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 MondaySeptember 10, 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.

Four Pillar Foundation Based Portfolio Review

We first introduced the concept of four corner based investment framework in the newsletter April 23, 2012: All Weather Portfolio Construction. We prefer using the term of  ‘Four Pillar Foundation‘. To recap, we showed the following picture in the introductory article: 


We made an important distinction between Treasury Inflation Protected Securities (TIPs) and other fixed income bonds. From the above picture, one can clearly see bonds can fall into all four corners! 

Given markets up and down with natural economic forces and artificial government (or politics driven) intervention coming into play, it is a good time to look at portfolios that are based (explicitly or implicitly) on this four pillar framework:

  • Yale’s P David Swensen Yale Individual Investor Portfolio Annual Rebalancing. One can classify its 6 ETFs into the following categories
    • Growth: 30% in US stocks, 15% in international stocks and 5% in emerging market stocks. Total 50%. 
    • Inflation: 15% in TIPs and 20% in US REITs. US REITs can be classified to Growth category too. Total 35%
    • Deflation: 15% in long term Treasuries. 
The second and third portfolios are not directly related to the four pillar framework but they are constructed with these concepts in mind. We believe the four pillar framework is very intuitive and helps to classify various investments related to economic cycles. This is especially true for bonds: 
  • Growth: high yield bonds, convertible bonds.
  • Inflation: TIPs, Emerging and international bonds (these two are more for currency value preservation for a global investor)
  • Deflation: Long term bonds, intermediate corporate bonds. 
  • Safe harbor: cash and short term bonds. 


So next time when you see bonds in your portfolio, don’t just simply lump them into fixed income or ‘safe’ asset. They actually serve for various purpose.

In fact, you are encouraged to use our ‘Static Portfolio’ tool to construct a ‘permanent’ portfolio using ALL bonds, similar to our Permanent Income Portfolio (which uses dividend stocks and REITs). Note that even for a retiree, we believe some dividend stocks and REITs (up to 20%, for example) are still required to construct an optimal portfolio, even from risk point of view. See our previous newsletter June 25, 2012: Conservative Allocation Fund Upgrading.

It is also very important to remember that not all bond funds are safe. In fact, at MyPlanIQ, we have done quite research in how to properly handle various bond funds, especially for long term, high yield and international and emerging market bond funds. These bond funds lie in the risky spectrum of the fixed income and need special treatment. This is why we did some re-classification of long term bond funds starting in the last re-balance period (i.e. the July re-balance).

For expert users, another way to apply the four pillar framework concept in constructing a portfolio is to construct sub portfolios to cover growth (equities), inflation and deflation corners. Similar to Doug Robert’s Follow the Fed, these sub portfolios can use our Tactical Asset Allocation strategy (for example, set risk profile to 0 to construct an all equity portfolio) or Goldman Sachs Global Tactical Allocation strategy to rotate between gold and TIPs for inflation corner and long term bonds and intermediate or short term bonds for deflation. Such a composite portfolio gives two levels of hedging: one is at the four corner side and the other is at each corner.

Finally, let’s take a look at the performance among these portfolios. Bear in mind that some portfolios have higher risk. For example, David Swensen’s portfolio has only 30% in fixed income. So the comparison is not entirely apple to apple.

Portfolio Performance Comparison (as of 8/6/2012)

Portfolio/Fund Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Harry Browne Permanent Portfolio -0.3% 5.1% 9.4% 108.3% 12.0% 175.1% 8.8% 103.0%
P David Swensen Yale Individual Investor Portfolio Annual Rebalancing 0.4% 9.7% 15.5% 71.2% 14.2% 106.7% 5.1% 25.2%
P Doug Roberts Follow the Fed Add Treasury Note One Month Simple Indicator Moving Average 64 Days -0.2% 4.7% 4.8% 13.7% 13.7% 118.4% 9.7% 77.2%
P Permanent Portfolio ETF Version -0.1% 3.1% -0.5% -27.5% 11.4% 114.6% 8.3% 67.7%
PERM 0.1% 0.0%            
Permanent Income Portfolio -0.2% 6.6% 13.2% 243.1% 12.3% 229.2% 7.5% 101.1%
PRPFX 0.3% 3.1% -0.3% -29.1% 11.0% 123.4% 8.2% 52.4%

*: NOT annualized

**YTD: Year to Date

Note PERM’s Inception is 02/09/2012.

See complete detailed and latest comparison >>


Year to date, P David Swensen Yale Individual Investor Portfolio Annual Rebalancing has done the best. This is due to its sizable exposure in US stocks, REITs, TIPS and Long Term Treasuries, all of which have done well. Similarly, Permanent Income Portfolio has done well due to its dividend stock exposure, in addition to TIPS, Long Term Treasuries and REITs. On the other hand, gold’s performance has been lackluster, which affects traditional permanent portfolios. Notice how well our P Permanent Portfolio ETF Version portfolio has matched to the permanent portfolio mutual fund PRPFX.

Looking ahead, we  are concerned about the diminishing returns on long term bonds and TIPs. However, deflation pressure is still mounting in real economies and no one knows when that will end. This is exactly the reason why one should choose a diversified investment framework such as the four pillar one as the investing foundation.

Market Overview

Due to the recent stock market surge, some of our tactical portfolios might choose to increase stock exposures. However, we remain very skeptical on the fundamentals. But as a disciplined investor, however unconvinced we are, we choose to stick to the strategy and let the markets and natural laws of statistics play out.

Based on 360° Market Overview, other than gold (GLD) and frontier market stocks (FRN), all risk assets are now ranked higher than cash. Even international stocks (EFA) is now above the total bond index (BND). Also notice how stretched US REITs (VNQ) has risen: in the past 52 weeks, it had return of 42.33%. US stocks (VTI) had 26.59% 52-week return. In the meantime, gold (GLD) and commodities (DBC) are the only two that had negative 52-week returns.

Allocation funds listed on  SmartMoneyIQ Managers usually have excellent long term records. Again, we are seeing these managers are very steady in the current uncertain markets.

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