Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

We had a re-balance today. For regular SAA and TAA portfolios, the next re-balance will be on Monday, August 26, 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.

New Feature

As promised, we now feature conservative portfolios on a separate page Conservative Allocation Fund Portfolios. These portfolios were first reported on newsletter May 27, 2013: Conservative Allocation Mutual Fund Portfolios. Together with the Fixed Income Bond Fund Portfolios, these portfolios can be very useful for conservative investors. 

To use these portfolios, please customize a portfolio (please use risk profile 0) instead of following them. The customized portfolio will start to count holding periods for the mutual fund holdings in the portfolio the day you create it. This will ensure holding periods  in your actual account in sync with your customized portfolio, assuming you follow the customized portfolio precisely. 

Tactical Asset Allocation: The Good, The Bad And The Ugly

Since 2009, we have witnessed how our subscribers have behaved. What concerns us most is that many subscribers don’t understand the essence of asset allocation strategies and they suffered from a same mistake as many other investors have: an inconsistent behavior when it comes to deal with their investments. 

In this newsletter, we would like to point out the pros and cons of our Tactical Asset Allocation (TAA). In the subsequent newsletter, we will do the same for Strategic Asset Allocation (SAA)

We have addressed similar topics in the following newsletters previously. We strongly suggest you to read them if you have not done so: 

TAA: The Good

As usual, investors “started to discover” a strategy mostly after the fact. TAA became very popular right after 2008-2009 crisis. Soon after, they “discovered” that it has not done as well as SAA and now, at the market high, people started to doubt its effectiveness. 

In reality, here are the ‘good’ parts for a sound tactical strategy: 

  •  It avoids big loss. Because the strategy responds to adverse market conditions by reducing risk exposure, it usually avoids the big disaster before it is too late. 
  • It achieves comparable or better returns than a buy and hold strategy in a full market cycle. A full market cycle is defined as the one that consists a bear market and a bull market. For example, current market cycle starts from late 2007 and still running to the present. We have updated our rolling 5 years chart mentioned in our previous newsletter December 10, 2012: How Asset Allocation Strategies Performed In Secular Market Trends below. It assumes the year 2013 would end on 7/19/2013. 


Note: The above charts assume year to date (YTD) 2013 as 2013 full year to calculate the rolling 5 year returns. 

From the performance data we have gathered, we are seeing that TAA has started to out perform their SAA counter parts: the above data are somewhat unfair as they compare a globally diversified TAA portfolio with U.S. stock market index S&P 500 (VFINX, Vanguard S&P 500 index). If you compare a TAA portfolio with a globally diversified SAA portfolio, you will see a different picture. See section Portfolio Performance Review for more details. 

From the above, one can see that when a TAA starts to out perform a SAA, it either is in a bear market or in a raging bull period when some segments of markets exhibit a strong upward trend. At the moment, with the length of the current bull market being 4 years and 4 months (starting from March 2009) and the average bull market length being 3.8 years (see for example The Big Picture article), coupled with a lot of unresolved structured problems in global economies, it is hard to imagine how much longer this bull market can go. Either way, it looks like the TAA will begin to outshine again in the near future. 

TAA: The Bad

However, a TAA such as ours is not without problems. The following are the list of its bad parts:

  • More frequent trading requires much higher maintenance. Though our TAA requires probably monthly or at worst quarterly rebalance, it is still too much for folks who are not into investing. Furthermore, human nature hates a regular burden. 
  • The more frequent trading results in higher tax bites. This can be very sensitive to some people for a taxable account investing. Though our data have shown that in general, TAA tax bite is about 1-2% (see September 24, 2012: Tax Efficient Investing) while SAA tax bite is about 0.5% or so, it is still something many people would find unappealing, especially at the current bull market height. 
  • The trial and error fashion of our TAA makes some people suspicious: these people are looking for sure bets. Anything tries to take positions that eventually result in a loss is unbearable. The nature of our TAA is that it tries to catch big fish (or ride on a mega trend) or to avoid big splash (big loss) by taking several trials. The strategy might try several times (or years) to finally catch a big trend markets finally start to exhibit. Unfortunately, some trials might end up small loss. The worst is a stream of small loss while the market has been stable or advancing. This was very evident in 2011. 
  • A TAA portfolio might not be in sync with general markets. Again, we can see this since 2009: even though TAA portfolios have delivered reasonable returns (for example, Six Core Asset ETFs Tactical Asset Allocation Moderate only did 7.2% in the last 5 years), some of them are now under performing Vanguard Balance Fund Index VBINX (7.9% in the last 5 years). A big voice might say: why bother?

