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.

How to benchmark portfolio returns

As 2013 is drawing to a close, we naturally would like to understand how well our investments have done. We often receive suggestions and complaints from our users on our portfolio comparison as our portfolios are always compared with the two de facto funds:VFINX (Vanguard 500 Index Investor) and VBINX (Vanguard Balanced Index Inv). However, simply comparing with these two funds is misleading, as many have pointed out. 

First, the risk profile or level of these funds might be different from the actual risk profile your portfolio has. That makes it less comparable. A simple way is to scale up or down VBINX to get the right scale. But that is not obvious and too kludge. 

Secondly, these two funds are predominantly U.S. stocks and bonds based. So they are not really comparable with a portfolio that is supposed to invest in global stocks and bonds. 

Strategic Asset Allocation Equal Weight as benchmarks

One way to do so is to compare with some well known global balanced indices. For example, one can compare this with Dow Jones Global Asset Allocation Indices. These indices were originally designed as static balance indices and since have been used for target date funds. However, they are not open and the allocations are not publicly disclosed (to the level of US, international stocks etc.)  Furthermore, it is still not precise or unfair to compare a portfolio that has commodities with an index that has no exposure in commodities. 

A simplest way is to compare your portfolio with a Strategic Asset Allocation (SAA) – Equal Weight based major asset portfolio of the same risk profile. For example, let’s say you have a portfolio that has exposures to the six major asset classes: U.S. equities, international equities, emerging market equities, REITs, commodities and US bonds, you can compare this portfolio with a customized portfolio that is based on SAA-Equal Weight with the same risk profile. For example, all of MyPlanIQ’s moderate portfolios can be compared with Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate

The reason one can choose the equal weight allocation is due to its simplicity: it just allocates equally among risk assets (i.e. excluding bonds). We have written many articles on the effectiveness of equal weight allocation: see, for example, July 18th 2011: Equal Weight or Not Equal Weight in Strategic Asset Allocation?

As an interesting follow up, even up to today, if one looks at the annualized returns since 12/31/2000, the start date of  Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate, one can see the following performance comparison: 

Table 1: Portfolio Performance Comparison (as of 12/30/2013)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 12/31/2000
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate 4.9% 5.7% 4.9% 10.2% 6.4% 6%
VBINX (Vanguard Balanced Index Inv) 17.2% 17.6% 10.6% 13.5% 6.9% 5.7%

**YTD: Year to Date

Detailed comparison >>

So even after strong US stocks’ out performance in the last 1, 3 and 5 years over other risk assets (international and emerging market stocks and commodities), VBINX, the 60% US stocks and 40% bond index fund still lags behind the equal weight since 12/31/2000. 

This comparison is certainly a bit arbitrary but the key message is that the SAA equal weight is a very good benchmark to measure against, if not to beat. 

The following shows how our featured ETF portfolios listed on Major Brokerage Investors  are compared with their benchmarks: 

Table 2: Portfolio Performance Comparison (as of 12/30/2013)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 2000 10Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Moderate 12.5% 13.5% 6.7% 9.3% 10.0% 9.1% 0.84
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 8.1% 9.0% 6.4% 10.9% 6.0% 5.6% 0.38
MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate 11.6% 12.7% 7.9% 10.3% 10.3% 9.2% 0.9
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate 8.2% 9.0% 6.9% 11.8% 7.9% 4.9% 0.55
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate 4.9% 5.7% 4.9% 10.2% 6.4% 6.0% 0.4
Retirement Income ETFs Tactical Asset Allocation Moderate 9.2% 10.3% 8.9% 9.1% 10.0% 10.2% 0.86
Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate 7.6% 8.5% 8.1% 11.9% 7.5% 7.1% 0.52
Five Core Asset Index ETF Funds Strategic Asset Allocation – Equal Weight Moderate 6.6% 7.6% 5.9% 11.7% 6.7% 6.3% 0.38

See detailed comparison >>

Notice that Retirement Income ETFs portfolios have exposure to only the five core assets (no commodities) and thus they should be compared with the Five Core Asset portfolios. 

It is clear that our TAA has done so much better in the 1, 3, 5, 10 and since 2000 time frames than their benchmarks. Same can be said for the SAA optimal. 

For other risk profile, you can customize a portfolio with that risk profile and do the comparison. 

