Re-balance Cycle Reminder

The next re-balance time will be on next Monday, March 4, 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.

Day To Day Portfolio Management

Warnings: the following can be boring and messy but they are important for your portfolio health!

Recently, we have received many emails asking for helps. Some of them are from new users who inquire how to use our system and how to start to mirror their accounts to those portfolios. Some of them are from existing users who have encountered various problems when managing their accounts during re-balance. In our previous newsletter January 28, 2013: Valuation Matters, we addressed one of the pressing problems for new users: how to migrate their accounts when stock markets are at record high. This newsletter continues to address several important day to day portfolio management issues. Often, these are the dirty work that never appears in a model portfolio. But as anyone who has to execute in a real world understands, these are as important as those virtual numbers or portfolio strategies.

New Account Migration Issues

A typical scenario a new user faces is that she/he has an account that consists of several legacy holdings. The question is how to migrate to a new portfolio that follows one of the asset allocation strategies

The following are the steps to follow

  1. Decide your plan: 
    1. If your account is in an existing 401k, 403b or other plan that only allows you to invest in a restricted set of funds, just search for the plan in our system. If the plan does not exist or does not have investment options, please send us the list of available funds and we will establish the plan for you. Or you can create the plan yourself (or modify an existing one) using our Predefined Plans feature (on the left panel of Dashboard). 
    2. If your account is in a brokerage as an IRA or a taxable account, you can search for the brokerage and the plans (ETFs or mutual funds) could be possible choices
    3. Or you can choose a plan by browsing those listed on ETF, Mutual Fund Portfolios  page (pay attention to more portfolos on other pages listed on the right panel of this page). 
    4. Note: We are in the process of refining Step 2 and 3 as we have received many inquiries and criticism on too many plans listed there. 
  2. Decide your risk profile for your account — you can use our questionnaire on the Get Started Now steps (accessible from our home page or from your Dashboard). Please note this is only reference and ultimately, you should consult a financial advisor or do your own due diligence on this. Furthermore, please note this can be only for the portion of your money in that account or for your overall financial situation. In the latter case, you’ll need to further decide what risk profile for your specific account. 
  3. Decide what asset allocation strategy(ies) you’ll use for this account. For a taxable account or a low maintenance account, you might want to consider using Strategic Asset Allocation – Equal Weight (free) or Strategic Asset Allocation – Optimal. For an account that you feel it needs more capital preservation and/or active management, you might consider using Tactical Asset Allocation. Again, this itself deserves more discussion and due diligence. 
  4. Migrate your existing account: 
    1. for your existing positions, you can do the following
      1. For those risk asset holdings (stocks, stock funds or commodities), if your overall risk level exceeds your newly decided risk level already, you can consider pare them down to the target level(s) or just switch them all together to the new positions. The actions taken here are dependent on a). risk asset (stock market) valuations (too high pare them down immediately, too low, gradually reduce them); b). tax consideration: to avoid short term capital gains, retain some portion of existing funds deemed to be worth holding, you will want to consider in kind replacement: for example, if the funds are US stocks while the model portfolio have several US stock funds, you can safely match the allocations without selling out all of the fund positions immediately. 
      2. For bonds that are relatively safe (we consider long term bonds, emerging market and foreign bonds and high yield bonds as risky), you can gradually liquidate them and DCA (Dollar Cost Average) to the new positions when risk asset markets are at elevated levels (like right now) or perform more aggressively (but still gradually) if valuations are low. For those risky bonds, you will want to treat them as risk assets and perform migration as stated above. 
    2. For new money, again, using DCA to gradually scale to the portfolio when valuations are high or markets are overbought or invest into risk assets more aggressively when markets are at low valuations. 
  5. As one can see, the above involves many specific situations. You will need to consult an advisor or do your own due diligence here to get through this process. We would like to reiterate that this is a non trivial process that shouldn’t be treated lightly. 

