MyPlanIQ Newsletters
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July 16, 2012: Understand The Behavior of Investment Strategies
07/17/2012
Re-balance Cycle Reminder
Based on our monthly re-balance calendar, the next re-balance time will be on Monday, August 6, 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.
Understand The Behavior of Investment Strategies
As what we repeatedly pointed out, any investment strategy has its up and down. Before you commit to using any strategy in your investment portfolios, it is critical to understand the nature of the strategy, especially its pros and cons.
Investors are often carried away with a period of the out performance of a particular strategy and then take a plunge into it. But soon, they will be disappointed when the strategy under performs. They then pull the plug, claiming the strategy does not work, often at the worst time to do so. This whole cycle repeats when they go to find another strategy. Years go by, their performance languishes or even suffers from great loss. This is even true for many professional investment advisors. That is why investing is so hard for many average investors and even many professionals.
It is thus very costly for an investor to commit to an investment strategy without fully understand its behavior, i.e. its strength and its weakness.
The key here is that the success of an investment strategy can only be observed in a large enough sample of data or event points, i.e. a relatively long period of time (such as at least 5 to 7 years). Sometimes, people prefer using a full market cycle that consists of a bear and a bull market.
But to stick to an investment strategy in such a long period, is extremely hard for many investors, considering the given nature of under performance in a period of time long enough to create excruciating feeling.
The number one step to counter this is to fully understand the behavior of the investment strategies, assuming these investment strategies possess the two most important qualities: strong intuition and reasonable expected returns (through back testing or historical performance).
That means understanding the pros and cons of the strategies.
In the following, let's walk through the pros and cons of the two most used asset allocation strategies on MyPlanIQ.com: Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA).
SAA allocates capital into a diversified array of asset classes, such as US stocks, foreign stocks, emerging market stocks, Real Estate Investment Trusts (REITs), commodities and bonds. It then performs periodic rebalancing.
MyPlanIQ's TAA uses asset price momentum to dynamically adjust risk asset (stocks and commodities) and fixed income (bonds) mixes monthly or quarterly.
The two qualities for each strategy:
Intuitions Expected Returns Strategic Asset Allocation Diversification Equities deliver above inflation returns while bonds are stabilizers Tactical Asset Allocation Momentum exists in nature, in human behavior and social events It is recognized momentum factor can deliver market beating average return in many research results Now let's take a look at the pros and cons:
Early Bull Late Bull Bear Side Way Strategic Asset Allocation Good: rebalancing actually enables more exposure (allocation wise) to beaten down risk assets Good: always riding on risk assets and rebalancing actually takes some profit off the table Bad: holding falling assets can actually ride the falling trends all the way down OK: no loss for risk assets but bonds can actually generate some income. Risk assets with dividends can cushion more
Tactical Asset Allocation Miss: It has a lag due to confirmation of rising trends Good: invest in high performing assets that can even outperform market indices Good: reduced risk asset allocation and exposure to other 'safe' assets such as treasury bonds Bad: frequent switching results in buy high sell low. These can amount to large loss over time Since in a normal long term secular growth period, bear markets happen in smaller periods of time. One can see that SAA does better more often than TAA. In a long term secular stagnated period, TAA does better than SAA.
Moreover, each one can have an edge over the other in certain times.
As a side note, one can see that to do better in a side way market, using dividend paying assets such as dividend stocks or covered call option writings can be better than using plain vanilla growth stocks or stock market indices.
For example, 2011 was a side way market that has proven to be tough for many tactical allocation strategies and funds. This period may continue this year.
That also explains that following SAA (that is widely practiced in financial investment communities) is a lot easier than following a TAA: you can large herd of people who are supporting each other. Furthermore, when you are not doing well, you are not alone: majority of investors are with you. A status quo which might not be bad for average investors.
That is why we at MyPlanIQ advocate both SAA and TAA. Furthermore, we believe the best way is to allocate capitals into both strategies, a so called core satellite portfolio management practice. From the above table, one can see that by doing so, you can smooth out the return curve.
But on ther other hand, one has to realize that no matter which way you do it, unless you are totally indexing, you will not be in sync with market indices. That would mean that your investments will under perform in a period of time.
Now that we understand better the pros and cons of a strategy, one should be prepared for these events (especially under performance) beforehand. That is the first step to guarantee long term success.
