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, April 28, 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.

Time Diversification

Among tens of thousands of MyPlanIQ users, many of you are very experienced. These power users have greatly helped to shape up our products. We thank them for their insights and constructive suggestions. In this newsletter, we are addressing an important issue for our Tactical Asset Allocation strategy: the day of a month to do rebalance.

Many users often have questions on why we choose a particular day of a month to rebalance. Our rebalance calendar turns out to be pretty random: we developed this calendar purely based on the need to make sure each rebalance day should be at least more than 30 calendar days apart and it should be on the first trading day of a week (often a Monday). Other than this, there isn’t any magic in it. However, a natural question follows: how effective such a ‘random’ rebalance day is? Furthermore, what happens if there is some significant event before the next rebalance day? Can we improve this?

Before we go on to show our studies, we would like to remind our users of a feature to allow you to specify a rebalance day of a month when you customize a Tactical Asset Allocation or Strategic Asset Allocation  based portfolio (not the advanced ones). We announced this feature on January 6, 2014: Lessons Learned in 2013. The feature is currently available to expert and pro subscribers. 

To answer the above questions, we did the following study (many thanks to those who made suggestions):

We applied the momentum based strategy Goldman Sachs Global Tactical Asset Allocation that is used for P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds ETFs (listed on Advanced Strategies ) to the following list of funds: 

All of our back testing portfolios start on 12/31/1997

We then construct 4 portfolios as follows: 

  • P GS 2 Week 0: Each month, on the last trading day (usually Friday) of the first week, the portfolio chooses top two funds ranked based on momentum scores
  • P GS 2 Week 1: Each month, on the last trading day (usually Friday) of the second week, the portfolio chooses top two funds ranked based on momentum scores
  • P GS 2 Week 2: Each month, on the last trading day (usually Friday) of the third week, the portfolio chooses top two funds ranked based on momentum scores
  • P GS 2 Week 3: Each month, on the last trading day (usually Friday) of the fourth week, the portfolio chooses top two funds ranked based on momentum scores

Finally, we construct a static portfolio P GS 2 TimeDiversify that consists of the above 4 portfolios, 25% each, balanced annually. 

The back testing results are as follows: 

Portfolio Performance Comparison (as of 3/24/2014): 

Ticker/Portfolio Name Since 12/31/97 YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
P GS 2 Week 0 14.9% -1.2% 12.3% 6.3% 11.0% 15.0% 0.91
P GS 2 Week 1 13.7% -0.3% 17.0% 7.6% 12.9% 13.6% 0.79
P GS 2 Week 2 13.8% -0.3% 16.0% 9.1% 16.7% 14.1% 0.8
P GS 2 Week 3 15.6% -0.5% 16.3% 6.9% 14.8% 15.3% 0.89
P GS 2 TimeDiversify 14.5% -0.8% 15.0% 7.0% 14.1% 14.5% 0.87
VFINX (Vanguard 500 Index Investor) 5.9% 0.5% 22.0% 15.4% 21.1% 7.2% 0.31

**YTD: Year to Date

See year by year detailed comparison >>

We make the following observations:

  1. Rebalance on the Fridays of  the first and the last week yields the best result, both in terms of returns and maximum draw down (to see the maxium drawdown, click on year by year detailed comparison  and scroll to the detailed table).  This is consistent with the results we obtained from other portfolios and confirmed by some long term practitioners. We suspect this has something to do with the long held calendar trading theory that says trading around the end and the beginning of a month is more profitable, at least for stocks. 
  2. Rebalance in the mid month is worse: this might also have something to do with option expiration, which happens on the 3rd Friday of every month. 
  3. However, if you look at the year by year return, week 0 and week 1 both have 2 losing years while week 2 and week 3 have 1 losing year. However, both week 0 and week 3 had a loss in 2011. 
  4. Week 1 and Week 2 had a loss in 2008 with week 2 had a -17.9% loss, pretty significant. 
  5. P GS 2 TimeDiversify did what it was supposed to do: smooth out returns and fluctuations. 

What can we learn from the above? First, rebalance on various days of a month all deliver very reasonable results. With limited back testing data (only 15 years), one should not try to generalize our results too much. However, it is probably more beneficial to rebalance around the month change than in mid month.

There are other ways to further study such a diversification. For example, if one is using more than 2 tactical portfolios, you can probably rebalance them on different days to alleviate or reduce volatility. 

Time diversification, as one of our users terms it, is indeed another dimension of diversification that can help an investor who has time to manage a large portfolio. For many average investors who have small portfolios or constrained with time, a simple fixed rebalance can still deliver a reasonable result in a long period of time. 

Market Overview

Stocks have been more volatile recently. However, we are still not seeing a wide spread panic selling yet: this is evident by the high yield (junk) bond strength. Looking more closely, we can see that among US stocks, value styles are now becoming more favorable. This is usually an indication that investors now begin to worry about stock valuation or earning growth. Again, we are cautious but will let markets sort out their actions. 

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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