Existing Portfolio Rebalance

For your day to day (or month to month) existing portfolio management, the following are several common issues our users encounter: 

  1. Redemption issue: many times, users asked us what to do when performing re-balance, selling a mutual fund might incur redemption charge. This is due to the violation of minimum holding period for this fund.
    1. Possible cause: many users simply follow an existing model portfolio. Remember an existing (running) portfolio has its own holding history. It might have held the fund for 2 months before you buy the fund in your actual account. Thus your holding period of the fund is different from that of the portfolio. 
    2. What to do: a). do not sell the fund. In general, our position is to avoid those short term redemption charges. If the fund is a risk asset fund (i.e. stocks or commodities or REITs), you’ll reduce your other positions accordingly so that your overall risk asset holdings do not exceed your target allocations. If this is a risky bond fund (such as emerging market or foreign bond funds), you might want to include their allocation in the overall risk asset allocation. In the case that this is a long bond fund, you can hope to use your stock allocation to offset the long bond allocation as long bonds are usually very negative correlated with stocks (not always though). b). Customize a new portfolio: this feature now generates suggested holdings base on the latest market conditions (so, say you customize a new portfolio in the middle of the two re-balance days, you will get suggested holdings that might be different from those in an existing model portfolio). Furthermore, for this newly customized portfolio, it will start to count the holding periods in the next day. Thus, if you follow this customized portfolio precisely, you’ll be in sync with the portfolio which does not violate the minimum holding periods set in the fund table. 
  2. A mutual fund is closed or not available for purchase: again, in this case, you’ll use in kind replacement to find another similar fund. Consider the sub asset classes first. By sub asset classes we mean US stocks-Large Cap Blend, US stocks-Small Cap Value etc. If you can find a fund with a high rating in the plan’s fund table (you can find a fund’s rating by clicking on ‘Show All Funds & Details‘ at the bottom of the fund table on a plan page), you can use that fund as the replacement for this re-balance cycle. Otherwise, go up to another level in the asset class hierarchy, for example, to replace Vanguard Small Cap Value Fund VISVX, if there is no more Small Cap Value fund in the plan, you’ll go to Small Cap class to find another fund such as Vanguard Small Cap Index NAESX. If that is still not possible, go up one more level to US stocks to find a US stock fund that has high ratings. 
  3. ETFs: intra day prices, open or close prices? An often confusing but a real issue here is how to make ETF re-balance trades. What prices should you get? As a general principle, we never advocate doing any ETF trades at the open prices. You should place your trades at least 30 minutes after market open, or place trades 30 minutes before market close. However, do not attempt to predict intra-day market prices unless you have all day to play with markets and you believe you can out smart markets in day trading. Use a systematic sell and buy orders to finish your re-balance. Give yourself a life, in fact, a better life both financially and quality wise in the long term. Please note: all of MyPlanIQ’s ETF portfolios use next day open prices just purely for accounting purpose. It is not meant to have our users to use market open prices for re-balance. We believe  that using open prices for portfolio performance calculation might be overly conservative (thus underestimate), a belief we have stated many times in our articles or newsletters. 
  4. Slack off: I missed several trades or re-balance, what to do?  If you miss a re-balance or only finish a re-balance partially, you’ll need to make decisions on how to catch up. Sometimes, the next re-balance date might be more than 30 days away from the next re-balance day (like the latest re-balance on 2/28/2013 to the next one on 3/4/2013, for example) , that might give you opportunity to do the re-balance. You can also use a similar ETF to replace missing mutual fund so that you don’t have issues with holding periods. Hold the proxy ETF till the mutual fund in the model portfolio is sold and then you can get back in sync with the model portfolio. For more details, see an excellent guide by one of our users. 

Momentum Trends In The Super Bowl XLVII 2013

As the light or fun side of this newsletter (to compensate for the boring part in the above?), let’s talk about the Super Bowl on last Sunday! For many sports fans, momentum is a well recognized phenomenon in a game. It was exhibited clearly in this year’s Super Bowl. In the first half, 49ers were clearly not into the game since the opening. Ravens gained momentum after 49ers first turn over from offense to defense. Joe Flacco was clearly in charge while 49ers’ Colin Kaepernick was overly cautious or nervous: his few attempts of long pass were either intercepted or unsuccessful. As a result, Ravens carried their momentum all the way to the second half. For Niners’ fans who were hoping a turn of the trend in the second half, the historically first ever 108-yard kickoff return from one end zone to the other by Ravens’ Jacoby Jones would have been the nail in the coffin for 49ers. 

