (NYSEArca: VBK),

    In the last article we saw that adding three US ETFs in place of VTI didn't move the needle much. That doesn't mean that it is not valuable to have the funds, just that the market dynamics didn't show the benefit.It is likely that the benefits will be seen in future as SmallCap Growth are currently leading the US equities league table

    In this article, we are going to focus on Real Estate Trusts. Anything with Real Estate in its name causes a visceral reaction as Real Estate was the notional straw that broke Wall Street's back and while the recovery is happening, we are not out of the woods. However, Real Estate Trusts are not consumer biased and they have been strong contributors to portfolios over the past year.

    To keep the portfolio as small as possible, I am going to have two funds -- one domestic and one international.

    U.S. REITs

    Description Symbol 1 Yr 3 Yr 5 Yr Avg.
    1 Yr Sharpe
    Vanguard REIT Index ETF VNQ 30.39% 3.38% 1.97% 1,694 174.86%
    SPDR Dow Jones REIT RWR 31.88% 2.47% 0.57% 243 184.72%
    iShares Cohen & Steers Realty ICF 33.82% 0.56% -0.1% 616 191.7%
    iShares Dow Jones US Real Estate IYR 29.32% 1.97% -0.14% 7,342 176.35%

    The US REITs are ordered by they five year returns. While VNQ has the best five year return, it is at the bottom of the list over the past one year. ICF is attractive in the short term but has poor medium term performance. Therefore, I selected RWR as it has better short term properties and will likely be better going forward. Again, I am not an expert in researching likely forward looking returns, others may be.

    International REITs

    Description Symbol 1 Yr 3 Yr 5 Yr Avg.
    1 Yr Sharpe
    SPDR Dow Jones Global Real Estate RWO 27.78% NA NA 71 144.86%
    SPDR Dow Jones Intl Real Estate RWX 24.45% -3.57% NA 312 106.56%
    WisdomTree International Real Estate DRW 22.25% -3.97% NA 32 99.26%
    iShares S&P Dev ex-US Property WPS 16.81% -4.01% NA 20 79.7%
    iShares FTSE EPRA/NAREIT Dev Real Estate IFGL 13.32% -5.29% NA 66 65.6%

    When we examine the international REITs, we see that they have a shorter history so they were sorted on the three year returns and RWO came out the clear winner.

    My two picks are

    • SPDR Dow Jones REIT RWR
    • iSPDR Dow Jones Global Real Estate RWO

    It is possible to make different selection and measure historical returns but these are the choices I make for this exercise and we will now review the historical returns against the previous version with just VNQ. Note that I have removed VNQ from the list of fund choices.

    Attribute Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT Six Core Asset ETF Benchmark With PTTRX-3USETFs
    Diversification above average (68%) above average (65%)
    Fund Quality average (37%) average (54%)
    Portfolio Building above average (80%) above average (83%)
    Overall Rating average (64%) above average (69%)

    Performance chart (as of Mar 10, 2011)

    Performance table (as of Mar 10, 2011)

    Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT Tactical Asset Allocation Moderate 11% 82% 10% 79% 14% 96%
    Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT Strategic Asset Allocation Moderate 16% 128% 6% 28% 8% 38%
    Six Core Asset ETF Benchmark With PTTRX-3USETFs Tactical Asset Allocation Moderate 13% 96% 11% 84% 14% 98%
    Six Core Asset ETF Benchmark With PTTRX-3USETFs Strategic Asset Allocation Moderate 16% 124% 7% 31% 8% 40%

    We have already noted that the graph is going to be misleading because of the youth of the ETFs. VTI and VNQ were available before RWO, RWR, RSP, IWS and IJT so, in the early days, we were comparing portfolios with different numbers of asset classes. We have also noted that VNQ beat RWR in the longer time horizon and RWO was not available in the five year horizon but only in the three year horizon.


    • In the longer term there is no appreciable difference at least rounded up to the nearest whole percent
    • In the three year time frame the plan with the extra funds beats the other by 1% over both strategic and tactical asset allocation
    • In the short term, the simpler plan actually outperformed the plan with more funds which seems counter intuitive

    We have already covered the limitations of momentum strategies and how that pertains to rotating sub-classes. The asset class rotation was not effective in the one year timeframe for Tactical asset allocation and the as both SAA and TAA will deploy both the REITs and their aggregate performance almost equal to VNQ so the SAA strategies are identical.

