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, January 13, 2014. 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.

Tax Efficient Portfolio Planning

Many investors have multiple accounts including various tax deferred accounts such as 401k, IRA or annuity, as well as taxable brokerage accounts. How to efficiently implement investment strategies in these accounts is thus a very common issue. 

Here are the two rules of thumb that can be useful to help you decide what to do in each account.

  • Buy and hold equity or stocks should be in taxable  if it is possible. See Carnegie Mellon University Professor Dammon’s research paper on this topic. 
  • Tactical equity or stocks should be in tax deferred if it is possible. 

You should follow the order of the following three steps: 

Implement Strategic Asset Allocation (or Buy and Hold) in taxable accounts

Step 1 is to first decide how much you would like to allocate to a Strategic Asset Allocation (SAA) based portfolio. We are a fan of core-satellite approach that allocates part in a core SAA portfolio and the rest in a satellite Tactical Asset Allocation (TAA) portfolio. See for example, July 15, 2013: Portfolio of Portfolios & Core Satellite Portfolios on the concept of core-satellite. 

Once you decide the amount in your overall investable assets that should be in SAA, you should try to implement an equity (or stocks) only (or risk profile 0) SAA in your taxable accounts as much as possible. The reason to allocate equity (or stocks) only portion in a taxable account is that they are more tax efficient as both dividends and long term capital gains are taxed preferably. Investing fixed income (bonds) in a taxable account incurs ordinary income tax for both interests (or ordinary dividends) and short term capital gains, which consist of the majority of earnings in fixed income investment anyway. 

If you have more buy and hold SAA equity portion that can not be implemented in your taxable accounts, you then invest the rest in your tax deferred accounts. 

Implement Tactical Asset Allocation (or Satellite) portion in tax deferred accounts

The next step is that, after you have taken care of the buy and hold core Equity/Stock portion, you now should try to allocate the tactical satellite portion in your tax deferred accounts such as 401k, IRA or variable annuities. In general, you should first try to decide how much tactical equity/stock portion (i.e. risk profile 0) you should invest in your overall investable assets. You then try to pack as much these tactical equity portion into tax deferred accounts as possible. 

Again, the reason to use tax deferred accounts to implement Tactical Asset Allocation (TAA) is because the bulk of earnings generated by tactical is much bigger than the earnings generated from the equal amount in fixed income (using TAA). It is thus justified to first pack these equity/stock portion into tax deferred accounts. 

Implement the rest with the rule: tactical in tax deferred accounts first

After you have decided the two risk profile 0 equity investments (SAA and TAA, if there is either one or both), you now have the fixed income portion left. Again, here, you should implement the TAA fixed income portion in tax deferred accounts first and the rest in taxable accounts. 


Suppose you have the following investable assets: 

  • 401K: $100K
  • IRA: $200K
  • Annuity: $100K
  • Taxable: $600K
  • Overall amount = $1000K

And you decide that your personal risk profile should be 50. Furthermore, you want to have 20% implemented on a global risk profile 0 SAA. 

That means you have 20% or $200K in SAA Risk Profile 0. Now since your risk profile is 50, that means you should have $500K in equities. Thus, this leaves out $500K-$200K = $300K in TAA risk profile 0. 

Step 1: We should put $200K SAA risk profile 0 to taxable.  So now, we have $400K taxable slot left. 

Step 2: We should try to put $300K TAA risk profile 0 to the tax deferred accounts.  We might decide that we put these $300K to the 401K and IRA account. Now we have $400K taxable and $100K annuity left. 

Step 3: Suppose we want to have $100K fixed income in SAA or some bond index funds, that means we should have $400K in taxable TAA or total return bond fund upgrade portfolios such as those in Fixed Income Bond Fund Portfolios. So we put $100K fixed income SAA in taxable and then $300K in taxable TAA and $100K TAA in the annuity account. 

The following summarizes the result of our allocations: 

  • 401K $100K: TAA risk profile 0
  • IRA $200K: TAA risk profile 0
  • Annuity $100K: TAA risk profile 100 (fixed income)
  • Taxable $600K: $200K SAA risk profile 0, $100K SAA risk profile 100, and $300K TAA risk profile 100 (fixed income) . Note we can combine the SAAs to $300K SAA risk profile 33. 

Following the above steps will give you the first order of solution. In reality, you might encounter more issues such as in some accounts especially those 401k or annuity accounts, you have have limited choices of good funds to cover enough important asset classes. Furthermore, even in a taxable account, some brokerages might have more restrictions than others.  But at least you can start out the solution arrived and then begin to optimize or adjust it. 

Portfolio Performance Review

We usually list the most aggressive (or risk profile 0) Tactical portfolio for each brokerage plan. Users can customize one if it is not listed.  The following shows how the ETF portfolios have done: 

Portfolio Performance Comparison (as of 12/16/2013): 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Most Aggressive 16.6% 20.0% 10.8% 13.9% 0.86 15.1% 0.87
Six Core Asset ETFs Tactical Asset Allocation Most Aggressive 18.4% 21.0% 9.7% 13.1% 0.77 14.3% 0.77
Retirement Income ETFs Tactical Asset Allocation Most Aggressive 12.7% 15.4% 7.0% 12.1% 0.72 13.9% 0.76
Five Core Asset Index Funds Tactical Asset Allocation Most Aggressive 16.4% 18.6% 8.9% 13.3% 0.81 14.3% 0.85
SPY (SPDR S&P 500) 26.9% 27.6% 15.0% 17.4% 0.89 7.3% 0.3
EFA (iShares MSCI EAFE Index) 14.9% 18.2% 6.5% 11.7% 0.47 6.3% 0.21
EEM (iShares MSCI Emerging Markets Index) -6.5% -3.4% -2.5% 12.7% 0.44 10.2% 0.27

**YTD: Year to Date

See detailed comparison >>


Market Overview

Market behavior in the last week might signal the beginning of a correction, even though we are in a seasonally strong period. We note that both REITs and emerging market stocks behaved terribly. 

For more detailed asset trend scores, 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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