Re-balance Cycle Reminder

We had our monthly re-balance today. The next re-balance time will be on next MondayJanuary 28, 2013. You can also find the re-balance calendar of 2013 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.

Year End Review: Brokerage Specifc Portfolios

In this newsletter, we review 2012 performance of brokerage specific portfolios listed on both of the pages of Brokerage Specific ETF Portfolios and Brokerage Mutual Fund Portfolios.

Brokerage specific ETF portfolios are constructed based on popular brokerages’ suggested ETFs.  Other than  Etrade All Star ETFs listed on the Brokerage Specific ETF Portfolios page , all other 5 plans are based on commission free ETFs supported by their respective brokerages.  MyPlanIQ monitors and updates the lists of these ETFs based on the information provided by the brokerages. 

On the other hand, the big five brokerages also recommend certain (usually no load and no transaction fee) mutual funds to their clients. MyPlanIQ construct the five plans listed on Brokerage Mutual Fund Portfolios. Again, we monitor and update the lists of these funds. At the beginning of the year, we just updated these five plans. 

Brokerage specific portfolios are some of the most popular plans for MyPlanIQ users. We encourage readers to inform us of any outdated funds or their trading restrictions. 

Strategic Asset Allocation Portfolios

In the following table, we compare all of the strategic asset allocation (SAA) optimal portfolios. 

Portfolio Performance Comparison

Ticker/Portfolio Name 2012 Return 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Etrade All Star ETFs Strategic Asset Allocation – Optimal Moderate 10.7% 9.9% 114.1% 9.2% 73.6% 4.3% 22.9% 7.8% 47.0%
Etrade All Star Funds Strategic Asset Allocation – Optimal Moderate 14.8% 13.1% 171.1% 9.9% 88.1% 7.1% 44.2% 10.7% 77.0%
Fidelity Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 11.3% 10.3% 127.3% 9.5% 77.9% 5.7% 31.1% 8.4% 51.5%
Fidelity Extended Fund Picks Strategic Asset Allocation – Optimal Moderate 15.9% 14.5% 204.2% 10.8% 106.5% 8.6% 59.7% 12.3% 99.2%
Schwab Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 10.9% 9.9% 124.8% 7.7% 65.1%        
Schwab Income Mutual Fund Select List Strategic Asset Allocation – Optimal Moderate 13.7% 13.5% 196.3% 10.1% 95.8% 6.6% 43.5% 8.4% 63.6%
Schwab OneSource Select List Funds Strategic Asset Allocation – Optimal Moderate 12.6% 11.6% 163.2% 9.8% 92.8% 6.7% 43.8% 10.7% 82.1%
TD Ameritrade Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 7.7% 7.4% 90.2% 5.9% 47.4% 2.1% 10.8% 7.7% 46.9%
TD Ameritrade Premier List No Transaction Fee Mutual Fund Plan Strategic Asset Allocation – Optimal Moderate 10.4% 9.4% 134.2% 8.5% 81.1% 6.0% 39.9% 11.3% 87.0%
Vanguard ETFs Strategic Asset Allocation – Optimal Moderate 10.9% 10.1% 120.9% 9.1% 75.5% 5.8% 32.3% 7.7% 47.7%

— 1, 3, 5 and 10 Yr ARs (Annual Returns) are as of 1/18/2013. 

See more detailed year by year comparison >>

What we learn from the above

  • Among ETF portfolios, TD Ameritrade Commission Free ETFs Strategic Asset Allocation – Optimal Moderate is clearly a laggard. As too many sector specific ETFs provided in the plan have distracted the performance, we are considering to further improve this plan’s portfolios by better filtering out those volatile ETFs.  On the other hand, Etrade All Star ETFs and Fidelity ETFs have the best returns. We again caution the 10 year return numbers as many of these plans have very few ETFs 5 years ago and that makes the comparison not very meaningful for performance beyond 5 years. 
  • Mutual fund based portfolios are clearly better than their ETF counter parts. This is consistent with what we have observed in our previous newsletter on Goldman Sachs Tactical Portfolios. Again, trading ETFs even at the monthly re-balance frequency can have very substantial slippage or performance degradation. Another word of caution here:  The performance calculation of all of the above portfolios is based on the next day opening prices: for ETFs, that would mean the opening price on the re-balance day (after our rebalance emails are sent prior to the re-balance day) while for mutual funds, that would mean the closing price on the re-balance day (as mutual funds have the same open and close prices). The opening prices are very volatile and we use them purely for the accounting prices. We strongly suggest that you do not use open prices to trade ETFs. 
  • We do not have a commission free ETF plan for Etrade. From Etrade’s commission free ETF program description, it only provides various WisdomTree and Global-X stock ETFs. They are not sufficient to construct a balance portfolio. Some brokerages are using ETFs for portfolio building purposes while others are enticing their clients to trade more. For our purpose, we do not advocate frequent trading nor we provide such a service (that is, we believe, does more harm than good for average investors). 

