October 8, 2012: Asset Allocation Strategies Have Cycles Too

Re-balance Cycle Reminder

Based on our monthly re-balance calendar, the next re-balance time will be on Next Monday, October 15, 2012. You can also find the re-balance calendar of 2012 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.

Also please note that we now list the next re-balance date on every portfolio page.

Year To Date Performance Review

First, let’s review portfolio performance. The following is the year by year performance comparison for several portfolios, 3 of them are from Six Core Asset ETFs and one is the famous Permanent Portfolio.

Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate	SAA-EW
Six Core Asset ETFs Tactical Asset Allocation Moderate	TAA
Harry Browne Permanent Portfolio	Perm
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate	SAA-Opt

Performance as of 10/3/2012

	Port	1 Yr	3 Yr	5 Yr	10 Yr	2012	2011	2010	2009	2008	2007	2006	2005	2004	2003	2002
AR(%)	SAA-EW	15.3	9.4	3.3	8.2	7.7	0.5	13.4	23.5	-22.8	9.8	17.2	9.1	7.9	18.7	-5.4
	SAA-Opt	17.7	9.2	2.9	7.2	9.6	-0.1	12.8	22.3	-23.2	8.9	12.4	7.1	7.4	17.5	-12.4
	TAA	6.4	6.9	7	10.2	6.4	-0.6	10.2	17	-0.1	19.3	21.2	7.1	8.1	15.2	1.1
	Perm	10.5	11.7	8.5	9.3	8.6	10.1	13.2	9.6	-2.1	12	10.8	7.8	6.7	13.5	4
SharpeRatio(%)	SAA-EW	140.9	79.5	17.7	52.1	91.8	3.6	113.4	117.1	-97.6	61.9	157.8	90.3	91.4	172.3	-50.8
	SAA-Opt	158	76.5	14.8	45.2	112.3	-1.1	106.3	116.6	-95.2	56.7	124.6	75.5	97	168.2	-90.2
	TAA	125.3	61.5	58.2	84.6	120.3	-6.5	72	143.4	-10	102.2	155.7	56.5	89.9	213.7	117.6
	Perm	176.4	173.5	100.3	114.2	144.9	146.2	195.6	104.8	-28.4	131	96	122.2	139.1	223.1	54.8
DrawDown(%)	SAA-EW	6.7	12.2	38.9	38.9	6.7	12.2	7.8	17.5	37	6.1	7.6	4.7	6	8.3	13.1
	SAA-Opt	7.2	12.7	38	38	6.7	12.7	8.5	18.1	36.1	6.2	6.7	4	5.2	8.1	20.6
	TAA	3.5	9.5	11.7	11.7	3.5	9.5	9.4	5.6	11.7	10	10.5	7.4	5.7	2.7	0
	Perm	3.7	5.1	15.3	15.3	3.7	4	3.3	7.1	15.3	3.1	7.8	2.4	4.8	3.9	5.1

See the detailed comparison >>

It is clear that from 2009 to present, the buy and hold strategic portfolios have done better than actively managed tactical TAA portfolio in every year!

Comparison between SAA and TAA portfolios for lazy portfolio based plans reveals similar conclusion:

Portfolio Performance Comparison (as of 10/3/2012)

