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Re-balance Cycle Reminder

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.

How To Evaluate Investing Strategies

Evaluating an investing strategy such as an asset allocation strategy (strategic or tactical alike) is perhaps one of the hardest tasks for an investor. For investors who are tempted to or interested in a new investment method, this is obviously the most important factor for them to commit. For investors who have already started or in a investment strategy, it is constantly a nagging question: does it work? can it do better? In a market that everything does well (like today’s equity markets), investors want even better strategies that deliver higher returns (so called beat the market): how about sector rotation? How about those that have leverage? In a market that all things tanked, they want something better: how about strategies that have short capabilities that have been doing well? How about those zero coupon or long term bond strategies? 

It is a constant quest to find the holy grail strategy. This is nothing to be ashamed of: what makes we human great is our constant lookout for better solutions. Today’s advanced technologies have been discovered and invented because of our insatiable attitude towards nature and building a better world. 

But in investing, unfortunately, more often than not, such a never ending quest is doing more harm than good. This is at least true for most investors. 

So we have observed a repeated pattern here: find a strategy that does well and jump onto the bandwagon, oops, it lags, get off, look out again, find another one and repeat the process, … until one day, totally discouraged and give up all together about such thing called ‘investing’. 

So what constitutes a good strategy and how we stick to it?

Portfolio Analytic Metrics

For anyone who is new to a proposed method, the first to ask is how it has performed in the past. For anything that makes sense, it should at least have back tested or live historical data. In addition to the usual portfolio return metric, investors should pay attention to several key metrics that were discussed in length in our previous newsletter

October 29, 2012: Sharpe, Maximum Draw Down And Sortino Ratios

We encourage you to get familiar with these metrics if it is possible. 

Strong Intuitions and Plausible Reasons behind a Strategy

The next question is equally important in evaluating an investment strategy: you should demand strong intuitions and plausible reasons behind a sensible and good strategy. Anything short of these is subject to speculation. Why?

Because no one can predict the future and there is no guarantee that a strategy that has worked in the past will continue to work in the future. Furthermore, strategies with back testing data are subject to well known ‘data snooping’ and ‘survival’ issues:

‘Data snooping’ means in the process of back testing, extensive strategy parameter tweaking or data tweaking has been used to skew the testing results to favorable outcome.

‘Survival’ issue means that any funds still existing today are usually those that performed well in the past. Using those funds only in the testing of the past period again skews results. For example, portfolios using index funds as their candidate funds are usually less subject to the ‘survival’ issue than those that use actively managed funds. In this sense, we have to point out that several actively managed mutual funds based portfolios listed on our Brokerage Mutual Fund Portfolios page are subject to this issue. For example, the back testing results before Schwab OneSource Select List Funds and Fidelity Extended Fund Picks were established two or three years ago on are skewed as these results were based on the funds at the time of establishing these plans (two or three years ago) and these funds might not be chosen by Schwab or Fidelity before that time. On the other hand, after these plans were established, their results are more realistic as they were updated live using the funds recommended at that time. 

We stated in several early newsletters the intuitions behind the two asset allocation strategies we are using today: 

We again encourage readers to get familiar with these. 

Long Term Edges of Investing Strategies

When dealing with investments, the number one rule we maintain is that no one can predict the future, especially in the short term. In a short term such as days or even months, financial markets are chaotic and very random. It is impossible to predict consistently how markets will behave tomorrow, the day after tomorrow etc. However, in the long term, with large enough samples, markets are exhibiting some useful statistical properties that can be exploited. These properties can only be shown in a long term period (that corresponds to a large number of sample points). 

Recognizing this fact is very important in understanding and evaluating an investing strategy. Two things we would like to remind any investor (ourselves included): 

The first comes to mind is that ‘a strategy is not a strategy if you are constantly changing it’. By definition, this is obviously true. However, as stated above, many investors don’t stick to this. When a strategy lags, they would like to ‘improve’ the strategy to get a better result. Often, the ‘improved’ strategy is heavily tweaked and changed in its original form, totally losing the strong intuitions behind the strategy. Such a strategy is again subject to ‘data snooping’ issue and very likely will respond to upcoming market events in a strange or incomprehensible way. 

We understand that investigating a strategy and improving it is one thing, committing to a strategy and let enough number of instances to go through its normal course to show its advantage is another thing. 

The second: any strategy has its own ‘bear’ market or under performance period. We have discussed this in several newsletters such as July 16, 2012: Understand The Behavior of Investment Strategies and October 8, 2012: Asset Allocation Strategies Have Cycles Too

Understanding the second property is important in constructing your portfolios and setting up the right expectation. This means that you should understand the pros and cons of a strategy and have dry runs or stress tests under several extreme scenarios. 