    It is important to weigh the merits of historical performance which is past with the hope for future performance. The choices made here were with an eye to the future. International REIT will hopefully provide better diversification to minimize volatility and capture gains and the choice of the newer funds with better short term performance should hopefully give better returns. However, there is not a huge difference and it could be, for the sake of simplicity, one would want to keep this at one fund..


    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.


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  • Swensen Six Asset Lazy Portfolio Review Exhibits Different Q1 Behavior


    In the last article, we looked over the prior year's returns for the Swensen Six Lazy Portfolio. David Swensen, the Yale Endowment Investment Manager, proposed this portfolio for individual investors.

    - 30% in Vanguard Total Stock Market Index (MUTF: VTSMX)  ), (NYSE: VTI)

    - 20% in Vanguard REIT Index (MUTF: VGSIX), (NYSE: VNQ)

    - 20% in Vanguard Total International Stock (MUTF: VGTSX) or 15% in (VGTSX) and 5% in (MUTF: VEIEX), (NYSE: VEU), (NYSE: VWO), (NYSE: VEA)

    - 15% in Vanguard Inflation Protected Securities (MUTF: VIPSX), (NYSE: TIP)

    - 15% in Vanguard Long Term Treasury Index (MUTF: VUSTX), (NYSE: LQD)


    We made one year comparisons between
    • The original Swensen funds with an annual rebalance. Swensen himself performs a daily rebalance but that is too onerous for the general user
    • The original Swensen funds with a quarterly rebalance. Normal protocal for advisors is to have a quarterly review of a portfolio and that is what this is
    • The Swensen funds with the MyPlanIQ strategic asset allocation for a moderate portfolio, 40% bonds 20% in each of the other three asset classes
    • The Swensen funds with the MyPlanIQ tactical asset allocation for a moderate portfolio, 40% bonds 30% in each of the top two asset classes or moved to fixed income (including cash)
    • The Six Core Asset ETF Benchmark

    We now drill down into the first quarter of 2011 to see where differing market conditions test the portfolio's performance. As we come to the end of the QEII program, we expect to see pressure on fixed income. PIMCO recently moved more heavily into cash and fixed income has been under pressure in general for a couple of quarters. In addition, with inflation becoming a reality in the emerging world, the lack of commodities could result in a drop in returns.

    We previously noted that the buy and hold portfolios outperformed the momentum portfoilos over the past year. However, as we look into the end of that year (March 2010 - March 2011), we see a different picture emerging. There are a lot of moving parts as the fixed income segment is under a lot of pressure which is only exacerbated by the end of QEII. Inflation is making commodities more desirable followed by real estate and US Equities.

    By looking at the current Major Asset Class Trends (note that we include Gold even though it isn't a major asset trend in its own right) we can see that Commodities are clearly leading the field. Real Estate and US Equities are running neck and neck and fixed income is at the bottom of the table.

    Major Asset Classes Trend


    Description Symbol 1 Week 4 Weeks 13 Weeks 26 Weeks 52 Weeks Trend Score
    Commodities DBC -3.09% 2.93% 12.39% 27.11% 25.38% 12.94%
    Gold GLD -0.81% 4.46% 2.08% 13.55% 28.04% 9.46%
    US Stocks VTI -1.42% -1.83% 6.16% 20.86% 16.39% 8.03%
    US Equity REITs VNQ 0.03% -1.17% 7.18% 11.52% 22.59% 8.03%
    International REITs RWX -2.38% 0.62% 3.97% 12.27% 19.95% 6.89%
    Emerging Market Stks VWO -2.15% 0.96% -0.17% 10.17% 14.38% 4.64%
    US High Yield Bonds JNK -0.52% 0.13% 4.14% 7.46% 9.42% 4.13%
    International Treasury Bonds BWX -0.23% 2.98% 4.84% 6.29% 6.33% 4.04%
    International Developed Stks EFA -3.09% -2.45% 2.97% 12.37% 6.61% 3.28%
    US Credit Bonds CFT 0.57% 1.48% 1.49% -0.3% 5.3% 1.71%
    Emerging Mkt Bonds PCY 0.65% 1.93% -1.05% -1.84% 6.23% 1.18%
    Intermediate Treasuries IEF 0.71% 2.07% 0.2% -2.75% 5.59% 1.16%
    Frontier Market Stks FRN -0.59% -0.99% -9.1% -0.5% 16.21% 1.01%
    Total US Bonds BND 0.55% 1.57% 0.56% -0.72% 2.92% 0.97%
    Mortgage Back Bonds MBB 0.47% 1.64% 0.46% -2.36% 0.41% 0.12%
    Treasury Bills SHV 0.04% 0.03% 0.04% 0.06% 0.09% 0.05%
    Municipal Bonds MUB -0.08% -0.58% 1.34% -5.02% -1.76% -1.22%



