April 8, 2013: First Quarter Review: Trends Are In Place But Can They Sustain?

Apr 9, 2013 | All, Asset-Allocation, Economy, Feature, Headline, Investments, IRA, Markets, Mutual-Funds, Newsletter

All MyPlanIQ’s newsletters are archived here. 

Re-balance Cycle Reminder

We had our re-balance today. The next re-balance will be on Monday, May 13, 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.

First Quarter Review

As we just had a re-balance today, it is a good time to review how our portfolios have been doing, where we are at the moment and what we can expect from here. 

Major Asset Class Performance

Asset Class 1 Weeks 4 Weeks 13 Weeks 26 Weeks 52 Weeks Trend Score
Global Real Estate 2.4% 3.6% 6.1% 17.6% 33.5% 12.6%
US REITs 2.2% 3.1% 7.8% 12.1% 17.9% 8.6%
US Stocks -1.3% -0.4% 6.0% 7.8% 13.3% 5.1%
Long Term Treasuries 3.6% 6.1% 3.6% 2.0% 10.2% 5.1%
High Yield Bonds 0.0% 0.2% 1.0% 3.9% 11.2% 3.2%
Intl Stocks -1.3% -2.2% -0.3% 6.5% 9.8% 2.5%
US Bonds 0.7% 1.2% 0.8% 0.7% 4.1% 1.5%
Cash 0.0% 0.0% 0.0% 0.0% 0.1% 0.0%
Intl Bonds 1.0% 2.5% -1.2% -3.7% 0.7% -0.1%
Emerging Mkt Stocks -2.2% -5.5% -6.7% 0.8% -0.2% -2.8%
Gold -1.1% 0.1% -4.8% -11.5% -3.5% -4.1%
Commodities -2.3% -1.9% -3.1% -6.6% -7.1% -4.2%

Observations: 

  • Global, US REITs and US stocks are top performers
  • Gold, Commodities, Emerging Market Stocks are the losers
  • Intl Stocks weak but still out performed US bonds. 

Baseline Benchmark Portfolio Performance

We use Strategic Asset Allocation – Equal Weight based portfolios as our baseline benchmarks as these portfolios have equal weight diversification among risk assets present. Major risk assets include US stocks, international stocks, emerging market stocks, REITs, commodities and bonds. Furthermore, these equal weight portfolios are usually as effective  as any other strategic asset allocation strategy based portfolio in a long term. 

Ticker/Portfolio Name YTD
Return**		 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Five Core Asset Index ETF Funds Strategic Asset Allocation – Equal Weight Moderate 2.6% 8.3% 1.06 7.4% 0.59 4.5% 0.23 8.2% 47.0%
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate 2.4% 6.4% 0.88 6.9% 0.61 3.3% 0.19 8.0% 51.7%
Three Core Asset ETF Index Funds Strategic Asset Allocation – Equal Weight Moderate 3.3% 8.2% 1.01 6.6% 0.48 3.5% 0.2 6.4% 39.3%
VBINX (two asset) 5.6% 9.6% 1.29 9.4% 0.88 5.8% 0.37 7.5% 53.1%

*: NOT annualized

**YTD: Year to Date (as of 4/5/2013)

See year by year details >> 

Observations: 

  • YTD performance: clearly US stocks and REIT focus are doing the best. Anything with emerging market stocks and commodities (six core) has been affected  due to the two asset class under performance. 
  • Longer term (5-10 years): diversification still helps. In fact, three core has the least performance. Five and six cores have the best performance. 

Strategic Allocation Optimal Portfolios

Extending the above table to review Strategic Asset Allocation – Optimal based portfolios (as of 4/5/2013): 

Ticker/Portfolio Name YTD
Return**		 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Five Core Asset Index ETF Funds Strategic Asset Allocation – Equal Weight Moderate 2.6% 8.3% 1.06 7.4% 0.59 4.5% 0.23 8.2% 47.0%
Five Core Asset Index ETF Funds Strategic Asset Allocation – Optimal Moderate 2.9% 8.0% 1.01 7.5% 0.63 4.7% 0.26 7.4% 45.7%
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate 2.4% 6.4% 0.88 6.9% 0.61 3.3% 0.19 8.0% 51.7%
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 2.9% 7.8% 1.01 7.4% 0.65 4.1% 0.23 7.2% 46.5%
Three Core Asset ETF Index Funds Strategic Asset Allocation – Equal Weight Moderate 3.3% 8.2% 1.01 6.6% 0.48 3.5% 0.2 6.4% 39.3%
Three Core Asset ETF Index Funds Strategic Asset Allocation – Optimal Moderate 4.4% 9.1% 1.16 8.1% 0.72 4.7% 0.29 6.6% 44.3%

See year by year details >> 

Observations: 

  • Our SAA-Optimal strategy benefits from the allocation overweight on US stocks. All of the SAA-Optimal portfolios out performed their equal weight  counterparts.  We believe that in the coming years, US stocks (and economy) will be relatively robust among others. The situation will change at some point of time. Remember target allocations in an SAA-Optimal portfolio will stay unchanged for years until a long term trend is changed or emerges.  

