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Re-balance Cycle Reminder

We just had our re-balance today. The next re-balance will be on Monday, April 8, 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.

Hearsays, Fables and Systematic Investing

Investing can be simple or hard, depending on how you approach it. In this internet era, you are fed with all sorts of information and advice by main stream media and financial blogs. Some of them are actually very useful advice but many are outright garbage. Some of them are sound advice if placed under a systematic framework but can be dangerous if taken alone. 

Chasing hot hands is highly risky”  — This statement makes a lot of sense if it serves to remind investors that just simply or blindly following the herd is dangerous. On the other hand, if placed in a systematic trend following context, following rising trends systematically with predefined entry and exit rules for each asset class is actually profitable and less risky if done in a set of less correlated asset classes, as evidenced by MyPlanIQ’s numerous  live and back testing studies (see, for example, December 10, 2012: How Asset Allocation Strategies Performed In Secular Market Trends or August 27, 2012: Trends Can Be Fickle But Still Are Your Friends).

Buy and hold is dead” — This statement, placed in the last two severe bear markets, serves a meaningful reminder that even though stocks might be (not even for sure) good for the long run, they can be extremely dangerous for a period that is long for a human lifespan but short in a theoretical sense, especially in this period full of uncertainties. However, if placed in a diversified asset allocation portfolio with risk planned out, this statement is far from the truth: for example, a diversified permanent portfolio or a risk parity based portfolio has been very effective for the past 30+ years (see February 25, 2013: Risk Parity All Weather & Permanent Portfolio Review). 

Gold is nonsense and has further to fall” — From Warren Buffett to Ben Bernanke, gold is a barbarian investment (or Charlie Munger’s “Gold is a great thing to sew into your garments if you’re a Jewish family in Vienna in 1939,but I think civilized people don’t buy gold, they invest in productive businesses,”). This is correct if you a value investor like Buffett. However, gold has served as a good hedge in a well designed portfolio such as the permanent portfolio

Gold has fallen so much, it is a good buy” — Well, it depends: if you are talking about buying gold in a portfolio that has not been designed to use gold as part of diversification and you are only speculating it, it might be dangerous. However, as stated above, in a well designed portfolio, it might be a good time to perform re-balance to get some cheaper gold. 

Bond is in a bubble” — Similar to the above statements on gold, this statement is true or false depending on what portfolios and investment plans you are in. Jeffrey Gundlach just bought into the Treasury bonds (see this) and Gary Shilling expected the 10 year yield to drop to 1%. But on the hand, bond yields are in the extremely low territory, they do seem to rise for sure in the future. An excellent fund manager like Gundlach should have a well planned strategy on how to exit his Treasury bond position. You only hear half of the story. The best use of these stories is to perform scenario analysis on your portfolios to see whether 1). your portfolio is not severely damaged if the bond bubble starts to burst right now. 2). your portfolio can respond positively if that is the case. Furthermore, you also perform your portfolio analysis in the opposite scenarios. 

Amid all of these noisy information and articles, you can clearly see that it is very paradoxical: a statement is true in one sense and false in the other sense.  Another frequent puzzle or paradox is value stocks vs. growth stocks: a stock when it is in trouble may be a favorite for value investors but abandoned by growth investors. On the other hand, a stock that is hot may be a favorite for growth investors but sold or loathed by value investors. But both value investing and growth investing are equally effective in the long term. 

As the old Wall Street adage says “Bulls make money, bears make money, pigs get slaughtered”, a fable or a piece of random advice can be true or false depending on what investment process you are in. But you have to have a plan and sound process to carry out. 

Unlike many investment newsletters that tell you what to buy and sell but provide no systematic way to work on that, MyPlanIQ provides a platform and well designed strategies that serve as a framework in your investing process. We emphasize the process instead of telling people ‘this is a good buy or that is a sell’. 

So next time when you are asked on whether this is a good buy or sell, refuse the question. Instead, help others to understand the most important factor in investing: the sound framework and the consistent process. 

And next time when you read and hear about something sensational on investing, the easiest is to just treat them as entertainment. But if you are tempted, you’ll need to be serious in due diligence and ask at what context and in what process this statement is placed. You’ll find out that by insisting on understanding the whole process or the complete plan, you might be able to learn something truly useful or just dismiss this completely. If you find it too hard to understand, just ignore it or erase it in your memory, do not let it interfere with your own investment process that you believe in. 

Portfolio Performance Review

The following shows how the strategic optimal portfolios listed on Brokerage Mutual Fund Portfolios have performed recently: 

Portfolio Performance Comparison (as of 3/1/2013)

Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
VFINX 2.6% 7.3% 14.1% 97.9% 13.1% 70.7% 5.0% 18.0% 8.2% 33.7%
Schwab OneSource Select List Funds Strategic Asset Allocation – Optimal Moderate 1.0% 3.0% 7.3% 98.2% 10.2% 99.9% 6.5% 42.8% 11.1% 85.2%
Fidelity Extended Fund Picks Strategic Asset Allocation – Optimal Moderate 1.0% 4.2% 10.5% 144.8% 11.4% 115.3% 8.8% 61.3% 12.9% 104.0%
VBINX 1.5% 4.5% 9.7% 146.2% 10.3% 100.4% 6.0% 32.6% 7.7% 52.8%
TD Ameritrade Premier List No Transaction Fee Mutual Fund Plan Strategic Asset Allocation – Optimal Moderate 0.4% 2.2% 6.0% 85.8% 9.3% 90.1% 5.5% 36.9% 11.6% 90.4%
Etrade All Star Funds Strategic Asset Allocation – Optimal Moderate 0.3% 3.3% 7.4% 108.0% 9.9% 92.6% 5.5% 35.0% 10.5% 78.4%
Schwab Income Mutual Fund Select List Strategic Asset Allocation – Optimal Moderate 0.4% 3.9% 11.1% 160.0% 11.1% 106.8% 6.9% 45.7% 8.9% 68.0%

*: NOT annualized

**YTD: Year to Date

See the latest and year by year comparison >>

These portfolios have done well because of the recent strength in US stocks. As stated elsewhere, we believe in the coming several years, among other stock markets, US stocks might be the best or the least dirty. Our SAA – Optimal portfolios are positioned based on this secular outlook. 

Market Overview

As it turned out, the Italian election scare didn’t sway much in the risk asset (stock) markets. US stocks are bounced back amid the continuous weakness of emerging market stocks since the beginning of this year. Long term Treasury bonds stabilized but now are ranked below cash in  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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