Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.
For regular SAA and TAA portfolios, the next re-balance will be on Monday, August 15, 2016. You can also find the re-balance calendar for 2016Ass on ‘Dashboard‘ page once you log in.
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.
Please note that we now list the next re-balance date on every portfolio page.
Asset Trend Review
What a difference the last two weeks made! As it stands right now:
- S&P 500 stock index is at all time high
- 10 Year Treasury bond yield is at all time low
- Germany, Japan and Switzerland 10 year government bond yields: negative
- Britain, France, Spain, Italy 10 year government bond yields are all lower than the U.S:
What happened after Brexit referendum is that interest rates in all major countries fell with the belief of possible strong central bank support or intervention. Friday’s US job report made investors believe that the risk of US economy weakening is removed and it is now in a robust trajectory. This caused a flurry to buy stocks, pushing S&P 500 to its all time high.
In all fairness, US 10 year Treasury bond yield is still the highest among major developed countries. This is strange as US credit situation is better than that of most of these other countries. However, with all countries are racing to the bottom for yields, investors naturally push US yield further down. Granted, the reasons behind all the asset price movement are more than the above (for example, the currency war is one of the main factors driving sovereignty bonds’ price lower). Nevertheless, what a inter-connected world!
Stock and bond portfolios are all performing well
In such euphoria, it’s not surprising that both stock and bond portfolios are doing very well:
Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
---|---|---|---|---|---|---|
Six Core Asset ETFs Tactical Asset Allocation Moderate | 7.3% | 5.8% | 4.4% | 4.2% | 8.6% | 0.83 |
Schwab Total Return Bond | 7.2% | 7.0% | 4.4% | 6.0% | 8.8% | 1.83 |
Fidelity Muni Bond Funds | 7.4% | 12.3% | 8.2% | 8.7% | 7.1% | 2.15 |
VFINX (Vanguard 500 Index Investor) | 5.7% | 5.1% | 11.1% | 11.8% | 7.5% | 0.33 |
VBINX (Vanguard Balanced Index Inv) | 6.0% | 5.1% | 8.2% | 8.4% | 6.9% | 0.52 |
VBMFX (Vanguard Total Bond Market Index Inv) | 6.1% | 6.0% | 4.4% | 3.6% | 5.1% | 1.1 |
VWIUX (Vanguard Interm-Term Tx-Ex Adm) | 3.7% | 6.5% | 5.2% | 4.7% | 4.7% | 1.46 |
Apparently, bond portfolios have done better than stocks, both in the short term (Year To Date YTD) and in the longer term: 10 year period. In fact, they did that with much less risk. Regardless of how much attention and excitement stocks garner, for the past 10 years, they still can’t beat bonds. What’s more, tax free bonds have done better than taxable bonds (see April 25, 2016: Tax Free Municipal Bond Funds & Portfolios for discussion on tax free bond portfolios).
The road to low return: stagnation and gyration
Now that all of the major assets are at an elevated valuation level, what’s next?
Mean reversion and momentum are the two key factors driving the price of financial securities such as stocks or bonds. Our Tactical Asset Allocation(TAA) utilizes momentum factor extensively. Mean reversion, on the other hand, dictates that the price of a stock or bond will eventually revert back to its mean (average). At this moment, unfortunately, both the prices of stocks and bonds are way above their long term means.
It’s easier to estimate the long term return of a bond assuming one holds it till maturity. At this moment, holding a 10 year Treasury note will return 1.43% (its yield) annually. We have discussed the long term returns of stocks in many of our previous newsletters (see, for example, January 18, 2016: Strategic Asset Allocation: A Cautious Outlook). The most likely annual return of US stocks in the coming 10 years is estimated to be around 2%.
Investors tend to argue that since bond yields are so low, stocks deserve to have higher valuation. The problem or non-problem of this argument is that this has been priced in the current stock price. To the extent that bond delivers 1% or so annual return, stocks, at the current valuation (no one would argue that stocks are undervalued, it’s just whether they are fully valued or way to overvalued), will deliver higher returns than bonds by adding so called risk premium. The theory goes as follows: since stocks are more volatile or riskier, they deserve to obtain extra (risk premium) returns. 2%+ is actually not a unreasonable estimate even along this line of argument since bonds only yield around 1%. Regardless, stocks are likely to deliver lower than historical average returns 10 years later.
In such a low future return environment, the path stocks will take can only be either stagnated (just like what we have observed for the past one plus year) and thus clock in very low return each year. However, history tells us that it’s more likely they will travel in a more volatile and gyrated fashion: they will drop significantly at one point and then recover. For example, from the top on 8/31/2000 in the internet bubble to today, S&P 500 total return (dividend reinvested) VFINX (Vanguard 500 Index Investor) experienced two big drawdowns, losing more than 50% of its value at some point between 2008 and 2009 and recovered to today’s all time high.
Its annual return? 4.1%, compared with 5.2% of bond index VBMFX (Vanguard Total Bond Market Index Inv)!
As always, we do not proclaim that stocks and bonds will decline immediately nor we know precisely when they will fall sharply. In fact, it’s very likely the current up trend will go on for a while. However, the long term path is very clear: danger ahead.
What we can draw from the above discussion is that to obtain higher returns and avoid big losses from stocks and bonds for the coming decade, one has to invest in a more proactive or tactical way. This is true for both stocks and bonds. Fortunately, our tactical portfolios such as those listed in the above table are tactical in nature. For bonds, if a big loss is emerging, these portfolios will rotate to short term bonds or even cash temporarily to wait out the storm.
As stocks and bonds are rising more and more each day, we believe it’s becoming more and more important to overweight in tactical portfolios, both stocks and bonds.
Market Overview
Now that Brexit is behind us (is that really?), stocks and bonds rose to all time high. Along with these two important assets, REITs, gold, international bonds and emerging market stocks all rose strongly too. Risk assets are in a sharp up trend. However, investors now need to face the old fundamental reality that has dogged stocks for so long: earning report for Q2 2016. It is again projected by Factset that earnings of S&P 500 companies will decline -5.6% in Q2 2016. If this projection holds, it will mark the 5th consecutive quarter of earnings decline for S&P 500 companies. So the current stock gain is purely based on yield seeking or racing to the bottom. Regardless, we shall follow our strategies systematically to stay on course.
For more detailed asset trend scores, please refer to 360° Market Overview.
We would like to remind our readers that since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Economies have heavily relied on low interest debts. Capital might be misallocated to unproductive investments and consumption. U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future.
We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.
Latest Articles
- June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- May 2, 2016: Low Cost Index Fund Investing
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- April 18, 2016: Asset Class Trend Review
- April 11, 2016: Construction of Sound And Conservative Portfolios
- March 28, 2016: Total Return Bond ETFs Review
- March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles
- March 14, 2016: Are Tactical And Timing Strategies Losing Steam?
- March 7, 2016: Defined Maturity Bond Fund Analysis
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- February 22, 2016: Be Cash Smart
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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