Tactical Asset Allocation Portfolios

The following shows how are the TAA portfolios are compared (as of 4/5/2013)

Ticker/Portfolio Name 1 Week
Return*		 YTD
Return**		 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Five Core Asset Index ETF Funds Strategic Asset Allocation – Equal Weight Moderate -0.0% 2.6% 8.3% 1.06 7.4% 0.59 4.5% 0.23 8.2% 47.0%
Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate 0.0% 1.7% 4.4% 0.74 5.8% 0.63 8.2% 0.86 10.8% 93.2%
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate -0.1% 2.4% 6.4% 0.88 6.9% 0.61 3.3% 0.19 8.0% 51.7%
Six Core Asset ETFs Tactical Asset Allocation Moderate 0.2% 2.5% 7.1% 1.19 4.6% 0.46 6.9% 0.65 10.6% 88.1%
Three Core Asset ETF Index Funds Strategic Asset Allocation – Equal Weight Moderate -0.4% 3.3% 8.2% 1.01 6.6% 0.48 3.5% 0.2 6.4% 39.3%
Three Core Asset ETF Index Funds Tactical Asset Allocation Moderate -0.4% 3.0% 3.3% 0.57 1.1% 0.14 2.5% 0.31 5.5% 59.2%

See year by year details >> 

Observations: 

  • Six Core TAA out performed Six Core SAA -Equal Weight: the reason is that the TAA positioned earlier on at the end of the year on REITs and US Equities. The overweight on these two major assets enables the outperformance. However, there was a distraction along the way that the portfolio invested in emerging market stocks (VWO) only to swap out in the next re-balance cycle. 
  • Five core TAA under performed its SAA counter part. Further,  it under performed its Six Core TAA part, which is puzzling: the reason is really because the Five Core is still using VEU (Vanguard the rest of world) ETF as international stock ETF. It should use VEA instead (which the Six Core plan has been using). Because VEU has sizable exposure in emerging market stocks, its performance lags VEA. Thus exposure to VEU instead of VEA affected performance materially. We have replace VEU with VEA and the replacement should be effective from now on. The lesson learned here is that candidate funds matter a great deal. Non overlapped or less correlated asset classes and funds are very important in constructing a good plan. 

Fund Selection Effectiveness

SAA fund selections: 

Ticker/Portfolio Name 1 Week
Return*		 YTD
Return**		 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 – Equal Weight Moderate 0.1% 1.4% 6.3% 0.93 6.6% 0.67 3.4% 0.22 8.3% 60.5%
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate -0.1% 2.4% 6.4% 0.88 6.9% 0.61 3.3% 0.19 8.0% 51.7%
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate -0.1% 3.9% 8.3% 1.13 8.7% 0.78 6.2% 0.39 9.7% 68.8%
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate -0.2% 2.9% 7.8% 1.01 7.4% 0.65 4.1% 0.23 7.2% 46.5%

Observations: 

  • Year To Date (YTD), it is quite inconclusive. On one hand, MyPlanIQ Diversified Core Equal Weight has under performed the Six Core one while MyPlanIQ Diversified Core SAA Optimal out performed the Six Core counter part. 
  • It is also interesting that MyPlanIQ Diversified Core Equal Weight under performed the six core equal weight for the last 1 and 3  years. It out performed the six core one in the last 5 and 10 years. However, the MyPlanIQ Diversified Core SAA Optimal has consistently out performed its Six Core counter part for the last 1, 3, 5 and 10 years. 
TAA Selections:
Ticker/Portfolio Name 1 Week
Return*		 YTD
Return**		 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Moderate 0.2% 2.5% 7.1% 1.19 4.6% 0.46 6.9% 0.65 10.6% 88.1%
Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate 0.0% 1.7% 4.4% 0.74 5.8% 0.63 8.2% 0.86 10.8% 93.2%
Retirement Income ETFs Tactical Asset Allocation Moderate 1.0% 4.4% 11.4% 1.82 9.2% 0.95 8.2% 0.77 11.9% 101.8%
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 0.9% 3.9% 12.3% 1.83 6.6% 0.65 7.5% 0.69 10.9% 95.8%

Observations: 

  • Six Core vs. MyPlanIQ Diversified Core (both have the six core assets): MyPlanIQ diversified core out performed the Six Core in every period  (YTD, 1, 3, 5, 10 years). This indicates a consistent superior fund selection algorithm if enough style and sector funds are given for each asset class (which the MyPlanIQ diversified core plan is designed exactly for this purpose). 
  • Five Core vs. Retirement Income ETFs (both have five core assets, other than commodities): again, the Retirement Income ETFs out performed the five core in every period (YTD, 1, 3, 5 and 10 years). 

Summaries

Overall, we are pleased with the performance of the three strategies (SAA equal weight, SAA Optimal and TAA). They have done exactly as what they were supposed to do. 

What’s Next?

Frankly, we really don’t know the answer. Even though the markets have done relatively well, there are too many concerns that remind us that complacency is not warranted, especially at this moment: 
  • Technically, US stock markets are over extended and over bought. 
  • Valuation wise, US stocks are not cheap in fact, based on several long term stock valuation indicators, they are either slightly over valued (Buffett GNP vs. Market Cap ratio) or 40-50% over valued (Shiller, Hussman and Tobin’s Q). See Market Indicators or Tobin’s Q Ratio: Stocks Are 40% To 50% Over Valued
  • European economies are not well and can go worse any moment.
  • Japan is non into a big experiment: trying to use quantitative easing technique, similar to the US has used, to inflate itself out of deflation. Its yen denominated stocks might get propped up but by any means, this is a huge experiment. 
  • Bonds are at record low yields.
We are skeptical whether the current trends can continue. However, as what we stated many many times, the key factor to succeed is to discard personal emotional hunches and stick to a systematic strategy. For now, that is what we should remind ourselves to do. 

Market Overview

Another not insignificant possible trend turning event is that last week, long term Treasury bonds exhibited a strong jump and now it is ranked just below US stocks. On the other hand, emerging market stocks and commodities, two of the 5 major risk assets are ranked below cash in the  major asset trend ranking table on Asset Trends & Correlations (for other detailed ranking, see 360° Market Overview).  All of these did not change substantially on our re-balance today. However, it is definitely worth watching. 

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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