Put it simply, the biggest edge you possess is the consistency with your strategies, as many others couldn't adhere to this simple yet sometimes uncomfortable practice for a long time. To gain this edge, you need to understand the nature of the strategy you are using so that you are better prepared psychologically.
As an exercise, we encourage you to work out the scenarios for the four corner investment framework we outlined in our previous newsletters (April 23, 2012: All Weather Portfolio Construction, May 29, 2012: Four Corner Investment Framework Applications, June 11, 2012: Strategic, Tactical and Permanent: Putting All Together). Or you can work out the pros and cons of other strategies such as those listed on Advanced Users page.
Please share your thoughts through comments. We need healthy discussion.
Portfolio Reviews
We compare tactical portfolios for our lazy portfolio plans:
Portfolio Performance Comparison (as of 7/16/2012)
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe David Swensen Six ETF Asset Individual Investor Plan Tactical Asset Allocation Moderate 0.6% 6.4% 13.5% 151.7% 13.1% 123.0% 6.9% 53.7% The Coffee House Lazy Portfolio ETF Version Tactical Asset Allocation Moderate 0.3% 4.8% 3.6% 41.7% 11.0% 93.6% 6.8% 63.2% FundAdvice Ultimate Buy and Hold Lazy Portfolio Tactical Asset Allocation Moderate 0.4% 4.4% 5.5% 69.6% 11.0% 109.8% 6.4% 55.8% Permanent Portfolio ETF Plan Tactical Asset Allocation Moderate 0.3% 3.2% 1.5% 20.9% 11.6% 97.5% 7.1% 59.8% Israelsen 7Twelve Tactical Asset Allocation Moderate 0.6% 5.0% 3.7% 44.0% 9.1% 85.1% 7.0% 53.9% Wasik Nano Plan Tactical Asset Allocation Moderate 0.5% 5.9% 6.6% 79.2% 10.9% 99.5% 5.0% 44.3% See up to date detailed comparison>>
Overall, these tactical portfolios have done well.
Current Markets
Near term, we are very cautious: based on many economic indicators and various research (such as John Hussman and ECRI), the US economy is either on the verge of entering a recession or has entered a recession. Though asset class trends are not uniformly pointing to risk asset downside, it is not a period to take excessive risk.
From 360° Market Overview, one can see that the US stocks (represented by VTI) are consistently ranked below the total bond index (BND), even after the surge late last week.
On the other hand, we would like to point out that the smart money managers are still keeping well balanced portfolio allocations. See SmartMoneyIQ Managers.
We are comfortable with our current portfolio positions.
Latest Articles
- Why Bond Yields Scare Me More Than Friday the 13th
- Excellent Gold Mining Mutual Funds Out Performed Gold Mining ETFs By Miles
- Squirrel Away Money While You Can
- Gold's chameleon role in a portfolio
- Commodity Trends: Agriculture Strong While Broad Base Commodities Recovering
- Hedge Funds Trail Vanguard Index Funds
- Major Asset Trends: REITs Near 52 Week High While Stocks Dropping
- Domestic Equity Funds Bleed While International Equities Continue To Attract Capital
- Gold And Treasury Yields: This Time Is Different?
- Broker-sold funds still a hard sell
- Technology sector doing the best YTD, energy the worst.
- The Big Trend: Professional Asset Management Within the 401k
- The Collapse of the American Net Worth
How can we improve this newsletter -- we value your inputs --Thanks to those who have already contributed -- we appreciate it.Disclaimer:Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ. -
July 9, 2012: Online Community Engagement
07/10/2012
Re-balance Cycle Reminder
Based on our monthly re-balance calendar, the next re-balance time will be on Monday, August 6, 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.
Help Each Other, Help Yourself
The mission of MyPlanIQ has always been to provide low cost yet effective solutions to retirement investments. Since we made our first public debut in 2009, we have worked very hard to improve our services and tools. You have provided many invaluable suggestions. Best of all, many of you concur with our vision that there is absolutely a need for such a service for retirement investments. You have encouraged us to keep going along this direction. We thank you for the support!
We also feel that it is time for our users to become more active in our communities to help each other. Though it might seem obvious to some, we would like to point out the following important advantages in doing so:
- Investing is a process that requires consistency, patience and, we might add, enlightenment. It is extremely important to stay on the course that is governed by a well proven and intuitive principle (or strategy). Investing itself is a process that unfolds a series of samples that form a stochastic process. Absent from 100% winning odds, any strategy's result can only be fully realized in a sufficiently long period of time, usually a full market (or economic) bull and bear cycle. As humans are subject to emotional and impulsive reactions, it is thus very important to have fellow investors (or travellers?) to help each other in this journey. This is perhaps the most reason for you to help others and in return, to get help from others.