    Comparing the different plans, they each have slightly different properties

    • The two original Swensen plans will only rebalance, there is no notion of rotating funds -- with the simplicity of the plan, this only makes sense with the fixed income portion
    • The Swensen plan with TAA and SAA do have the ability to rotate fixed income funds into cash or each other with a 90 day redemption period restriction
    • The Benchmark has commodities and the ability to rotate funds into cash with a 30 day redemption period


    • The Six Asset Benchmark has moved all the fixed income to cash and has the risk assets in real estate and commodities.
    • The Swensen TAA is in cash Real Estate and US Equities 
    • The Swensen SAA has 15% in cash and 15% in inflation protected (TIP, VIPSX), the balance distributed over US, international and Real Estate

    The takeaways from the last quarter's review are:

    • Equities have still been doing well so that the buy and hold of the original Swensen portfolio with only 30% in fixed income is doing well
    • The benchmark still trumps the original portfolio based on exposure to Commodities and the ability to move out of fixed income into cash
    • The Swensen TAA and SAA portfolios are weighed down by extra fixed income exposure and not access to commodities as well as not being able to quickly move in and out of sub-classes with a 90 day holding period

    Our contention is, for those who are serious about optimizing their long term investments, that you have to be involved. A lazy portfolio is appealing because you can "fire and forget" with only quarterly adjustments. However, if you want more out of your investments and you accept that conditions will change, then a portfolio with monthly adjustments is more likely to give you better returns. It's our contention that a monthly review (not necessarily requiring action every month), is about the right frequency.


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  • What Do Japan and Libya Tell Us About Retirement Investing?


    The events of recent days reveal the connected nature of the world in which we live. Twenty years ago, Japan was part of the mysterious far east and now we share their disaster minute by minute and are moved by their courage and the tragedy. 

    We also observe how startling events of nature, along with man-made events in North Africa and the Middle East have put a significant damper on the financial markets and a dagger of fear can pierce our hopes for a sustained rally and the recovery of our hopes for a secure retirement. Just as the Japanese preparedness has been tested to breaking point, incidents and unexpected changes in direction test the preparedness of our financial planning and investing strategy. It is one thing to have a backup in case it rains but who really would have thought that a triple disaster would strike

    In that light, we are looking to build an investment portfolio that will provide downside protection and upside growth to deal with the slings and arrows of outrageous fortune. We have seen that diversifying from three to six asset classes doubled your investments in a decade based on historical simulations of a simple six asset class benchmark. Subsequent to that, we have been adding more funds to each of the asset classes to determine if, and by how much, adding additional funds will provide additional returns.

    We have already reviewed what adding more funds to fixed income, US Equties and REIT has made. In this article we add commodities and then review all the work we have done to date and draw some conclusions before we add the last two classes.

    In the original benchmark, we had (NYSE: DBC) as the commodity ETF. The main reason for this is that it is one of the oldest commodity ETF's that will provide the best history. If we review the alternatives with an eye to the future as well as the past, we should look at how they have performed recently.