Fortunately, the 34-minute power outage right after that bought 49ers much needed time to recoup their acts. After the power outage, it was clearly that the tide had turned: both Niners’ offense and defense had clearly turned a corner and they out played Ravens all the way to the end. Unfortunately, the very last touch down attempt by Niners was stopped and Ravens still won the game. Well that is another story here. 

The Super Bowl clearly showed two strong trends and the turn of one trend to the other! By the way, even the turn of the trend was very visible right after the power outage.  

Another lesson we learned from the game: 4 out of 5 commentators on CBS Sports predicted Niners’ win before the game started! So forget about pundits, as they say. 

Portfolio Performance Review

In the following, we compare the model portfolios of several 401k plans. 

Portfolio Performance Comparison (as of 2/4/2013)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Ford Motor 401K Strategic Asset Allocation – Equal Weight Moderate 0.1% 2.2% 9.3% 141.8% 9.9% 104.2% 5.2% 37.0% 9.1% 73.6%
Ford Motor 401K Strategic Asset Allocation – Optimal Moderate 0.1% 2.5% 10.4% 131.7% 10.5% 89.4% 4.3% 25.5% 8.4% 57.4%
Ford Motors 401K Tactical Asset Allocation Moderate 0.3% 2.1% 8.3% 147.4% 7.0% 84.9% 5.9% 69.6% 9.8% 109.7%
Hewlett Packard 401K Strategic Asset Allocation – Equal Weight Moderate -0.6% 1.6% 9.7% 158.7% 10.5% 113.5% 4.9% 33.8% 10.3% 82.2%
Hewlett Packard 401K Strategic Asset Allocation – Optimal Moderate 0.2% 3.1% 13.5% 181.1% 11.4% 100.7% 5.9% 34.9% 10.4% 73.2%
Hewlett Packard 401K Tactical Asset Allocation Moderate -0.3% 1.5% 7.7% 184.5% 11.8% 135.7% 10.7% 121.3% 13.6% 147.1%
The Bank of America 401(k) Plan Strategic Asset Allocation – Equal Weight Moderate -0.1% 2.1% 7.3% 134.5% 10.5% 114.0% 5.2% 33.8% 8.1% 59.4%
The Bank of America 401(k) Plan Strategic Asset Allocation – Optimal Moderate 0.2% 2.8% 10.1% 144.5% 11.6% 105.1% 5.8% 35.8% 9.3% 66.4%
The Bank of America 401(k) Plan Tactical Asset Allocation Moderate 0.0% 1.9% 5.1% 103.8% 10.4% 103.5% 10.6% 108.2% 11.7% 120.0%
VBINX -0.2% 3.0% 10.2% 146.2% 10.3% 100.4% 5.1% 32.6% 7.6% 52.8%
Wal-Mart Profit Sharing and 401(k) Plan Strategic Asset Allocation – Equal Weight Moderate -0.1% 0.5% 7.4% 128.0% 9.3% 116.7% 5.7% 53.4% 9.1% 93.0%
Wal-Mart Profit Sharing and 401(k) Plan Strategic Asset Allocation – Optimal Moderate 0.4% 1.3% 7.5% 88.2% 10.5% 87.4% 5.2% 32.5% 9.5% 68.0%
Wal-Mart Profit Sharing and 401(k) Plan Tactical Asset Allocation Moderate 0.4% 2.5% 6.8% 143.7% 9.2% 125.6% 7.6% 101.9% 10.0% 119.0%

*: NOT annualized

**YTD: Year to Date

See the latest and year by year comparison >>

Overall, strategic asset allocation portfolios out performed the tactical ones in the last 1 and 3 years but still lagged in 5 and 10 years. 

Market Overview

This week opened with big drops of US stocks and other risk assets. Gold and long term Treasury bonds rebounded. European economic and debt issues resurfaced again. Gold is now ranked above US bonds on the major asset trend ranking table on Asset Trends & Correlations or more detailed ones on 360° Market Overview.

We don’t know whether this is the beginning of the long overdue market correction (and there will be one for sure). 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. 

Latest Articles

How can we improve this newsletter — we value your inputs –Thanks to those who have already contributed — we appreciate it.

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.