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Re-balance Cycle Reminder

The next re-balance will be on Monday, June 17, 2013. You can also find the re-balance calendar for 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.

Conservative Allocation Mutual Fund Upgrade Portfolios

It is no stranger to long time MyPlanIQ readers that we are fans of conservative allocation funds. We discussed this topic in various previous newsletters: 


As stated previously, conservative allocation often achieves higher returns for a long term portfolio without introducing much extra volatility (risk). This is backed by the intuition that some (up to 20-25%) stocks will often mitigate the risk suffered by an all bond portfolio while achieving similar or better returns for a long term portfolio. 

Fixed income investors have done very well for the past 15-20 years, thanks to the ever declining (loose) interest rate policies. The following table shows how PIMCO total return bond fund (PTTRX) has compared with Vanguard Wellesley Income fund (VWIAX):

Portfolio Performance Comparison (as of 5/27/2013)

Ticker/Portfolio Name YTD
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
VFINX 16.6% 27.6% 2.18 17.7% 1 5.9% 0.22 7.9% 0.33
VWIAX 6.4% 14.0% 3.93 11.6% 2.46 8.3% 1.01 7.2% 0.89
PTTRX 0.4% 6.1% 2.47 6.5% 1.94 7.7% 1.71 6.3% 1.23

*: NOT annualized

**YTD: Year to Date

Even though a conservative fund out performed a total return bond fund in the past, it didn’t fare much better, especially the above comparison should be taken in the current context that stocks (S&P 500 represented by VFINX) has risen 16.6% year to date. 

However, bonds now have extremely low yields (historically low other than in the Great Depression era). It is prudent to be aware that once current loose monetary policy ends, most of bond segments will have difficulty to deliver similar returns as we have been used to. Even though we don’t belong to the ‘bond bubble bursting’ camp (see March 18, 2013: Are Bond Investors Doomed? for example), as a long term investor, we should understand bonds are not safe investments anymore but they are just merely one of several key asset classes. 

Putting things together, we have two strong reasons to consider conservative allocations: fundamental or theoretical portfolio results as well as the current extreme interest rate situation. We believe in the coming years, conservative allocation funds should be considered by many investors who are used to be fixed income only investors. For any capital that have more than 5 years time horizon, we believe conservative allocation should be considered. 

Brokerage Specific Conservative Allocation Mutual Fund Upgrade Portfolios

We understand that it is much easier to manage a conservative allocation mutual fund than a highly volatile stock or commodity fund. However, not all of conservative funds are not created equal. Furthermore, some of them can have a really bad year during market stress:

Conservative Allocation Fund Performance in 2008

Ticker/Portfolio Name 2008 1Yr AR 3Yr AR 5Yr AR 10Yr AR
EXDAX -5.0% 11.2% 8.0% 6.3% 5.9%
VWINX -9.8% 14.0% 11.2% 8.0% 7.1%
AONIX -6.6% 7.0% 7.0% 4.6%  
PRPFX -8.4% 3.7% 7.6% 5.4% 9.0%
PRSIX -20.4% 14.9% 10.5% 6.3% 7.4%
BERIX -10.2% 13.8% 8.4% 8.7% 7.6%


Berwyn income BERIX andd Vanguard Wellesley Income VWINX had about double digit loss. This can definitely cause problems for some investors who rely on these funds for their short term needs. It is also a psychological threshold for many conservative investors. 

Though we have high faith in many great investors, time and time again, many of them stumbled for a few bad years. Some of them never recovered. If you are a very conservative investor, you might not be able to afford such mistakes, however how high respect you have for the managers or funds. 

To solve this problem, a practical way we found is to use fund upgrading or rotation algorithm, similar to our Tactical Asset Allocation, on a set of carefully chosen funds that have solid long term performance. We maintain this list of funds and from time to time, we might purge or add some funds. This leads to the advanced portfolio P No Load Conservative Mutual Funds Upgrading Quarterly on the Advanced Strategies page. 

However, to implement this portfolio in a particular brokerage has proved to be no easy task. Mostly, users need to find candidate funds that have low minimum requirement, no transaction fee and available to investors in that particular brokerage. What is more, brokerages have different minimum holding period requirements. For example, TDAmeritrade has the most stringent requirement: to avoid their extra short term redemption fee charge, one needs to hold a fund for at least 180 days. 

