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, December 9, 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.

Tactical or Strategic in Overvalued Stock Markets

An question often came up to us is that when to use a Strategic Asset Allocation (SAA)and when to use a Tactical Asset Allocation (TAA).  Strategic allocation strategies regularly rebalance a diversified portfolio that has a proper risk exposure (or allocation to risk assets such as stocks and REITs). Tactical allocation strategies can dynamically change a portfolio’s asset mix based on market conditions. In MyPlanIQ’s TAA, when an asset class exhibits a down trend, it is avoided. The purpose of doing so is to avoid big loss in a portfolio. 

A natural source to ponder this question is the valuation of asset classes or assets. Valuation is a natural link between what to buy and what to sell. 

The relationship between value and momentum has been explored before. For example, AQR’s Asness and others studied these two factors and found them negatively correlated (see Value and Momentum Everywhere). Similarly, “Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes” explored how to apply both value and momentum together. 

In this newsletter, we want to answer a simpler question: can one switch between SAA and TAA based on market valuation? Before going too much details, let’s first review our motivation for the current market condition. 

Current US Stock Markets: Overvalued

It is no strange to regular readers of this newsletter that we are now in an elevated stock market. Just briefly, we cite the following data from our Market Indicators page:

  • Buffet Stock Market Indicator:The ratio of the total stock market capitalization to GNP is 112%. US stock market is Modestly Overvalued. 
  • Shiller CAPE10: The ratio of Real Price to the average of last 10 year Real Earnings(CAPE10)(25.39) to its long term average (16.51) is 1.54. US stock market is 54% Over Value.
  • Hussman Peak PE: The ratio of Real Price to the average of last 10 year Peak Real Earnings(18.51) to its long term average (12) is 1.54. US stock market is 54% Over Value. 
Furthermore, interested readers can read more on Hussman’s latest article on how stretched the markets have been recently: Hussman: Risk dominates, Hold tight

A user also proposed some interesting ideas on how to value a tactical strategy on our support forum recently (see MyPlanIQ A “Value Stock”? ). 

Strategic or Tactical: a Historical Perspective

Recently (year to date, for example), TAA has started to out perform SAA. This seems to be across the board. For example, 

Name 1Wk
P Momentum Scoring Style ETFs -0.5% 30.7% 37.3% 17.1% 19.5% 8.5%
VFINX (Vanguard (S&P 500) Index) 0.6% 26.3% 31.2% 15.4% 16.1% 7.4%


Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate 3.2% 6.2% 4.6% 10.2% 0.7 6.6% 0.42
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 6.2% 9.7% 6.1% 11.3% 0.79 6.2% 0.39
Six Core Asset ETFs Tactical Asset Allocation Moderate 9.9% 12.9% 5.9% 9.5% 0.93 10.2% 0.85

However, for the past 5 years, SAA in general has out performed TAA. In fact, as we are approaching the 5 year anniversary since the market low in March 2009 (by the time of March 2014), we suspect the out performance of the 5 year measurement will continue. 

We have explored the topic of  relative performance between the SAA and TAA in our previous newsletters: 


Tactical Asset Allocation in Overvalued Stock Markets

As a rational investor who take the safety as our number one concern in investing, we are worried in today’s overvalued environment. However, the past 5 year SAA out performance and the underperformance of many tactical funds are clear evidence that SAA has merits in investing. Again, for those who missed our ‘the good, the bad and the ugly’ mini-series on this topic, please find them in our newsletter archive

A straightforward way to deal with such a dilemma is to have a diversification among both strategies, a so called ‘core satellite’ approach we have advocated. In this approach, one can invest part of his/her capital in SAA portfolios and others in TAA portfolios. 

However, it is still a nagging issue on how much one should invest in SAA and TAA. Furthermore, in an obvious overvalued market that is prone to correction, isn’t it prudent to take a more active role?

A way to do that is just simply get out of  an overvalued market. That is what the portfolios such as P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly does. It goes to 100% cash when Shiller PE is more than 1.5x of its long term average. 

