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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.

Are We A Momentum Strategy Shop?

Some users think that we are a momentum investing strategy shop that sells trend following strategies. On the surface, this seems to be true. However, as many long time users might have known, we provide many other strategies and features for retirement investments, other than just the Tactical Asset Allocation that is part of our premium offerings. As stated in our logo (“Effective Investment Solutions“) or in our mission statement, we strive to provide sound and effective solutions for retirement investments. We believe our value lies in providing education materials and a platform that helps users to tackle issues encountered in their investment management, regardless of the types of investment strategies. As a result, one can see that we advocate both Strategic Asset Allocation (Equal Weight or Optimal) or Tactical Asset Allocation as well as many other sound and good advanced strategies and methodologies (such as core satellite portfolios, permanent portfolios and all weather risk parity portfolios). 

We have written several newsletters on the pros and cons of various strategies. For example, in

December 10, 2012: How Asset Allocation Strategies Performed In Secular Market Trends or 

October 8, 2012: Asset Allocation Strategies Have Cycles Too,

we discussed the pros and cons of strategic and tactical strategies. 

In addition, we will continue to develop and provide ease of use features which we consider an integral part of our overall services. 

All Weather & Permanent Portfolio Review

Several users have asked us to review several all weather portfolios we have written about. As stated in our previous newsletter February 18, 2013: Dividend & Income Funds In Asset Allocation, we like these portfolios and believe they can serve as the core part of one’s portfolios. 

The following are the types of all weather portfolios: 

The original Bridgewater’s risk parity based all weather portfolio has the following risk allocations (see this document):  

The following table shows the risk allocations for each fund based on the above allocations: 

  Growth + Growth – Inflation + Inflation – Total Risk Allocations Fund
Equities 6.25%     12.50% 18.75% VTSMX
EM Debt Spreads 6.25%   8.33%   14.58% PEBIX
Commodities 6.25%   8.33%   14.58% GLD
Corporate Spreads 6.25%       6.25% VWEHX
Nominal Bonds   12.50%   12.50% 25.00% VBMFX
TIPS   12.50% 8.33%   20.83% VIPSX

We then solve a simple system of linear equations to derive each fund’s actual target allocation using last 10 years’ standard deviation as the proxy of risk: 

  Tgt Risk Allocation Fund Std Dev (Risk) Actual Allocation %
Equities 18.75% VTSMX  0.21 6.23%
EM Debt Spreads 14.58% PEBIX  0.07 14.80%
Commodities 14.58% GLD  0.21 4.84%
Corporate Spreads 6.25% VWEHX  0.05 9.06%
Nominal Bonds 25.00% VBMFX  0.04 42.30%
TIPS 20.83% VIPSX  0.07 22.77%
    Total Risk 14.07 100.00%

We use the allocations derived in the above table to construct Bridgewater All Weather Portfolio Risk Parity

Through the risk parity re-calibration, the risk asset allocation of the portfolio  (equities + commodities + high yield bond + emerging market debts) is reduced from 54.16% to 34.9%. It has only very little stock and gold allocation (about 11%). However, it allocates substantial amount in high yield bonds (9% in VWEHX) and Emerging Market Bonds (14.8% in PEBIX). This portfolio falls into conservative allocation category. This is similar to Permanent Income Portfolio

Performance Comparison

The following shows how these portfolios have performed: 

Portfolio Performance Comparison (as of 2/22/2013)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Bridgewater All Weather Portfolio -0.3% -0.2% 2.8% 71.1% 9.3% 185.7% 7.0% 105.2% 8.7% 134.6%
Bridgewater All Weather Portfolio Risk Parity 0.2% -0.3% 5.3% 217.6% 8.4% 257.6% 7.0% 154.7% 7.3% 152.3%
Harry Browne Permanent Portfolio -0.2% -0.5% 0.2% -0.7% 9.4% 147.5% 6.7% 81.5% 8.5% 104.0%
Permanent Income Portfolio 0.4% 0.7% 4.0% 110.2% 9.2% 184.1% 6.6% 91.7% 7.2% 100.6%
VBINX -1.1% 2.9% 8.5% 146.2% 10.4% 100.4% 5.5% 32.6% 7.6% 52.8%
VFINX -2.0% 4.7% 12.0% 98.4% 13.0% 69.6% 4.1% 16.3% 8.0% 32.5%

