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

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

Our static portfolio feature continues to get better: we now allow users to modify a static portfolio’s holdings for a given date. Furthermore, our system will record the transactions for the holding changes. A static portfolio now carries full historical holdings and transactions, just like any other portfolio on MyPlanIQ platform. 

The feature allows users to use a static portfolio to keep track of their actual accounts or just simply keep track of a ‘model’ portfolio they would like to have a history. With the existing portfolio features such as portfolio metrics, charting and comparison, you should be able to understand your static portfolio’s behavior much better now. 

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

As promised, this newsletter is devoted to understanding the pros an cons of Strategic Asset Allocation (SAA). In the previous newsletter July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly, we did a similar analysis for Tactical Asset Allocation (TAA).

SAA is often called buy and hold strategy. The name strategic means that the allocations will not change unless there is a significant event, either for the investor’s personal situation (such as a financial windfall or short fall or other major life events) or the underlying economic/financial mega trend. 

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

SAA: The Good

New and old investors who have ridden through the 2008-2009 financial crisis should be happy now: their portfolios should have recouped all the loss and some at the current market levels. It is proved again and again that buy and hold strategy has done it. The following are the salient good features of SAA: 

  • The key of an SAA is the diversification over various asset classes. Imagine a single fund or a portfolio that consists of several holdings such as Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate is effectively investing in the whole major assets around the world. This by itself is one of the biggest advancements in financial investments. That was not possible just 20 years ago. 
  • SAA has strong academic research support. In fact, the famous Modern Portfolio Theory (MPT), part of which made its advocates win Nobel prize. It’s so often quoted in financial media that an investor of using such a strategy can feel comfort and support, especially when markets are down significantly. This psychological effect shouldn’t be underestimated: many investors went to their financial advisors at the market low of 2008 and 2009 and held on to their investments with advisors’ insistence and eventually came out OK by now. 
  • SAA, unlike TAA, requires less intensive maintenance. It is thus less sensitive to implementation errors. You can rebalance quarterly or even annually, assuming you have positioned your portfolio right at the first place. For investors who can slack off often, this truly buy and hold strategy can be very appealing. 
  • Given the infrequent adjustment of SAA, it has much better tax effect as one can defer capital gain tax until it is liquidated. 

The following chart shows the performance of S&P 500 total real return (price +  dividend reinvested, adjusted with today’s CPI inflation):

 Data source: Robert Shiller S&P 500 annual return data

It is remarkable that the US stock market has been extremely resilient. Since 1871 to 7/29/2013, the S&P real return has been 6.63% (using S&P closing price 1685 on 7/29/2013). It is said the the real return should be between 6% to 7%. It is currently slightly over valued if the mid point 6.5% is used. 

SAA: The Bad

However, SAA has the drawbacks that everyone should be aware of: 

  • SAA portfolios can be very volatile. This is evident in the last 13 years. The two bear markets in the period are gut wrenching: during the two bear markets, S&P lost over half of its value. Even for a typical 60% stocks and 40% bonds portfolio such as Vanguard balance index fund (VBINX), it had over 36% draw down. 
  • Psychologically, for a person who actually needs the money in some period of time such as 5 years, the damage to the investment portfolios can be very challenging. This is especially true for retirees or people who (partially) rely on investment income. As a result, not all of investors can withstand huge loss and only sold their investments at the worst time. 

SAA: The Ugly

The often ignored big picture for using SAA, mostly due to overwhelming media’s noise when markets are up, can be extremely misleading.  In our opinion, the following two are the ugliest facts people are fooled and/or confused: 
  • The often touted ‘the stellar long term performance of stocks’ is mathematically correct but also very deceptive: the 142 year stock performance (real return 6.63% since 1871) should not be simply used to project for the next 10 years or even next 20 years. In fact, the nominal return (i.e. the actual price and dividend return together without inflation adjustment) for the next 10 year is projected to be around 3% (see 3% Annual Return Next Decade? for example). It is also very obvious that when the market overshoots, it will reverse to mean eventually. But many people simply choose to  ignore this fact and just blindly buy and hold. This is fine for the money you don’t need perpetually (such as a University endowment, even for that, it needs to have an annual spending budget), but for realistic purposes, investors should be very clear about the possible downside here. Readers are also referred to a recent study we did in July 8, 2013: When To Retire And Bear Market Impact On Retirement Income And Spending. In this study, it reveals that even though S&P 500 achieved a very respectable annualized return (based on the current level, S&P 500 annualized total return is 5.5% since 12/31/2001), retirees who rely on a 100% S&P 500 portfolio would now be in jeopardy for their retirement spending. 
  • Even though we pointed out that SAA has a strong intuition backing, for  example, we stated in July 4th 2011: What Make Strategic Asset Allocation Work?Furthermore, since a company owner would demand higher returns compared with just simply putting money into a bank (otherwise, the owner would just simply closes the company and get similar or better returns in a bank, for example), equities in general return more than cash or even safer fixed income. Notice it is not always intuitively correct to hold equities in any country since the country’s economy might not be growing at all (think about many poor African countries or even China 30 years ago), The extra return derived by equity (so called risk premium) can only be realized in a free and fair financial market (and also in an growing economy?).  But it can be also said that in the past 142 years, the US in general experienced an economic growth a world super power enjoyed. Is this going to be sustained? Or if it is, can one guarantee we will experience the same economic benefit and stable financial market environment as this country enjoyed before? 

Finally, we conclude this missive by showing you the three insightful quotes for the meaning of “long term”: 

Keynes: “In the long run we are all dead.”

Zerohedge: “On a long enough timeline, the survival rate for everyone drops to zero”. 

And the more optimistic quote for those who are willing to tie their long term fortune with the country’s: 

Warren Buffett: “It’s never paid to bet against America. We come through things, but its not always a smooth ride.”

Portfolio Performance Review

We compare the performance with several ETF and mutual funds. Notice for Arrow DWA Tactical A (DWTFX), one should compare that with P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds ETFs as both of them can invest up to 100% in stocks. 

Portfolio Performance Comparison (as of 7/29/2013)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
DWTFX (Goldman Sachs Dynamic Allocation A) 15.2% 18.4% 9.3% 0.67 2.4% 0.12    
GTAA (Cambria Global Tactical) -1.2% 3.2%            
Six Core Asset ETFs Tactical Asset Allocation Moderate 5.3% 8.2% 6.9% 0.83 7.4% 0.72 10.3% 0.85
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds ETFs 6.1% 11.2% 8.0% 0.69 10.4% 0.75    
GDAFX (Goldman Sachs Dynamic Allocation) 0.8% 4.3% 4.9% 0.61        

*: NOT annualized

**YTD: Year to Date

See the latest year by year comparison details >>

Overall, MyPlanIQ portfolios are very competitive, compared with other tactical portfolios. 

Market Overview

Markets are in a holding pattern. Unfortunately, emerging market stocks retreated again, ranked below the total bond index, along with commodities. For more details, see  360° Market Overview. For now, other than commodities, major risk assets are all showing reasonable positive momentum.  

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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