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.

Dividend & Income Funds In Asset Allocation

In the current extremely low rate environment, investors are turning attention to dividend paying stocks or funds.  As we pointed out many times, we are in favor of dividend paying stocks: in general, dividends don’t lie and companies that pay dividends are forced to manage their cash flow and future growth more prudently than those that are simply positioned to grow at any cost!

Dividend paying stock funds have several properties: 

  • They offer comparable or even better returns in the long term. For example, the following shows how Vanguard Dividend Growth (VDIGX) vs. Vanguard Total Stock Market Index (VTSMX): 

Portfolio Performance Comparison (as of 2/18/2013)

Ticker/Portfolio Name Since 3/31/1993 Since 3/31/1993 Sharpe YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
VDIGX 6.7% 29.9% 6.7% 13.3% 13.4% 6.8% 10.4% 49.6%
VTSMX 7.18% 24.7% 7.3% 15.0% 14.3% 5.3% 9.3% 36.1%

*: NOT annualized

**YTD: Year to Date

3/31/1993: the earliest date that VDIGX had a price. 

See more detailed year by year comparison >>

  • They have better risk adjusted returns or Sharpe ratio. This is because with regularly paying dividend streams, dividend funds are more steady in terms of their total returns. This is evident in the above table, in fact, for both the last 5, 10 years and since 3/31/1993. 
Furthermore, when a portfolio is constructed with dividend funds instead of general stock funds, the portfolio usually has better risk adjusted returns (Sharpe ratio). This is obvious for a Strategic Asset Allocation  based portfolio, but it is also true for Tactical Asset Allocation. The intuition behind this is that dividend funds exhibit more stable trend than broad base index funds, mostly due to their steadier returns. 
The following shows how the model portfolios of   Retirement Income ETFs  (a plan consisting of mainly dividend paying stock funds and various bond funds) have compared with their counter parts in the other two plans: 

Portfolio Performance Comparison (as of 2/15/2013)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate 0.0% 2.4% 8.3% 108.1% 10.9% 96.5% 6.4% 40.0% 9.8% 69.0%
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 0.0% 1.7% 10.3% 158.5% 9.2% 91.0% 7.9% 73.2% 10.7% 94.1%
Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate 0.1% 2.2% 9.9% 148.8% 11.4% 114.0% 6.5% 40.8% 8.1% 57.6%
Retirement Income ETFs Tactical Asset Allocation Moderate 0.3% 1.9% 8.3% 134.7% 11.9% 122.4% 7.8% 72.2% 11.7% 99.9%
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate -0.0% 2.2% 7.8% 99.2% 9.6% 82.8% 4.6% 26.3% 7.5% 48.2%
Six Core Asset ETFs Tactical Asset Allocation Moderate -0.0% 0.9% 6.8% 118.9% 7.3% 72.3% 7.3% 67.3% 10.4% 86.8%

*: NOT annualized

**YTD: Year to Date

More detailed year by year and up to date comparison >> (click on More Performance Analytics Comparison)
The above shows that the tactical portfolio in Retirement Income ETFs has the highest Sharpe ratio and highest 10 year return than other portfolios. For strategic portfolios, Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate is worse off than MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate in the 10 year time frame but it is better in the 5 year time frame. Notice that some of dividend ETFs have shorter history and thus they might not be used 5 years ago, making the comparison less useful here. 
To test out whether dividend stock funds indeed can do better, we created a new portfolio P Relative Strength Trend Following Five Assets Dividend Stocks that uses dividend paying stock funds only, similar to P Relative Strength Trend Following Six Assets
  • U.S. stocks: VDIGX instead of VFINX
  • European stocks: Same Vanguard European (VEURX). We tried to find other European funds but find Vanguard’s fund already pays high dividends. One can use Mutual European Z (MEURX) that pays slightly higher dividend.
  • Pacific stocks: Same Vanguard Pacific (VPACX). Again, one can use Matthews Asian Growth & Income (MACSX) which performs even better but we would like to stick to index fund for performance testing purpose. 
  • US REITs: Vanguard REITs (VGSIX), inception: 6/28/1996
  • Gold: No GLD in P Relative Strength Trend Following Five Assets Dividend Stocks
  • US Bonds: Vanguard Total Bond Index (VBMFX), inception: 6/4/1990
  • CASH: calculated using 3 month T-Bill interest. 

Portfolio Performance Comparison

Ticker/Portfolio Name Since 12/31/97 YTD
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
P Relative Strength Trend Following Six Assets 11% 3.4% 11.8% 117.5% 12.5% 92.1% 6.9% 49.7% 11.8% 81.7%
P Relative Strength Trend Following Five Assets Dividend Stocks 10.9% 4.0% 14.2% 148.1% 10.6% 70.2% 8.6% 60.9% 12.9% 91.3%

*: NOT annualized

**YTD: Year to Date

What the above tells us is that by replacing US stocks with dividend paying stocks and  taking away GLD from 1998 to now, a time that gold has done phenomenally well, the portfolio does equally well as the original one. In fact, in the last 1o years, it did better. 
In conclusion, dividend paying stocks are better substitutes for general broad base index funds. This is especially true in the coming years that will likely see low rates environment and then a possibly high inflation period (in a high inflation period, dividend paying stocks and REITs will also do better than normal stocks as dividend paying companies usually have better stable cash flow thus pricing power to raise their prices to counter rising cost. 

Market Overview

Stocks practically did nothing last week while Gold had a big -3.6% drop. Gold, long term Treasuries and international bonds all had negative trend scores, ranked below cash. See the major asset trend ranking table on Asset Trends & Correlations or more detailed ones on 360° Market Overview for more details. 

John Hussman’s latest weekly commentary contains the following paragraph that is worthwhile to be quoted here: 

Whatever discipline you choose, be sure you understand how it has performed historically in a score of previous market cycles. Stress-test it now against the most challenging market data you can obtain – it is reckless to believe that the markets will be forever bailed out in every future crisis. Know how often you would have been whipsawed. Except for a buy-and-hold approach, improve your discipline where you can, provided that those improvements would also have enhanced performance in prior market cycles – particularly in “holdout data” that was unused during the improvement process. ……. If you are a trend-follower, recognize the psychological difficulty of following a trend-following exit when the market is already down substantially. But whatever discipline you’ve tested fully and your risk-tolerance can accept, commit to following that discipline as the market cycle unfolds. Because whether you hear the siren’s song at the end of a bullish half-cycle, or instead at the end of a bearish half-cycle, the unfortunate fact – as Homer understood – is that discipline is hard work. It is also the only thing that will keep you from running your ship into the rocks.

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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