*: NOT annualized

**YTD: Year to Date

See the more detailed year by year comparison >>


  • Bridgewater All Weather Portfolio Risk Parity had the highest Sharpe ratio in the last 1,3,5,10 year. This is very consistent across all the periods, compared with the rest of 3 portfolios that had different out performance in different periods. 
  • All of these all weather portfolios have achieved very respectable 10 year annualized returns. However, in the past 1 year, they have had some difficulties, especially for  Harry Browne Permanent Portfolio and Bridgewater All Weather Portfolio. These are due to the under performance of gold (GLD). 
  • All of these portfolios have out-sized exposure to various bond funds. In the coming bond bubble bursting (there will be one for sure, we just don’t know when), investors should really consciously move these fixed income (bond) exposure to shorter duration (maturity) and more diversification (such as international TIPs, floating rate funds, GNMAs. 
  • For the anti-inflation corner, the fickle nature of gold should be addressed. Commodity funds, MLPs and inflation protected bonds (TIPs) can be used in this corner. Investors can now use the risk parity/allocation method to contain the risk exposure in this corner. At the moment, TIPs are still expensive and we encourage users to wait for a better entry point. These funds are the best and most direct inflation fighting instruments. 

Portfolio Performance Review

The following shows how the strategic equal weight portfolios listed on Brokerage Specific ETF Portfolios have performed recently: 

Portfolio Performance Comparison (as of 2/25/2013)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Schwab Commission Free ETFs Strategic Asset Allocation – Equal Weight Moderate -1.0% 1.2% 6.1% 94.0% 8.2% 69.0%        
Etrade All Star ETFs Strategic Asset Allocation – Equal Weight Moderate -1.1% 0.2% 5.3% 83.4% 7.8% 65.1% 2.9% 16.6% 8.0% 49.9%
TD Ameritrade Commission Free ETFs Strategic Asset Allocation – Equal Weight Moderate -1.4% 0.1% 5.5% 90.3% 6.5% 60.3% 1.6% 10.0% 7.7% 53.4%
Fidelity Commission Free ETFs Strategic Asset Allocation – Equal Weight Moderate -1.1% 0.4% 6.8% 107.4% 9.0% 82.2% 4.5% 27.2% 9.2% 60.4%
Vanguard ETFs Strategic Asset Allocation – Equal Weight Moderate -1.2% 0.7% 6.8% 103.9% 9.4% 73.6% 4.5% 24.1% 8.6% 51.7%

*: NOT annualized

**YTD: Year to Date

See the latest and year by year comparison >>

The performance has been distracted by the recent weakness in international and emerging market stocks:

Major Asset Returns (as of 2/25/2013)

Ticker/Portfolio Name 1 Week
1Yr AR 3Yr AR 5Yr AR
VWO (Emerging Stocks) -1.8% -1.9% 1.3% 5.8% 0.5%
VTI (US Stocks) -0.5% 6.9% 13.8% 13.8% 5.3%
VNQ (US REITs) -1.5% 3.6% 16.2% 20.0% 7.2%
VEA (Intl Stocks) -0.1% 3.1% 10.7% 6.6% -0.6%
GLD (Gold) -0.9% -4.7% -10.8% 12.7% 10.6%
BND (US Bonds) 0.1% -0.6% 2.2% 4.9% 5.1%

*: NOT annualized

Market Overview

The Italian election result in the weekend sent stocks substantially lower. There have been several such mini corrections/scares for the past several weeks. Whether this time is different or not, we will have to wait and see. However, we will not be surprised if this is the beginning of the long overdue correction or weakness (see our positioning statement below). Long term Treasuries bond now has positive trend score while international bonds, commodities and gold all have negative trend scores. 

See the major asset trend ranking table on Asset Trends & Correlations or more detailed ones on 360° Market Overview for more details. 

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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