TAA: The Ugly

We devote this section to really alert our readers some of biggest surprises using TAA. These include the following:

  • Implementing a TAA is psychologically challenging: buying when markets are advancing and selling when markets are declining, taken out of context, is very counter intuitive. In addition, you have been bombarded with many other advices that advocate ‘not to chase markets’ etc. These advices are all valid when placed in a right context (for example, for people who have no systematic investing plans). Nevertheless, this problem is by far one of the biggest obstacles we observe from our users. 
  • Unlike buy and hold SAA, TAA is extremely sensitive to the rigorous implementation: if an investor does not follow the strategy for whatever reasons (such as the one above or just simply forget about it), it can be detrimental to follow back: say you miss the current buy and wait on sideline, will you get back into the strategy when markets are even higher? What happens if right after you start to follow it rigorously, it starts to lose (Murphy’s law)? Same can be said for selling. 
  • Another often asked question on TAA is that: can it avoid a sudden ‘death’ or 1987 type one day big drop? Unfortunately, based on our study, we found that our TAA can not avoid the 1987 stock market crash that had no enough market evidences shown before hand. Though for many other bear market incidents, TAA has done well, it does have its inherent risk: that is why we have emphasized that even for TAA, investors should only invest in a portfolio that has an acceptable risk profile. 

To summarize, as we human intend to focus on the good parts, we urge everyone to focus on the bad parts so that you can be well prepared for them when they happen (and they are bound to happen for sure in the future). By doing so, you will be ready for a ride if you choose to implement this strategy and won’t abandon it when it is at its low (and only to discover it shines again years later when you look back). Or you might be able to say to yourself, this is too much work and too (implementation) error prone and you decide not to pursue it. 

Regardless what you would like to pursue, we think it is prudent for you to understand fully the strategy you use and its inherent pros and cons. We are not selling a particular strategy to anyone. 

Portfolio Performance Review

The following two tables, taken from  Overview & Featured ETF Portfolios, show that the TAA has mostly out performed or is in par with its SAA-Optimal counterparts. It is even more evident when compared with SAA-Equal Weight portfolios:

Latest Featured ETF Tactical Portfolios Performance Comparison


Latest Featured ETF Strategic – Optimal Portfolios Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate 4.2% 9.5% 9.8% 7.0% 8.7%
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 4.7% 9.9% 9.1% 5.3% 6.5%
Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate 3.8% 8.9% 10.0% 7.5% 8.0%
Vanguard ETFs Strategic Asset Allocation – Optimal Moderate 5.6% 10.2% 10.1% 6.9% 7.4%
Permanent Global Portfolio ETF Plan Strategic Asset Allocation – Optimal Moderate 3.6% 9.1% 8.3% 4.7% 6.3%

**YTD: Year to Date (as of 7/22/2013). 

You can find similar tables of TAA and SAA-Optimal performance on Brokerage Mutual Fund PortfoliosBrokerage Specific ETF Portfolios and Lazy Portfolios

Market Overview

It is encouraging to see that emerging market stocks (represented by VWO) have finally turned to a possible trend score (see  360° Market Overview). For now, other than commodities, major risk assets are all showing reasonable positive momentum. 

Please refer to  360° Market Overview or Asset Trends & Correlations for various asset class trend rankings. At current level, Treasury bonds are in a better valuation. 

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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