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Articles on SHV)

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

    03/20/2011

    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
    Trend
    Score
    03/11
    Trend
    Score
    Direction
    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. 


    Symbols:EEM,VNQ,FRN,VWO,IYR,ICF,GLD,RWX,VTI,SPY,IWM,PCY,EMB,JNK,HYG,PHB,EFA,VEU,IEF,TLT,GSG,DBC,DBA,CFT,BWX,MBB,BND,MUB,SHV,AGG ,Exchange,Tickers,(NASDAQ,EEM),(NASDAQ,VNQ),(NASDAQ,FRN),(NASDAQ,VWO),(NASDAQ,IYR),(NASDAQ,ICF),(NASDAQ,GLD),(NASDAQ,RWX),(NASDAQ,VTI),(NASDAQ,SPY),(NASDAQ,IWM),(NASDAQ,PCY),(NASDAQ,EMB),(NASDAQ,JNK),(NASDAQ,HYG),(NASDAQ,PHB),(NASDAQ,EFA),(NASDAQ,VEU),(NASDAQ,IEF),(NASDAQ,TLT),(NASDAQ,GSG),(NASDAQ,DBC),(NASDAQ,DBA),(NASDAQ,CFT),(NASDAQ,BWX),(NASDAQ,MBB),(NASDAQ,BND),(NASDAQ,MUB),(NASDAQ,SHV),(NASDAQ,AGG),

    Disclosure:

    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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  • 'Safe' Assets' Trends Back to Positive: Risk Aversion Began?

    03/14/2011

    Risk assets' correction in last week was across the board: virtually all risk assets, other than US REITs (VNQ), turned up negative. Among them, both international stocks (EFA) and commodities (DBC) had the largest drops: both lost 3.09%. On the other hand, most 'safe' assets had a positive week. For more detailed performance for last week, please refer to here.

    From the following table, one can see that other than municipal bonds (MUB), all of 'safe' fixed income assets now have positive trend scores, meaning their return behaviors are better than cash or short term treasury bill (SHV). 

     

    Assets Class Symbols 03/11
    Trend
    Score
    03/04
    Trend
    Score
    Direction
    Commodities DBC 12.94% 16.8% v
    Gold GLD 9.46% 9.66% v
    US Stocks VTI 8.03% 10.61% v
    US Equity REITs VNQ 8.03% 8.47% v
    International REITs RWX 6.89% 9.33% v
    Emerging Market Stks VWO 4.64% 7.17% v
    US High Yield Bonds JNK 4.13% 4.99% v
    International Treasury Bonds BWX 4.04% 3.49% ^
    International Developed Stks EFA 3.28% 7.15% v
    US Credit Bonds CFT 1.71% 1.09% ^
    Emerging Mkt Bonds PCY 1.18% 0.29% ^
    Intermediate Treasuries IEF 1.16% -0.27% ^
    Frontier Market Stks FRN 1.01% 2.22% v
    Total US Bonds BND 0.97% 0.05% ^
    Mortgage Back Bonds MBB 0.12% -0.55% ^
    Treasury Bills SHV 0.05% 0.01% ^
    Municipal Bonds MUB -1.22% -1.24% ^

    The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).

    It is especially telling that the trend score of intermediate term treasury bonds (IEF) are now positive, ahead of frontier market stocks (FRN). Is this the beginning of a turn?

    Fundamentally, stocks across the globe are not cheap. Based on Valueline, Capital IQ and Bloomberg data collected by Prof. Damodaran at NYU, as of January 2011, the world market valuation is as follows:

      Aggregate Market Cap/Aggregate Net Income
    US 27
    Europe 20
    Emerging Market 21.9
    Global 23.1


    By no means, the equity markets are cheap. In fact, Shiller's CAPE 10 for US stocks is currently at 24.4, compared with its long term average 16.4 (see more detailed info here). This is about 49% over valued!

    Coupled with the recent relentless ascent in all risk asset prices, the markets are very prone to sharp gyration. 

    Fortunately, major stock market downturns were usually preceded by relative strong movements of  other assets, especially 'safe' assets. For example, at the end of 2007, fixed income investors started to sense the danger in general economies, long term treasury bonds (TLT) started to show its strength in 8/2007. In fact, by the end of 2007, TLT has shown enough strength to be ahead of  SPY. The following chart shows the total returns of both SPY and TLT between 2007 to 2008. 


    Nobody can predict the future and we don't know what will lie ahead this time. However, as long as one maintains a risk level that is suitable to his/her situations and adheres to a systematic way to properly allocate assets, one can withstand possible market shocks. Moreover, adopting a more active monitoring on major asset movements can be helpful to make tactical decision in risk asset exposures. For example, a tactical asset allocation strategy that uses major asset trends was effective in the last two major stock bear markets, based on historical simulation. 

    Though current situation does not warrant a dramatic change of asset allocations, investors with over allocated risk asset exposure should start to lighten up and get back to their normal risk level. It is a prudent way to avoid big loss in one's portfolios.

    Symbols: EEM,VNQ,FRN,VWO,IYR,ICF,GLD,RWX,VTI,SPY,IWM,PCY,EMB,JNK,HYG,PHB,EFA,VEU,IEF,TLT,GSG,DBC,DBA,CFT,BWX,MBB,BND,MUB,SHV,AGG ,Symbols,(exchange), (NYSE,EEM),(NYSE,VNQ),(NYSE,FRN),(NYSE,VWO),(NYSE,IYR),(NYSE,ICF),(NYSE,GLD),(NYSE,RWX),(NYSE,VTI),(NYSE,SPY),(NYSE,IWM),(NYSE,PCY),(NYSE,EMB),(NYSE,JNK),(NYSE,HYG),(NYSE,PHB),(NYSE,EFA),(NYSE,VEU),(NYSE,IEF),(NYSE,TLT),(NYSE,GSG),(NYSE,DBC),(NYSE,DBA),(NYSE,CFT),(NYSE,BWX),(NYSE,MBB),(NYSE,BND),(NYSE,MUB),(NYSE,SHV),(NYSE,AGG),

    Disclosure:

    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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