- In today's noisy world that is full of news, rumors and analysis 24/7, forming a community of like mind people can provide a shield that filters out much garbage. A good example is bogleheads.org, an extremely helpful community that have a group of people who believe in John Bogle's low cost indexing investment principle.
- The collective intelligence can generate a 1+1>2 effect! Based on a third party statistics, majority of users on MyPlanIQ.com are post graduate and 50+ year old fellows. Unleashing such a pool of talent and experience to help out each other is of tremendous potential and value!
- Finally, more activities will give us more feedback and insights into what you are looking for and how our system and service have been doing.
We have recently just installed a well known community discussion tool Disqus across our plan, portfolio and article pages. We believe Disqus will make community engagement much easier. To use this, you don't have to be a registered Disqus user though that might help to consolidate your comments across the internet (i.e. your comments on other websites that implement Disqus).
So ask questions, engage with fellow users! Help others, help us and help yourself!
Portfolio Reviews
We compare tactical portfolios for our brokerage mutual fund plans:
Portfolio Performance Comparison (as of 7/9/2012)
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Schwab Income Mutual Fund Select List Tactical Asset Allocation Moderate 0.8% 4.9% -0.0% 2.5% 15.3% 139.8% 8.2% 81.9% Fidelity Extended Fund Picks Tactical Asset Allocation Moderate 0.6% 3.2% -1.6% -10.5% 15.7% 152.4% 12.5% 116.9% Schwab OneSource Select List Funds Tactical Asset Allocation Moderate 1.0% 3.6% -6.2% -51.3% 11.0% 92.6% 5.7% 46.7% TD Ameritrade Premier List No Transaction Fee Mutual Fund Plan Tactical Asset Allocation Moderate 0.8% 6.1% -1.2% -7.0% 12.3% 110.9% 8.4% 72.6% Etrade All Star Funds Tactical Asset Allocation Moderate 0.9% 5.8% 4.0% 55.7% 15.9% 151.1% 12.0% 111.1% *: NOT annualized
**YTD: Year to Date
See up to date detailed comparison>>
Overall, the mutual fund portfolios have done OK. As ETFs become more and more mainstream, we are somewhat agnostic on these brokerage mutual fund portfolios, especially due to their various redemption restrictions and/or transaction and expense fees.
Current Markets
Markets are now again entering a period of uncertainty. We made the following observations:
- US stocks (VTI) is now trending lower: it is now ranked below the total bond index (BND) again.
- Defensive sectors are still bettering cyclical sectors, as pointed out in the last week's newsletter.
- The US might have entered recession, as repeatedly insisted by John Hussman in his weekly commentaries. Though one has to be aware of that economic recession is not 100% equivalent to a bear stock market.
- The bond market is divided: 'safe haven' long term Treasury bonds are still strong while 'riskier' high yield bonds and emerging market bonds are also strong.
More details can be seen on 360° Market Overview,
We are comfortable with our current portfolio positions.
Latest Articles
- Even with low interest rates you should have an allocation to bonds
- Even Wallstreet Can't Handle Its Own 401(k) Well
- Vanguard Emerging Market ETF VWO Bigger Than iShares EEM
- Bill Bernstein's ways to rewire your brain for investing
- Domestic Equity Funds Resumed Outflow
- LIBOR Fixing: The Biggest Scam In Global Free Market History
- The Death of Equities: A Contrarian View?
- Six AMT Reduction Strategies
- Five money lessons I’ve learned through 10 bear market
- Shocking!? JPMorgan Pushed Its Own High Cost Funds/Portfolios To Clients
- How To Avoid Drowning in College Debt
- Markets Are Just Like Irrational Human
- Vanguard Vs. Schwab: Who Has The Best Suite Of Commission Free ETFs For Portfolio Building
- E-Trade All Star ETFs: A Myriad Of Low Cost And Popular Funds For Portfolio Building
How can we improve this newsletter -- we value your inputs --Thanks to those who have already contributed -- we appreciate it.Disclaimer:Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ. -
July 2, 2012: Half Year Review
07/03/2012
Re-balance Cycle Reminder
We had a re-balance today. Based on our monthly re-balance calendar, the next re-balance time will be on Monday, August 6, 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.