All in all, we believe these portfolios are on the right track to deliver better performance than balance index funds For example, Vanguard Balance Index Fund VBINX (60% stocks and 40% bonds) had 5.7% annual return in the last 5 year, worse than ALL of our mutual fund portfolios. 

Tactical Asset Allocation Portfolios

We again list the tactical portfolio performance side by side between ETF and mutual fund ones.

Portfolio Performance Comparison

Ticker/Portfolio Name 2012 Return 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Etrade All Star ETFs Tactical Asset Allocation Moderate 8.6% 8.9% 142.3% 9.5% 84.9% 11.0% 98.8% 12.7% 105.2%
Etrade All Star Funds Tactical Asset Allocation Moderate 10.1% 10.7% 225.1% 10.1% 106.5% 12.6% 141.9% 15.5% 155.9%
Fidelity Commission Free ETFs Tactical Asset Allocation Moderate 8.6% 8.5% 161.4% 7.6% 75.0% 6.9% 66.1% 10.2% 83.9%
Fidelity Extended Fund Picks Tactical Asset Allocation Moderate 10.8% 11.4% 223.7% 9.7% 105.6% 12.3% 128.7% 16.6% 171.0%
Schwab Commission Free ETFs Tactical Asset Allocation Moderate 7.3% 7.9% 153.9% 4.9% 52.3%        
Schwab Income Mutual Fund Select List Tactical Asset Allocation Moderate 9.7% 10.8% 236.2% 10.1% 106.4% 9.1% 100.2% 10.3% 115.7%
Schwab OneSource Select List Funds Tactical Asset Allocation Moderate 9.4% 9.5% 160.9% 6.8% 63.7% 5.3% 48.8% 11.7% 109.6%
TD Ameritrade Commission Free ETFs Tactical Asset Allocation Moderate 7.0% 7.7% 122.2% 5.7% 52.0% 3.6% 27.2% 8.6% 65.9%
TD Ameritrade Premier List No Transaction Fee Mutual Fund Plan Tactical Asset Allocation Moderate 9.3% 8.1% 146.3% 7.2% 72.2% 6.4% 62.0% 13.9% 135.2%
Vanguard ETFs Tactical Asset Allocation Moderate 11.9% 11.9% 200.3% 9.1% 83.7% 7.7% 62.6% 10.5% 81.2%
VBINX 10.6% 11.2% 150.7% 9.6% 88.3% 5.7% 36.1% 7.2% 49.4%

— 1, 3, 5 and 10 Yr ARs (Annual Returns) are as of 1/18/2013. 

See more detailed year by year comparison >>

We make the following observations

  • Mutual fund portfolios again outperformed their ETF counter parts. 
  • Most of them had comparable performance as VBINX though other than Vanguard ETFs and Fidelity Extended Fund Picks, they underperformed VBINX. 

Given the many uncertainties and the central banks consistent intervention to rescue risk asset markets in 2012, we are pleased with the TAA performance. In general, TAA might lag behind a strategic SAA portfolio in a year of side way, weak trend or trendless markets. Our expectation for TAA in these markets is that it should keep up with general markets. What we expect from TAA is that during bear markets, it preserves capital or is even profitable to deliver smoother year by year performance. We view 2011 and 2012 are the years that are difficult for this strategy but it delivered. 

Market Overview

From persistent elevated stock price levels and euphoric media reports all over the place, markets are indeed riding higher. In fact, US stocks (VTI) and US REITs (VNQ) rose most (among stock markets) last week, gaining 0.96% and 1.38% respectively. Gold and commodities are both ranked above the total bond index on the major asset trend ranking table on Asset Trends & Correlations or more detailed ones on 360° Market Overview

We, however, maintain a dose of skepticism. With many unsolved long term problems and an extremely short sighted administration (frankly, a very unimpressive inauguration speech today by the second term US President), 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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Disclaimer:
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