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  • US Total Bonds (BND): PowerShares CEF Income Composite shows good Performance

    04/20/2011

    Setting targets for your retirement nestegg must be evaluated based on the risks and the returns of the portfolio. The type of lifestyle achieved in retirement depends on decisions taken today.

    Bonds provide low risk, predictable income and are a key part of a portfolio. They are an investment with low risk and constant payments. In a previous article we outlined the types of credit risk that are possible for these types of investments.

    All bonds are under pressure and the US total Bond market is in the lower half of the table as interest rates domestically are being kept low by the Fed.

    Major Asset Classes Trend

    04/15/2011

    Description

    Symbol

    1 Week

    4 Weeks

    13 Weeks

    26 Weeks

    52 Weeks

    Trend Score

    Treasury Bills

    SHV

    0.01%

    0.01%

    0.06%

    0.05%

    0.12%

    0.05%

    Emerging Mkt Bonds

    PCY

    -0.45%

    0.53%

    0.47%

    -4.3%

    6.52%

    0.55%

    Frontier Market Stks

    FRN

    -1.63%

    6.32%

    -7.13%

    -5.77%

    11.34%

    0.63%

    Intermediate Treasuries

    IEF

    1.49%

    -0.85%

    -0.01%

    -4.26%

    6.86%

    0.64%

    Municipal Bonds

    MUB

    0.84%

    0.45%

    5.25%

    -3.69%

    0.57%

    0.68%

    Mortgage Back Bonds

    MBB

    0.71%

    -0.1%

    0.54%

    -0.01%

    3.92%

    1.01%

    Total US Bonds

    BND

    0.82%

    -0.26%

    0.77%

    -0.44%

    5.01%

    1.18%

    US Credit Bonds

    CFT

    0.98%

    -0.02%

    1.32%

    -0.21%

    6.11%

    1.63%

    International Treasury Bonds

    BWX

    0.93%

    0.07%

    4.49%

    -0.04%

    10.44%

    3.18%

    International Developed Stks

    EFA

    -0.54%

    5.23%

    2.52%

    6.94%

    8.47%

    4.53%

    US High Yield Bonds

    JNK

    -0.05%

    1.28%

    2.68%

    8.69%

    14.88%

    5.49%

    International REITs

    RWX

    -0.1%

    4.52%

    1.25%

    4.62%

    21.16%

    6.29%

    Emerging Market Stks

    VWO

    -1.63%

    8.33%

    2.25%

    6.58%

    18.78%

    6.86%

    US Stocks

    VTI

    -0.61%

    3.65%

    2.9%

    15.79%

    15.39%

    7.42%

    US Equity REITs

    VNQ

    2.49%

    3.99%

    6.7%

    10.41%

    23.94%

    9.5%

    Gold

    GLD

    0.97%

    4.83%

    9.31%

    8.51%

    30.39%

    10.8%

    Commodities

    DBC

    -2.35%

    4.88%

    11.24%

    24.98%

    28.54%

    13.46%

     

    In the very short term (1 week) US Bonds ended below other Fixed Income Investments, such as the Treasury Bills (SHV), which is short term focused (maturity less than a year), but Above Municipal Bonds (MUB) and International Treasury Bonds (BWX).

    PowerShares CEF Income Composite (PCEF) is a diversified portfolio which includes mostly Bonds (44%), followed by High Yield Bonds (20%) and Options (36%). This provides low risk with a high one year return.

    U.S. Total Bonds

    04/08/2011

    Description

    Symbol

    1 Yr

    3 Yr

    5 Yr

    Avg. Volume(K)

    1 Yr Sharpe

    PowerShares CEF Income Composi

    PCEF

    6.21%

    NA

    NA

    57

    55.92%

    Vanguard Intermediate-Term Bon

    BIV

    4.07%

    1.7%

    NA

    129

    71.62%

    iShares Barclays Aggregate Bon

    AGG

    3.73%

    4.49%

    5.52%

    715

    114.39%

    Vanguard Total Bond Market ETF

    BND

    3.03%

    1.62%

    NA

    805

    92.35%

    Vanguard Intermediate-Term Bond (BIV) is, as its name suggests, a safer Bond in the Medium Term, with lower returns. In other words, a less risky portfolio, that comes with lower returns, composing the investments in 50% of the assets in Corporate Bonds and the other half in US Government Bonds.

    BIV can be a good choice taking into account the maturity of the asset and that the risks of the investments can be due to significant changes on interest rate.

    iShares Barclays Aggregate Bond (AGG) has a longer performance history. Despite lower 1 year returns, the 3 and 5 year returns are strong which translates into a good price/yield ratio.

    Finally, Vanguard’s Total Bond Market ETF (BND), shows a lower one year returns, but showing longer history (3 years), and good volume. It is an ETF based on high quality, medium Weighted Maturity.

    US Total Bonds deserve consideration for a diversified Portfolio for medium to long term objectives, linked with consistent returns.

    Today Bonds are under pressure with many momentum strategies preferring cash. However, in the long term, a well thought out bond strategy is a critical piece of the retirement portfolio. PCEF delivers strong one year returns but is very new. Having AGG as the safe, proven alternative makes sense.

    Symbols: CEF, BND, SHV, MUB, BWX, PCEF, BIV, AGG, Exchange, Tickers, (NYSE: CEF), (NYSE: BND), (NYSE: SHV), (NYSE: MUB), (NYSE: BWX), (NYSE: PCEF), (NYSE: BIV), (NYSE: AGG)

     

    Disclaimer: 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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  • 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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