But on the other hand, markets can be irrational for a long time, as evident in almost 10 year bull market run before 2000-2002 bear market, as well as the 2003-2007 bull market. So it is almost impossible for any sensible investor to completely sit out the markets during those long years. 

A way to remedy this is that, when stock markets are under valued or reasonably valued, one adopts buy and hold strategic approach and when the markets become way too overvalued, one switches to a tactical approach to proactively manage possible risk. 

The following table and chart present how this approach could have performed: 

Portfolio Performance Comparison (as of 11/11/2013, since inception: 12/31/1991)

Ticker/Portfolio Name Since Inception (12/31/1991) Max. Drawdown 1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
P Shiller Cyclically Adjusted PE 10 SO SU Tactical Strategic Switch Monthly 1x 11.4% 33% 26.6% 10.3% 14.1% 0.76 13.1% 0.75
P Shiller Cyclically Adjusted PE 10 SO SU Tactical Strategic Switch Monthly 1.2x 11.3% 45% 26.6% 13.4% 18.6% 0.92 12.9% 0.63
P Shiller Cyclically Adjusted PE 10 SO SU Tactical Strategic Switch Monthly 1.5x 11.1% 51% 29.3% 15.2% 16.7% 0.76 10.8% 0.47
P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Monthly Cash 8.9% 19% 29.8% 15.4% 21.3% 1.17 11.3% 0.79
P Relative Strength Trend Following Six Assets 10.9% 17% 26.6% 10.3% 12.3% 0.89 12.1% 0.83
VFINX (Vanguard 500 Index Investor) 8.9% 55% 31.0% 15.8% 16.2% 0.73 7.4% 0.31


See the full detailed comparison >>



  • One can see that when we relax the over valued ratio, the strategy incurs higher maximum drawdown. 
  • However, in the recent 3 years, it clearly shows that it has paid off to be in VFINX, or SAA. 
  • The switching to TAA when Shiller PE exceeds 1 times its long term average has the highest annualized return, higher than the TAA (P Relative Strength Trend Following Six Assets) or buy and hold VFINX. 
  • However, the TAA has the lowest maximum drawdown and highest Sharpe ratio. 

The takeaway is that for maximum safety concern, one should still adopt TAA. But on the other hand, to ease the anxiety caused by the severe mismatch between the current market environment and the portfolio, one can adopt a strategy that switches to active tactical TAA portfolios when markets are overvalued by long term valuation metrics such as Shiller PE and when markets are reasonably or under valued, use strategic SAA.  This strategy is in fact effective based on the above study in a 22 year span. 

The bottom line: right now, it is a good time to pay attention to tactical approach to protect your capital instead of chasing the markets. 

Portfolio Performance Review

Here is the performance of Fixed Income Bond Fund Portfolios:

Latest Portfolio Performance

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
Schwab Total Return Bond 0.5% 1.4% 4.8% 8.7% 6.3%
Fidelity Total Return Bond 0.5% 1.4% 4.6% 9.3% 6.7%
TDAmeritrade Total Return Bond 0.4% 1.2% 5.6% 9.3% 6.9%
FolioInvesting Total Return Bond 0.5% 1.4% 4.8% 8.5% 6.2%
Etrade Total Return Bond 0.5% 1.4% 4.6% 8.3% 6.3%
PTTRX (PIMCO Total Return Instl) -1.6% -1.1% 3.4% 7.7% 6.3%
VBMFX (Vanguard Total Bond Market Index Inv) -2.3% -2.6% 2.4% 5.4% 4.6%

**YTD: Year to Date

Returns (AR: Annualized Return) include dividend/interest reinvested. 
More detailed portfolio info.

The tactical approach in these brokerage specific bond portfolios have paid off this year: so far, their returns have been positive, compared with negative returns incurred in the total bond market index or the famous PIMCO total bond fund PTTRX. We expect in the coming years, the turbulence in bond markets will continue. 

Market Overview

Frankly, we are worried, even in this seasonally strong markets. We see both emerging market stocks and US REITs slipped back to negative trend again. At the moment, only the developed markets (US and Europe) stocks are rising. What’s more, they are over stretched and over valued. For more detailed, please refer to  360° Market Overview

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

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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