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.

The Difference Between Investment Loss & Mistakes

We discussed the importance of understanding the behavior of an investment strategy in the previous newsletter. Supposed now that you are fully aware of the pros and cons of an investment strategy, the next step is to understand correctly the difference between investment loss and investment mistakes. 

Investment loss is easy to understand: an investment portfolio lost some money and you account for that loss. The next thing investors would start to ponder is that whether they have made a mistake in their investment strategies. Often investment loss is associated with mistakes. For example, looking back one’s portfolio last one year return that is a loss, he/she might conclude that there is a mistake made. But there is a big difference between a mistake or a normal outcome of a well defined strategy. 

Let’s look at the famous bridge playing example given by Warren Buffett’s mentor Ben Graham: 

Ben Graham explains that playing bridge is like investing in that one must follow a discipline when investing or playing the card game bridge. An excerpt from the market comment:

Why bridge? Though Graham wasn’t talking about Buffett at the time, he offers a clue:

“I recall to those of you who are bridge players the emphasis that bridge experts place on playing a hand right rather than on playing it successfully. Because, as you know, if you play it right you are going to make money and if you play it wrong you lose money – in the long run. There is a beautiful little story about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife ‘I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?’ And his wife replied very dourly, ‘If you had played it right you would have lost it.’

Emphasis is ours. 

In contract bridge card games, based on the distribution of the 52 cards, the bidding process (assuming players are rational to convey their holdings to their partners) and the cards played so far, one can infer probability of remaining cards in various hands, sometimes fairly accurately. Thus, rules are formulated for higher odds of winning. 

However, these are still probabilities and in a particular play of a game, you follow the rule and could still lose.  So in this case, you actually play it right because you follow the rules with higher winning odds. It is only when many many games are played, correctly following these rules will eventually show the benefits. 

For many weaker or novice players, they often attribute a winning that results from a mistake of not following the rules as their abilities and blame the rules when they lose a game because of following the rules precisely. 

So an investment loss is not necessarily a mistake, in fact, that particular loss might be well expected in a well defined and sound strategy. On the other hand, an investment gain might not be the result of a good play but purely from  luck. 

So once an investment strategy is defined, execution becomes the key. If you play it right, you will make money in the long run, as what Ben Graham stated. 

On the other hand, the other hardest problem is whether the strategy is well defined and has the average outcome you would expect, in the future. Unfortunately, nobody can predict the future. That is why in addition to the historical performance and back testing, one needs to understand the intuitions behind the strategy. There should be some very easy but true valid arguments for the strategy, regardless of what economic and market conditions it is in.

For example, an argument for equities (stocks) delivering inflation beating returns in the long run is that in a healthy capital economy, business owners will eventually gain above inflation returns as a whole otherwise, they would simply choose to invest in cash or inflation linked debts. Notice nobody can guarantee a particular company will succeed in delivering such a return in the long run. But if you choose the whole stock market (that represents all businesses that have staying power), you can avoid individual company picking problem.

Such an argument is very intuitive and plausible.

But once you are convinced and decide to implement a strategy, you’ll need to follow it for a sufficient long period of time. Without the consistency (of following or implementing the strategy) and long enough time, you are bound to be fooled again and again by abandoning a winning strategy prematurely.  

Please share your thoughts through comments. We need healthy discussion.

Portfolio Reviews

We compare the Six Core Asset ETFs tactical portfolio with several tactical allocation funds:

Portfolio Performance Comparison (as of 7/23/2012)

Portfolio/Fund Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Moderate -0.4% 4.5% -3.2% -30.2% 7.7% 69.4% 7.4% 57.2%
MALOX -1.1% 2.4% -6.4% -32.1% 6.5% 59.1% 2.3% 12.9%
GTAA -0.6% 1.2% -9.0% -87.3%        
GDAFX -0.3% 4.1% -2.7% -12.2%        
DWTFX -0.9% 2.5% -11.9% -70.4% 7.1% 45.5%    

*: NOT annualized

**YTD: Year to Date

P_17295 (As of 07/23/2012) Six Core Asset ETFs Tactical Asset Allocation Moderate
GTAA (As of 07/23/2012) Cambria Global Tactical ETF
DWTFX (As of 07/23/2012) Arrow DWA Tactical A
GDAFX (As of 07/23/2012) Goldman Sachs Dynamic Allocation A
MALOX (As of 07/23/2012) BlackRock Global Allocation Instl      

See up to date detailed comparison>>

Overall, our tactical portfolio has done very well.

Current Markets

Again, we emphasize the heightened risk in the near term. European sovereign debts continue to deteriorate while the rest of the world including the U.S., China and Japan are slowing down significantly. Finally, this is the summer season that is not favorable for risk assets. 

From 360° Market Overview, after today’s (7/23/2012) weakness in stock markets, US stocks (represented by VTI) is again ranked below the total bond index (BND) (it was above BND on last Friday). 

We again would like to point out that the smart money managers are still keeping well balanced portfolio allocations. See SmartMoneyIQ Managers.  Maybe the managers are relying on the Bernanke put that can guarantee certain bottom of risk assets. 

We are comfortable with our current portfolio positions.

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