Half Year Review
Portfolio Performance
Let's first review how our portfolios have been doing.
Lazy, Strategic and Tactical Portfolios
The following table shows the performance of several typical lazy portfolios, stratgic and tactical asset allocation portfolios:
Portfolio Performance Comparison (as of 7/2/2012)
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Since 2001 AR Harry Browne Permanent Portfolio 1.2% 4.1% 10.9% 150.5% 12.9% 189.5% 8.7% 101.2% 7.7% P David Swensen Yale Individual Investor Portfolio Annual Rebalancing 3.4% 8.0% 6.5% 50.6% 17.7% 120.2% 4.2% 19.6% 7.6% Permanent Income Portfolio 1.0% 5.3% 12.0% 240.5% 13.5% 234.5% 7.2% 94.3% 7.4% Six Core Asset ETFs Strategic Asset Allocation Moderate 3.1% 4.5% -0.1% 4.2% 12.1% 91.9% 3.6% 19.5% 6.1% Six Core Asset ETFs Tactical Asset Allocation Moderate 1.7% 4.3% -0.1% -2.4% 8.9% 74.0% 7.7% 61.7% 8.9% VBINX 2.1% 6.3% 4.7% 41.4% 13.3% 104.0% 3.2% 15.7% 4.6% *: NOT annualized
We also show longer term performance (since 12/31/2012).
YTD (Year To Date), David Swensen's lazy portfolio has the highest return as both REITs and long term treasury bonds have had strong performance. Vanguard Balance Fund (VBINX), a 60% US stock and 40% US bond index fund, has also had strong performance, thanks to US stocks' strength. All other portfolios have respectable returns. It should be noted that our Six Core TAA portfolio has done very well, considering how range bound the markets have been. It is mostly due to its year long exposure in REITs.
401K Plan Portfolios
The following shows performance for some largest 401k plans' model portfolios
Portfolio Performance Comparison (as of 7/2/2012)
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe The Bank of America 401(k) Plan Tactical Asset Allocation Moderate 1.6% 4.4% 4.1% 56.8% 16.3% 137.3% 11.1% 104.7% VBINX 2.1% 6.3% 4.7% 41.4% 13.3% 104.0% 3.2% 15.7% Hewlett Packard 401K Tactical Asset Allocation Moderate 1.7% 4.6% 7.7% 112.1% 16.0% 160.4% 10.4% 104.1% Ford Motors 401K Tactical Asset Allocation Moderate 1.5% 2.9% 0.4% 22.9% 9.3% 96.1% 5.7% 61.5% Wal-Mart Profit Sharing and 401(k) Plan Tactical Asset Allocation Moderate 0.8% 2.5% 0.8% 31.7% 11.0% 131.9% 6.9% 82.5% *: NOT annualized
**YTD: Year to Date
Overall, the portfolios are performing as expected.
Some Advanced Portfolios
Portfolio Performance Comparison
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly 0.4% 3.4% 3.6% 91.9% 12.1% 276.4% 9.6% 187.1% P No Load Conservative Mutual Funds Upgrading Quarterly 0.9% 2.3% -1.5% -29.2% 8.6% 156.2% 7.8% 122.5% P Diversified Timing On Endowment Asset Allocation Model SMA 10 Months With Long Treasury 2.0% 2.2% -1.8% -17.4% 9.5% 76.9% 4.9% 45.0% P Doug Roberts Follow the Fed Add Treasury Note One Month Simple Indicator Moving Average 64 Days 2.3% 4.6% 4.1% 30.8% 14.5% 126.1% 9.8% 76.8% P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds ETFs 0.1% 0.0% -2.4% -12.6% 11.8% 70.7% 9.5% 59.8% P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds -0.2% 3.6% 4.6% 51.8% 14.5% 94.5% 10.3% 70.4% *: NOT annualized
**YTD: Year to Date
We note that the P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds ETFs has not done well. However, it's index fund one P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds has fared much better. The reason behind this is that the portfolios rank the underlying funds. The one with using ETFs has been affected by more volatile ETF behavior. This also tells us it is important to use more accurate index mutual funds to construct strategy signals instead of using ETFs.