We are pleased to announce that we have worked out specific portfolios to support the big 4 discount brokerages: Schwab, Fidelity, TDAmeritrade and ETrade. These portfolios are generated from a list of conservative allocation mutual funds. They need to satisfy the following requirements:

  • Available to new investors
  • Have low minimum requirement: $2500
  • No load and no transaction fee
  • Have minimum holding period such as 3 month (90 days) for Schwab, Fidelity and Etrade or 6 months (180 days) for TDAmeritrade
  • Rebalance monthly but satisfying minimum holding period requirement for any holding in the portfolio. 
The following table shows how these portfolios are compared: 

Portfolio Performance Comparison (as of 5/27/2013)

Ticker/Portfolio Name 2008 Return 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
BERIX(Berwyn Income) -10.2% 13.8% 3.11 8.4% 1.51 8.7% 1.18 7.6% 1.13
ETrade Conservative Fund Upgrade -1.4% 9.3% 3.02 6.4% 1.22 7.3% 1.34 7.3% 1.19
Fidelity Conservative Fund Upgrade -1.9% 8.5% 3.06 7.0% 1.46 6.7% 1.24 7.3% 1.13
Schwab Conservative Fund Upgrade -3.7% 9.3% 3.27 6.9% 1.43 6.7% 1.25 7.1% 1.09
TDAmeritrade Conservative Fund Upgrade -5.7% 8.3% 2.9 6.5% 1.18 6.2% 1.02 6.6% 0.95
VBINX(Vanguard Balance) -22.2% 17.1% 2.36 12.5% 1.21 6.4% 0.42 7.4% 0.52
VFINX(Vanguard S&P 500) -37% 27.6% 2.18 17.7% 1 5.9% 0.22 7.9% 0.33
VWINX(Vanguard Wellesley Income) -9.8% 14.0% 3.88 11.2% 2.34 8.0% 0.97 7.1% 0.89


See detailed year by year  and other performance comparison >>

These portfolios have delivered very reasonable returns. Furthermore, their maximum drawdown has been limited to only less than 10% (9.1% for TDAmeritrade and around 7% for all of the other 3 portfolios), compared with BERIX’s 16.8% and VWINX’s 21.7% maximum drawdown! This is also evident from their 2008’s returns. 
At the moment, these portfolios are only available to expert users. Please let us know what you think by participating the survey at the end of this newsletter or just simply commenting on this article. 

Portfolio Performance Review

The following table compares Strategic Asset Allocation – Optimal portfolios on Brokerage Specific ETF Portfolios page: 

Portfolio Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Schwab Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 4.5% 13.3% 1.83 9.8% 0.86        
TD Ameritrade Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 4.6% 10.5% 1.36 8.3% 0.71 1.5% 0.08 7.3% 0.44
Fidelity Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 4.6% 13.0% 1.75 11.5% 1.01 5.3% 0.3 8.2% 0.51
VBINX 9.7% 17.1% 2.36 12.5% 1.21 6.4% 0.42 7.4% 0.52
Etrade All Star ETFs Strategic Asset Allocation – Optimal Moderate 5.6% 15.3% 1.94 11.5% 0.99 4.2% 0.23 7.7% 0.47
Vanguard ETFs Strategic Asset Allocation – Optimal Moderate 5.9% 14.5% 1.84 11.4% 1.01 5.7% 0.32 7.9% 0.49

*: NOT annualized

**YTD: Year to Date

latest and detailed comparison >>

All of  portfolios lag behind Vanguard balance fund VBINX which allocates 60% in US stocks and 40% in US bonds. As the world is getting even more globalized and connected, we believe even US investors should construct a global balance portfolio instead of just merely investing in US stocks. Even though we recognize that in the the intermediate term, US stocks might out perform others (in fact, this is the main difference between our Strategic Asset Allocation – Optimal and Strategic Asset Allocation – Equal Weight), we still maintain a balanced diversified portfolio. All of these portfolios have done better or on par with VBINX for the past 10 years. 

Market Overview

Stocks finally started to experience some meaningful loss last week. REITs fared the worst. The gyration started from Japan’s currency and stock market weakness. Is this the turn of the correction? We don’t know. But we do know there will be a correction for sure (see May 13, 2013: Preparing To Take A Loss).

For now, all major stock assets including emerging market stocks remain above US bonds in the major asset trend ranking table on Asset Trends & Correlations (for other detailed ranking, see 360° Market Overview).  Commodities and gold are still at the bottom, though gold recovered a bit. 

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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