Readers are reminded that our SAA equal weight is free for registered users. 

Static portfolios as benchmarks

A more natural way to create your own blended benchmarks is to create a static portfolio with your own fund and allocation choices. Again, static portfolios are free for registered users. 

For example, if your risk profile is 52 (i.e. 48% in equities and 52% in bonds or cash), you can create a static portfolio such as 30% in US equities, 10% international equities, 8% in emerging market stocks and 52% in US bonds and then use this as your global blended return benchmark. You then compare it with the portfolio you are following, for example, let’s use Six Core Asset ETFs Tactical Asset Allocation Risk Profile 52

Portfolio Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Risk Profile 52 9.3% 10.0% 6.0% 8.4% 1.03 9.1% 0.98
My Custom Benchmark Demo 10.0% 10.9% 7.0% 9.6% 1.05    
VFINX (Vanguard 500 Index Investor) 31.0% 31.7% 15.7% 18.4% 0.94 7.4% 0.31
VBINX (Vanguard Balanced Index Inv) 17.2% 17.6% 10.6% 13.5% 1.15 6.9% 0.48

**YTD: Year to Date

Absolute return based benchmarks

As many readers might have known, MyPlanIQ’s investment philosophy has always been to seek solutions that deliver acceptable returns with managed risk. We are not here to compete against a particular market index or a fund. What we care most is whether our investments can help for our long term retirement needs. 

For example, let’s say you are in retirement. You would like to withdraw or spend 4% (a popular rule of thumb figure in retirement planning), adjusted with inflation,  every year from your investment portfolio. To make sure your portfolio can last in your retirement lifetime and still leave some to your heirs, you would need to not only earn enough returns but also need to make sure your portfolio’s volatility to be minimum.

The topic of withdrawal rate and the timing of withdrawing has been studied extensively. For example, we showed in  July 8, 2013: When To Retire And Bear Market Impact On Retirement Income And Spending that withdrawing from an all stock buy and hold portfolio since 2000 vs. withdrawing from a tactical portfolio can result in a dramatic difference over times. 

Again, we resort to rule of thumbs here: a reasonable safe assumption is that if you can earn an excessive 4% return over inflation, you probably can sustain your retirement spending need. In fact, assuming your portfolio has zero volatility (meaning no fluctuation) and inflation rate is 3% and the portfolio’s annual return is a constant 3%+4% = 7%, your portfolio’s balance would have the following chart after factoring 4% (with annual inflation adjustment) annual spending rate:

In reality, your portfolio fluctuates a lot more and thus the above is really an ideal case. That is because the portfolio volatility or loss is paramount (again, see the July 8, 2013: When To Retire And Bear Market Impact On Retirement Income And Spending as an example). 

To summarize, you can benchmark your portfolios using real returns — returns after inflation. You can setup your expectation such as for a moderate portfolio, the nominal return (nominal return is before inflation) is 4% over inflation. You can then compare your portfolio returns with your objective. 

For example, since 2000, the average annual inflation (CPI, Consumer Price Index) is about 2.3% (see for a calculator). That would mean you should achieve 2.3+4=6.4% for your goal. If you compare this figure in table 1 and table 2, you can see that VBINX barely missed this while other SAA – optimal and TAA portfolios have done better. 

Market Overview

US stocks made a new historical high last week again. Others are not as lucky. The following shows how the major 6 benchmarks have fared for the last year: 

Asset Performance Comparison (as of 12/30/2013)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
SPY (SPDR S&P 500) 31.7% 32.5% 15.9% 18.6% 7.4%
EFA (iShares MSCI EAFE Index) 21.0% 21.5% 8.4% 12.7% 6.7%
EEM (iShares MSCI Emerging Markets Index) -4.8% -3.1% -1.9% 13.5% 10.2%
IYR (iShares Dow Jones US Real Estate) 1.4% 1.7% 8.4% 16.6% 6.2%
DBC (PowerShares DB Commodity Index Tracking) -6.9% -6.7% -1.5% 5.3%  
BND (Vanguard Total Bond Market ETF) -2.2% -2.3% 2.6% 3.6%  

The parabolic rising of US stocks (international stocks somewhat) is a concern and we recommend John Hussman’s latest commentary Estimating the Risk of a Market Crash  to interested readers on a discussion of stock market crash.

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. 

We wish you a Happy New Year!

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