Current Markets
As what we repeatedly pointed out in the past, we believe that since the financial crisis in 2008-2009, many fundamental structural problems have not been addressed. Year to date, there have been full of surprises and bad news, mostly from Europe, but not much less from the US and emerging markets. Recent ISM manufacturing index (released today on 7/2/2012) clearly indicated that even the most resilient (or the least bad) US economy is on the verge of slipping back to recession. Globally, we see continuing European economic recession and sovereign debt deteriorating and possible hard landing for many emerging market economies.
Our investment principle is always 'be skeptical and conservative, but follow the strategy consistently'. For strategic asset allocation, this would mean properly allocating capital conservatively. For tactical asset allocation (such as the MyPlanIQ's cross asset trend following), this would mean following the major asset trend while keeping a cool head for rising assets. For example, many TAA portfolios have exposure to long term treasury bonds, which are clearly in a state that is either bubbly or is forming a bubble. The key here is to be vigilant, consistent and not over allocate capital to these bubbling assets. In the meantime, selecting rising assets to follow (in a conservative capital allocation) has proved to be an effective to capture upside while avoiding downside risk.
Overall, we are very skeptical on most asset prices right now. We don't see any substantially undervalued major asset class that has margin of safety to invest. However, this is just our subjective opinion which should not be directly translated into portfolio positioning, as explained above.
As can be seen on 360° Market Overview, after today's persistent strength in stock markets (even after a string of bad global PMI news), both US REITs, US stocks and high yield bonds have better trend scores than that of total bond market index. However, there are several under currents:
- Investors favor defensive sectors over cyclical sectors. Also, large cap and quality stocks are doing better than small cap and low quality stocks. See Defensive Sectors In Favor Amid Global Slowdown
- Volume has been extremely low.
- Long term bonds and municipal bonds have considerable strength up to now.
In the current fundamental backdrop, we will just need to stick to our strategy rigorously.
Features & Improvements
We would just like to bring your attention to some new and existing features on our website that we feel they are useful. In particular:
- We recently upgraded our server and software. Now our server and simulation speed has been improved noticeably.
- On a plan page, you now can find the list of candidate funds and their categories and fund ratings easily. This will help you to search for a replacement fund, for example.
- Furthermore, we have a much improved fund quote page: on a fund page, not only you can easily find its historical total returns and other statistics such as standard deviation and Sharpe ratios, you can also find 10 best funds in that fund's category for mutual funds, ETFs and Closed End Funds (CEFs).
- We would like again to remind our users that on a portfolio page, you can find
- Historical Transactions and Holdings. Look for a button with this label. We have been asked many times by users on how to find such information.
- More Performance Analytics. Again, to find the year by year performance, look for this label on a portfolio page.
- Finally, you can use Portfolio Compare and Flash Chart for a portfolio too.
Watch our website for more exciting new contents, new features and new services in the near future.
Latest Articles
- John Hussman: Anatomy of A Bear
- Defensive Sectors In Favor Amid Global Slowdown
- Greatest Fear Increased In Dorsey, Wright Client Sentiment Survey
- Is buy and hold dying a quick death?
- Conservative Mutual Fund Investing Pays Off Handsomely
- The Purpose of Fixed Income
- High Quality Stocks Are Out Performing
- Sure things in the age of uncertainty
- Ray Dalio: Don't Assume That Germany Will Bail Europe Out; Consider The "Fat Tail" A Significant Possibility
- Top 10 Real Return Or Inflation Protected Bond Mutual Funds
- Are Investment Management Fees Tax Deductible?
How can we improve this newsletter -- we value your inputs --Thanks to those who have already contributed -- we appreciate it.Disclaimer:Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ. -
June 25, 2012: Conservative Allocation Fund Upgrading
06/25/2012
Re-balance Cycle Reminder
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.
Conservative Allocation Fund Upgrading
In the previous newsletter, we discussed a portfolio that finds the best bond fund monthly or quarterly from a list of best total return bond funds. This portfolio has had good returns with acceptable risk for the past 10 plus years.