When Is ‘Enough is enough, I’m out”?

Finally, investors should have an exit plan or a set of criteria on using a strategy. When a strategy is performing poorly, one should ask: is this what’s expected or part of the nature of this strategy or  is this due to manager’s error or completely due to unforeseen (this time is different) scenarios. 

Answering the question whether the poor performance is expected for the strategies is perhaps the most important criterion to stick to or abandon a strategy. The following are two examples:

  • Stock markets dived and lost over 50% at some point in 2008-2009. This is not unheard of.  Any one investing in stock markets and expecting less is exercising ‘buy and hope’. So in 2007 or before that, when you adopted a strategic asset allocation, you should have done your home work and expected that one day, it will go through such a large loss. If you had done such an exercise, you probably won’t be panic in the bottom of the period and now fully recovered. But on the other hand, just like many investors, if you hadn’t done such a stress testing beforehand, you probably bailed out at the worst time. 
  • In 2011, tactical asset allocations in general had one of the most difficult years. Again, if you had been familiar with the strategy and understood that such a strategy might experience frequent small losses so as to avoid large losses and/or capture some secular large trends, you would be probably OK and sticked to the strategy (even though the tactical strategy itself hasn’t out performed the strategic one for the past 3 years but you understand that in general, in a full bull-bear market cycle, it will deliver better risk adjusted returns, you will still stick to it). 
But on the other hand, if a strategy or a fund has been doing something un-explainable, it is time to re-evaluate your investments and abandon it if you have done enough due diligence. 

Cautions Ahead

Current market situation presents a perfect example to show the difficulty of initiating a strategy: for example, if you start to follow one of the two MyPlanIQ asset allocation strategies , be ready to experience loss in the short term! Both strategies have been fully invested in risk assets: for strategic one, it has been always the case while for the tactical one, it is due to the current risk asset (stock) market strength. However, with markets being at such an elevated level, we are worried that when the eventual market correction comes, it might inflict loss to portfolios that are even started right now. 

For strategic asset allocation, we call for extreme caution for new investors: stock market valuations are by no means cheap. If you are initiating a new investment in such a portfolio, make sure 1). the portfolio is indeed for a long term purpose. By long term, we mean at least 5 years away. Ideally, in such an environment, 10 years is a better time frame. 2). dollar cost averaging in a very slow pace: with May in the horizon, you might be able to get a better deal in stocks later when a correction comes. 

Investors using tactical asset allocation should understand that in the short term, the portfolio might experience some meaningful loss when the correction comes. Similar to strategic allocation, right now, it is not the best time to jump in. Dollar cost averaging slowly is still the choice here. 

Portfolio Performance Review

The following shows how the tactical optimal portfolios listed on Lazy Portfolios have performed recently: 


Portfolio Performance Comparison (as of 3/11/2013)


Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
David Swensen Six ETF Asset Individual Investor Plan Tactical Asset Allocation Moderate 0.7% 1.4% 7.5% 145.2% 9.6% 102.7% 7.1% 69.2% 9.7% 81.8%
The Coffee House Lazy Portfolio ETF Version Tactical Asset Allocation Moderate 0.7% 3.2% 7.2% 120.3% 7.9% 79.5% 7.5% 77.6% 8.0% 77.2%
FundAdvice Ultimate Buy and Hold Lazy Portfolio Tactical Asset Allocation Moderate 0.9% 2.1% 7.3% 115.5% 6.9% 70.0% 7.6% 77.3% 11.0% 104.1%
Permanent Portfolio ETF Plan Tactical Asset Allocation Moderate 0.5% 1.6% 2.2% 42.2% 8.0% 77.5% 4.6% 42.5% 7.6% 69.9%
Israelsen 7Twelve Tactical Asset Allocation Moderate 0.3% 0.7% 8.9% 129.8% 6.5% 66.6% 5.4% 49.7% 11.0% 92.4%
Wasik Nano Plan Tactical Asset Allocation Moderate 0.8% 3.7% 8.0% 131.2% 8.7% 91.3% 5.6% 55.7% 8.7% 84.8%


*: NOT annualized


**YTD: Year to Date

See the latest and year by year comparison >>

Wasik Nano Plan Tactical Asset Allocation Moderate has done the best year to date because of its simplicity and missing emerging market stock asset class, which is a distraction year to date. 

Market Overview


It seems that investors are increasingly convinced that we are in a goldilock economy: extremely low inflation in the short term (commodities and gold are ranked at the bottom in  the major asset trend ranking table on Asset Trends & Correlations), growing economy (rising stock markets) and slight worry on long term inflation outlook (weak long term bonds). This is a highly unlikely scenario (see the statements below). However, our strategies are following the trends (for more detailed, refer to 360° Market Overview). 

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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