    Description Symbol 1 Yr 3 Yr 5 Yr Avg. Volume(K) 1 Yr Sharpe
    GreenHaven Continuous Commodity GCC 36.84% -0.63% NA 193 247.99%
    ELEMENTS Rogers Intl Commodity RJI 28.08% -8.14% NA 596 137.27%
    iPath DJ-UBS Commodity Index Tracker DJP 23.05% -9.31% NA 461 135.02%
    PowerShares DB Commodity Index DBC 24.64% -8.02% 6.6% 2,249 127.44%
    iShares S&P GSCI Commodity-Index GSG 16.76% -15.92% NA 639 77.14%

    We note that DBC is the only choice with five years of history. We also note that GreenHaven has the best 1 and 3 year returns and so would be a natural pick. I am have decided to stay with DBC so that we have the historical perspective when we run simulation.

    When we look at this, we would expect that the addition of GCC will be of benefit to the strategic asset allocation as it provides a better choice in the three and one year timeframe. The benefit to the tactical asset allocation will be more in the one year timeframe as the strategy would likely have preferred fixed income or cash in the three year timeframe.

    SAA(Moderate) Performance Comparison of Plans

    Plan Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Six Core Asset ETF Benchmark(Moderate) 10% 113% 4% 17% 6% 32%
    Six Core Asset ETF Benchmark With PTTRX(Moderate) 11% 111% 5% 23% 7% 37%
    Six Core Asset ETF Benchmark With PTTRX-3USETFs(Moderate) 10% 109% 6% 26% 7% 38%
    Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT(Moderate) 10% 113% 5% 23% 7% 35%
    Six Core Asset ETF Benchmark With PTTRX-3US-2REIT-2COMM(Moderate) 11% 86% 5% 21% 7% 30%


    We can see that the results are not monotonic. You can see that there is a "drift" towards higher historical returns with more funds but you can't bank on it. Remember that the strategy rotates funds in based on their price performance and this is not always correct. It often is, but not always. The more funds you have, the more decisions the strategy is making. When you have a large number of funds, the strategy will be right more often than not, but when you only have a few, the times when it isn't right are more noticeable.

    The key point is that having the ability to rotate funds can help when circumstances favor a particular sub-class, you just can't guarantee that you will make the right choice all the time. However, you will have more choices when you want to be defensive and find a safer harbor for your funds.

    TAA(Moderate) Performance Comparison of Plans

    Plan Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
    Six Core Asset ETF Benchmark(Moderate) 8% 86% 9% 65% 12% 88%
    Six Core Asset ETF Benchmark With PTTRX(Moderate) 8% 90% 10% 78% 13% 97%
    Six Core Asset ETF Benchmark With PTTRX-3USETFs(Moderate) 7% 84% 10% 75% 13% 96%
    Six Core Asset ETF Benchmark With PTTRX-3USETfs-2REIT(Moderate) 7% 80% 10% 74% 13% 96%
    Six Core Asset ETF Benchmark With PTTRX-3US-2REIT-2COMM(Moderate) 8% 58% 9% 69% 12% 86%

    The behavior here is slightly different. We have previously noted that 2010 was a poor year for tactical asset allocation strategies as no strong trend was established and with more funds, there was more opportunity to swap in and out of funds looking for a trend that never materialized. It is easy to see that with hindsight but, at the time, nobody knew. At this point, it appears that Commodities are on a strong run and that maybe set for some time. On the other hand, there has been a crossing between REIT and US equities for the second asset class to be selected.

    Given that we have looked at the commodities ETFs and we know that GCC has had better 1 year performance and we know that Commodities are currently being deployed, we also know that the final portfolio is unique in having access to that ETF and so there will be an incremental boost to the short term returns.

    • There is no magic or free lunch in retirement investing
      • You want to be as diversified in as many asset classes as you can
      • You want to have alternative funds in each asset class in case one of them is performing poorly
      • Additional funds in the asset class does not always result in higher returns
    • Whichever way you look at it, there are upsides and downsides
      • With SAA, you get the maximum benefit in good times but you can see significant downsides in bear markets
      • With TAA you are protected from big downside risk but you will likely miss the start of the upturn and/or and surprises with asset classes performing unexpectedly well
    • Over the longer term, when there are benefits for more funds in each asset class
    • If you want to limit downside, TAA has clear benefits

    MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.


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