However, with trillions of new money printed to save troubled financial (banking) systems around the world, many people are concerned that the good time of fixed income (bond) markets is coming to an end. In fact, even without such a concern, to get the best returns with lowest risk, it turns out a portfolio still needs some stocks. This has some good mathematical intuition (you can skip the following paragraph if you don't want to mess with math):
Mathematically, to achieve optimial metric (such as the lowest standard deviation, a metric often used to represent a portfolio risk), the best outcome would be to have equal weights among the objects (such as a stock fund and a bond fund) for this metric (i.e. standard deviation). In general, a total bond index fund (such as Vanguard total bond index fund VBMFX) has about 1/5 standard deviation of a total stock index fund (such as S&P 500 fund VFINX or SPY). So to have equal standard deviation for both stocks and bonds, the best allocation would be 80% bonds and 20% stocks if the bond fund is as 25% volatile as the stock fund. Other bond funds have higher standard deviation such as 30% of S&P 500 (for an investment grade corporate bond fund).This is best illustrated by the following chart from the article Long Term Treasuries Better Hedge For Stock Investments Than Corporate Or Muni Bonds
chart from Sober Look. x-axis represents the % of stocks in a portfolio. y-axis represents the volatility of the portfolio.
Conservative and very conservative allocation funds have limited stock allocations: in general, we view a fund with up to 40% stock allocation as conservative and up to 20% as very conservative. From the above discussion, one can see that these funds actually are much easier to manage and more predictable. They render themselves much better to a fund rotation process.
We have constructed portfolios P No Load Conservative Mutual Funds Upgrading Quarterly using a list of well chosen conservative funds based on their reputation and our knowledge on managers' conservative risk management skills.
- Berwyn Income BERIX
- Vanguard Wellesley Incom VWINX
- Permanent Portfolio PRPFX
- American Century One Choice Very Conservative AONIX
- Manning & Napier Pro-Blend Conservative Terms EXDAX
- Janus Conservtive Allocation JSPCX
- T.Rowe Price Personal Strat Income PRSIX
- Fidelity Strategic Real Return FSRRX
- James Balanced Golden Rainbow GLRBX
- Hussman Strategic Total Return HSTRX
In addition to the above conservative funds, the candidate funds also include several total return bond funds so that in a severe market distress, these funds can be used instead:
- PIMCO Total Return Bond Fund PTTRX
- Loomis Sayles Total Return Bond Fund LSBDX
- Doubleline Total Return Bond Fund DLTNX
- Metropolitan West Total Return Bond Fund MWTRX
At the end of every quarter, the portfolio selects 3 funds with the best momentum scores as the next quarter investments. See P No Load Conservative Mutual Funds Upgrading Monthly for the monthly rebalance portfolio.
We plan to update the candidate funds in the future as we see fit. Any input on the candidate fund selection is welcome.
This portfolio is now available on Advanced Users page. Any expert or pro user can follow or customize it.
The following shows the back tested performance.
Portfolio Performance Comparison
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Since 2001 AR P No Load Conservative Mutual Funds Upgrading Monthly -0.1% 5.0% 7.5% 218.0% 9.8% 304.1% 8.2% 168.2% 7.0% P No Load Conservative Mutual Funds Upgrading Quarterly -0.6% 1.4% -1.4% -27.1% 8.4% 162.2% 7.9% 123.2% 8.6% VBINX -1.4% 4.2% 5.6% 41.4% 12.1% 104.0% 3.1% 15.7% 4.4% *: NOT annualized
**YTD: Year to Date
Furthermore, the monthly, quarterly portfolios have 4.2% and 5.5% standard deviation respectively, compared with 12.2% of VBINX. Their standard deviation is comparable with Vanguard total bond index VBMFX which is 4.3% in the same period. The annualized return of VBMFX is 5.6% in the same period.
The above portfolios again demonstrate our belief that to achieve reasonable returns, one does not need to make excessive risky investments.
Portfolio Reviews
We compare tactical portfolios for brokerage commission free ETF plans:
Portfolio Performance Comparison (as of 6/25/2012)
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Vanguard ETFs Tactical Asset Allocation Moderate -0.7% 4.5% 4.4% 36.3% 11.6% 106.9% 7.9% 55.3% Etrade All Star ETFs Tactical Asset Allocation Moderate -0.8% 2.9% 5.8% 54.4% 13.8% 117.4% 11.4% 86.9% Fidelity Commission Free ETFs Tactical Asset Allocation Moderate -0.6% 3.7% 4.4% 41.1% 10.3% 99.0% 6.6% 50.3% TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate -0.8% 2.0% 1.7% 2.0% 9.2% 86.3% 5.3% 34.1% Schwab Commission Free ETFs Tactical Asset Allocation Moderate -0.5% 3.5% 7.5% 91.3% Latest Brokerage Specific ETF Tactical Portfolio Performance Comparison >>
Market Overview
The new week began with another weakness in stocks. US REITs (VNQ) is the only risk asset that has been ranked above the total bond index consistently for most of the time this year. After today's close, even VNQ has dropped out of the top 3 positions. US stocks VTI now has negative trend score, lower than that of BND, the bond index. See 360° Market Overview for more details.