Portfolio/Fund Name	YTD Return**	1Yr AR	1Yr Sharpe	3Yr AR	3Yr Sharpe	5Yr AR	5Yr Sharpe	10Yr AR	10Yr Sharpe
David Swensen Six ETF Asset Individual Investor Plan Strategic Asset Allocation – Equal Weight Moderate	9.0%	18.7%	177.7%	11.0%	88.6%	4.0%	19.9%	8.8%	53.3%
David Swensen Six ETF Asset Individual Investor Plan Tactical Asset Allocation Moderate	6.0%	6.1%	98.2%	10.7%	100.4%	6.0%	51.1%	9.6%	80.6%
FundAdvice Ultimate Buy and Hold Lazy Portfolio Strategic Asset Allocation – Equal Weight Moderate	8.9%	16.6%	127.0%	8.2%	59.3%	2.9%	14.9%	9.6%	60.0%
FundAdvice Ultimate Buy and Hold Lazy Portfolio Tactical Asset Allocation Moderate	4.8%	5.8%	106.2%	8.2%	78.1%	5.7%	55.2%	10.9%	104.3%
Israelsen 7Twelve Strategic Asset Allocation – Equal Weight Moderate	7.4%	13.3%	118.1%	9.4%	78.7%	4.0%	21.6%	9.1%	58.5%
Israelsen 7Twelve Tactical Asset Allocation Moderate	7.1%	8.4%	144.2%	6.9%	68.0%	6.6%	55.1%	10.6%	89.3%
Permanent Portfolio ETF Plan Strategic Asset Allocation – Equal Weight Moderate	9.3%	14.9%	141.6%	13.5%	120.7%	7.4%	46.3%	10.5%	75.1%
Permanent Portfolio ETF Plan Tactical Asset Allocation Moderate	3.9%	5.6%	112.0%	10.6%	97.1%	7.3%	64.6%	7.9%	72.2%
The Coffee House Lazy Portfolio ETF Version Strategic Asset Allocation – Equal Weight Moderate	8.9%	19.1%	166.7%	10.6%	76.5%	3.2%	14.2%	8.0%	43.6%
The Coffee House Lazy Portfolio ETF Version Tactical Asset Allocation Moderate	5.1%	5.0%	97.0%	9.7%	88.2%	6.7%	66.0%	7.6%	73.4%
Wasik Nano Plan Strategic Asset Allocation – Equal Weight Moderate	9.1%	17.6%	150.5%	10.3%	82.7%	2.7%	12.3%	7.6%	43.6%
Wasik Nano Plan Tactical Asset Allocation Moderate	6.8%	8.1%	158.1%	9.7%	96.3%	5.1%	48.6%	8.3%	81.6%

*: NOT annualized

**YTD: Year to Date

See latest year by year detailed comparison here>>

This again begs the question: will such an out performance (or under performance from TAA’s point of view) will continue in the future?

Strategic Or Tactical?

So should one write off the tactical strategies again? Well, not so fast.

First, if you look at longer term performance, tactical portfolios did perform better, especially in 2008 and 2001-2002. This is not surprising as tactical allocation tries to step through a bear market more carefully.

Secondly, the tactical portfolio usually lags in early bull markets (or in the phase of strong recovery out of bear market low). It then gradually catches up and eventually outperforms in late stage of the bull market. For example, the tactical portfolio did better than the two strategic portfolios from 2001 to 2002. It then lagged behind from 2003 to 2004. It caught up and outperformed again in 2005 to 2007 and then it did better again in 2008 (the bear market). It then under performed again from 2009 to present.

The intuition behind this behavior is clear: in the initial phase of a bull market, the buy and hold equity portions in a portfolio contributes significantly to the upside while in a tactical portfolio, it slowly adjusted its risk asset exposure. In the middle of a bull market, secular trends are forming with trial and error attempts, this results in the tactical portfolio’s underperformance also. In the late bull market, all trends are setup and the tactical portfolio will ride on strongest asset trends, which results in stronger performance. Finally, in a bear market, tactical portfolios reduced risk asset exposure, resulting in less loss.

From the above discussion, it is clear that strategic and tactical asset allocations should be complemented with each other. It is not an ‘all or nothing’ or ‘either you or me’ binary choice. This is consistent with our previous position in core satellite portfolios.

Market Overview

Markets continued to be in favor of risk assets. Stocks rose last week while Gold was consolidating. We have seen any major change even though undercurrents are not encouraging.

See 360° Market Overview for more asset class trends.

We remain deeply skeptical on this rally.

We again copy our position statements (from previous newsletters):

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible.

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.

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