We again note that smart money allocation managers are still very steady on their risk asset allocations, as of last Friday. See Smart Allocation Fund Managers Are Still Steady In Stock Allocations.
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- Long Term Treasuries Better Hedge For Stock Investments Than Corporate Or Muni Bonds
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- Moving Averages and Relative Strength Vs. Buy and Hold
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- Two Largest S&P 500 ETF Clones Imperfect
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- A visible slowdown in global economic activity
- Reasonable Returns For Retirees And Conservative Investors
- How Much Risk Should A 65-Year-Old Take?
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How can we improve this newsletter -- we value your inputs --Thanks to those who have already contributed -- we appreciate it.Disclaimer:Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ. -
June 18, 2012: Reasonable Returns Don't Need To Come With Excessive Risk
06/19/2012
Re-balance Cycle Reminder
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.
Reasonable Returns For Retirees And Conservative Investors
Investing in the past 10+ years has proven to be chaotic and for many, difficult. A conventional wisdom is that to achieve higher returns, one has to take higher risk. This statement is true in general. The question is that to achieve reasonable returns, how much risk one has to take.
This question is very important for most retirees and conservative investors who rely on investment returns to fund their retirement needs. In the following, we would like to take a look at a conservative investment strategy.
Portfolio P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly is listed on Advanced Users page. It is accessible to expert or pro users. The strategy behind this portfolio is to use a momentum scoring strategy that is very similar to MyPlanIQ's Tactical Asset Allocation(TAA): it uses total returns of past 1, 3,6 and 12 months to determine a fund's momentum score. What is unique for this strategy is that every month or quarter, it selects a fund with the highest score from a pool of total return bond funds whose managers have been recognized by Morningstar as fixed income manager of the year. The candidate funds are:
- PIMCO Total Return Bond Fund, managed by Bill Gross: PTTRX or PTTDX
- TCW Total Return Bond I, managed by TCW: TGLMX or TGMNX
- Western Asset Core Bond, managed by Western Asset: WATFX or WABRX
- Metropolitan West Total Return Bond, managed by Metropolitan West: MWTRX
- Loomis Sayles Bond, managed by Dan Fuss at Loomis Sayles: LSBDX or LSBRX
- Dodge & Cox Income, managed by Dodge & Cox: DODIX
- FPA New Income, managed by FPA's Robert Rodriguez: FPNIX
The portfolio is rebalanced monthly (or quarterly in P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Quarterly). The following shows the two portfolios' performance:
Portfolio Performance Comparison (as of 6/15/2012)
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe Since 2001 P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year`s Funds Monthly 0% 3% 4% 92% 12% 274% 10% 188% 10.8% P Bond Funds Momentum Based on Upgrading Fixed Income Managers of the Year Quarterly 1% 1% -3% -57% 10% 221% 8% 156% 9.8% Critics may point out that in the testing period since 2001, bonds have gone through a huge bull market. It will be much tougher to attain similar returns going forward. In fact, PIMCO's Bill Gross stated this many times in the past.
However, even though going forward, investing in fixed income will be tougher, we are not going to readily concede that it will spell the doom for these managers. Since these funds are total return bond funds, fund managers have many ways to invest in fixed income. These include high yield bonds, foreign bonds and inflation protected bonds (TIPS). For example, Loomis' Dan Fuss has dabbled in high yield bonds for years to enhance returns. In fact, his fund's over exposure in high yield bonds in 2008 caused severe damage to the fund's return in that year. Similarly, PIMCO's Gross has been very adept in investing in international bonds, as well as in TIPS.
Though fixed income investment environment will become tougher in the years to come, we are still very optimistic in using such fund rotation strategy among these great total return bond funds. We believe fixed income offers enough room for a good bond manager to take advantage of in the future.
The above portfolios have been live since 2008. They went to public in 2009.
In the next newseletter, we will discuss another strategy that works on conservative mutual funds. It again delivers very reasonable returns with acceptable risk to conservative investors.
Portfolio Reviews
We compare strategic and tactical portfolios for two popular ETF plans:
Portfolio Performance Comparison (as of 6/15/2012)
Portfolio/Fund Name 1 Week
Return*YTD
Return**1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe VBINX 2% 6% 7% 41% 13% 104% 3% 16% Six Core Asset ETFs Tactical Asset Allocation Moderate 0% 3% -0% -3% 9% 75% 8% 59% Six Core Asset ETFs Strategic Asset Allocation Moderate 1% 3% 1% 4% 11% 88% 3% 16% MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 0% 3% 2% 24% 10% 84% 9% 68% MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation Moderate 1% 4% 1% 8% 11% 99% 3% 14% *: NOT annualized
Some users have expressed concerns on the under performance of TAA portfolios, compared with SAA or even the simple vanilla index fund Vanguard Balanced Index Fund (VBINX). In fact, TAA portfolios have lagged behind since the stock market bottom in March 2009. In general, 2011 and 2012 thus far have been difficult for many funds or portfolios that adopt tactical strategies.
We have long argued that as investing is about future outcome (thus uncertainties), all investment strategies are subject to a period of under performance. The key to differentiate a good strategy from a bad one, in addition to (back tested) good performance in the past, is whether the strategy possesses simple intuitions that conform with nature (see June 27th, 2011: Simple Intuitions Are Keys to a Successful Investment Strategy). We pointed out in August 1st 2011: Intuitions Behind MyPlanIQ Tactical Asset Allocatio the following:
Intuitively, momentum exists everywhere in nature. Furthermore, even in fundamental based stock investing, momentum is used: in fact, growth style stocks are from companies that exhibit strong earnings momentum. Fundamental momentum drives price momentum until the price gets out of hand (thus the bubble) or until the fundamental loses its momentum. Fundamental momentum is reflected by price momentum.
The second key intuition behind TAA is that momentum is much easier to observe and thus exploited for major asset classes. A major asset class represents a large economic or financial segment such as U.S. stocks, international developed country stocks, emerging market stocks, commercial real estates, commodities, or debts (bonds). The fundamentals of these asset classes drive their prices. Since these asset classes represent a large economic or financial segment, their fundamental change will not happen overnight and is much easier to be spotted and followed.
Current financial markets represent one of those extraordinary periods in history: government and central banks intervention to defer painful solutions to structural economic problems have altered markets regularly: when a crisis hit, quantitative easing or bailout or stimulus was applied to forcefully drive up risk asset prices for a short period of time until the next crisis hit. Such a market condition creates whip sawing markets for many assets. This affects the TAA performance in a meaningful way.
However, we would like to point out also that our TAA, with its simple and intuitive principle, has done better than most mutual funds and ETFs that employ tactical strategies. For that, it again validates somewhat the strategy.
We further recommend the following previous newsletters to our readers:
- July 25th 2011: Why Tactical Asset Allocation
- July 4th 2011: What Make Strategic Asset Allocation Work?
Market Overview
US stocks and REITs again show signs of decoupling from the rest of the world: the latest trend scores show that both US REITs and US stocks are now above the total bond market index. See 360° Market Overview for more details.
For now, the best is to follow what the markets tell us.
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How can we improve this newsletter -- we value your inputs --Thanks to those who have already contributed -- we appreciate it.Disclaimer:Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ. -
June 11, 2012: Strategic, Tactical and Permanent: Putting All Together
06/11/2012
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June 4, 2012: Asset Class Trend Review
06/05/2012
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May 29, 2012: Four Corner Investment Framework Applications
05/29/2012
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May 21, 2012: Equity Investments
05/22/2012
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May 14, 2012: Cash Is The King
05/15/2012
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May 7, 2012: Bonds As Deflation Hedges
05/08/2012
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April 30, 2012: Inflation Hedges For All Weather Portfolio Building
05/01/2012
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April 23, 2012: All Weather Portfolio Construction
04/23/2012
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April 16, 2012: Markets At A Juncture
04/17/2012
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April 9, 2012: My Investment Accounts & Allocation Templates
04/10/2012
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April 2, 2012: Current Economic and Market Fundamentals
04/02/2012
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March 26, 2012: A Few Good Sources To Help On Deciding Risk Profiles
03/26/2012
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March 19, 2012: Should You Be Religious On Your Investment Strategies?
03/20/2012
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March 12, 2012: Setting The Right Risk Profile
03/13/2012
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March 5, 2012: Multiple Strategies Using Portfolio of Portfolios
03/06/2012