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, June 2, 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.

Consistency, The Most Important Edge In Investing: Strategic Case

Often, investors are looking for the next big thing: they study hard on strategies and convinced that is it. But once committed, reality sets in: it is a long and much less exciting process. Eventually, they are looking for another next big thing again.

We have touched this topic before. Here are some of the newsletters that addressed this issue: 

You can find a few of other newsletters on our Newsletter Collections page that touches the topic of strategic asset allocation and investor behavior.

At the moment, strategic asset allocation has been doing relatively well (especially for those that overweight U.S. stocks). In fact, VBINX (Vanguard Balance (60% stocks/40% bonds) has had a 13.5% annualized return in the past 5 years. 

Name YTD*
Three Core Asset Index Funds Strategic Asset Allocation – Optimal Moderate 2.7% 8.6% 8.3% 11.8% 7.3%
VFINX (Vanguard (S&P 500) Index) 2.7% 16.4% 14.4% 18.5% 7.7%
VBINX (Vanguard Balance (60% stocks/40% bonds) 2.4% 9.8% 10.1% 13.5% 7.3%

*   YTD: Year to Date (as of 5/19/2014)

However, skeptical investors often ask the following questions:

  • If this strategy (such as strategic asset allocation) is so great, why does not everyone use it?
  • What will happen if everyone is using it?

The answer to the first question actually depends on the answer to the second question. The second question is important and interesting in its own right: it is about the market equilibrium. 

What happens if every portfolio is using strategic asset allocation?

The conventional argument against any investment strategy is that when the ‘dumb ones’ become aware of a ‘good’ strategy, they will switch to the good strategy and eventually markets are now dominated by portfolios using this strategy. 

In the strategic asset allocation case, that would mean that now majority of investors are buy and hold and rebalance investors. At this point, high performing risk assets such as stocks become widely held. These assets seem to have low risk. In fact, at this moment, stocks can have very low volatility as can be found in the VIX index (S&P short term option implied volatility index) . 

So what will happen? 

The advantage of buy and hold is diminishing thus ‘smart’ investors are bailing out: they sell stocks. Now many buy and hold investors are no longer buy and hold, they sell and run. Most do this at the very bottom or close to the bottom of the bear market. 

Now this buy and hold strategic strategy is no longer working, many claim, precisely at the time the strategy begins to work again and deliver some of the best returns (think about the 666 price point of S&P 500 index reached in March 2009 and today’s 1885)!

The point is: there is no a single strategy that always works. When a strategy becomes crowded, its advantage disappears and it will stop ‘working’. 

Many people understand the above. 

However, most forget to ponder one step further: what happens afterwards. 

Well, it will start to work again. This is what has happened to stocks and in general, a strategic buy and hold portfolio. 

This also answers the first question: if a ‘winning’ strategy behaves just like the above, certainly we all understand many people will not have the patience and discipline to use it. 

Long term performance and risk

Investing is a long term statistical process. Many people acknowledge this but they don’t actually understand this. Academically or theoretically, it is possible for a strategy reaches an equilibrium state and eventually it will stop working. But human nature will soon revert this process and after a while, this strategy will appear working again. 

Having made the above clear, we believe investors should focus on long term performance and risk. There are many long term performance data for stocks. Here are the two useful charts: 

Data sources: Robert Shiller’s S&P data

What we learn from here:

  • Since 1871, stocks have exhibited a long term upward movement. Its real return (returns after inflation) centers around 6.5% trend line. 
  • Since 1880, there have been only two consecutive periods where S&P 500 had negative 10 year returns. For most of its parts, it had positive rolling 10 year returns. 
  • However, stocks can suffer from more than 50% maximum drawdown (or peak to trough return). 

Consistent buy and hold will win in the long term

So if you stay on course consistently and stick to a diversified and low cost (index) funds, you can achieve reasonable returns in a long period of time. However, you should be very clear about the risk tolerance and the time commitment you are about to make. For us, this would mean

  • Long term: means more than 10 years. In fact, we would claim 20 years are a better period of time for such portfolios. 
  • Risk tolerance: you understand that your stock portion can lose as much as 50% of its value during a period of time. 

With the strong intuition behind it and a long term data supporting its argument, strategic asset allocation is one of the viable investment strategies, in our opinion. But the key to be successful using this strategy is the patience and consistency to stay on course, thick or thin. Your biggest ‘open secret’ edge is the consistency, as in any long term process.

Portfolio Reviews

Lazy Portfolios have done well so far this year: 

Portfolio Performance Comparison (as of 5/19/2014)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
P David Swensen Yale Individual Investor Portfolio Annual Rebalancing 6.9% 6.3% 9.3% 14.6% 9.2% 0.55
Fund Advice Ultimate Buy and Hold Lazy Portfolio 2.7% 4.2% 5.5% 10.1% 7.4% 0.5
The Coffee House Lazy Portfolio ETFs 3.7% 7.2% 8.3% 13.2%    
Harry Browne Permanent Portfolio 5.2% 2.7% 4.3% 8.0% 7.6% 0.93
Wasik Nano 5.6% 4.5% 7.7% 12.0%    
VBINX (Vanguard Balanced Index Inv) 2.7% 10.1% 10.0% 13.4% 7.3% 0.52

**YTD: Year to Date

More year by year comparison >>

David Swensen’s portfolio is again out performing. This portfolio definitely has benefited from long term Treasury bond holdings, similar to Harry Browne’s Permanent Portfolio. 

Market Overview

Markets are consolidating. All risk assets other than gold have positive trend scores. However, we also note that small cap growth, blend and value stocks have all under performed against other styles, uniformly in the last 1, 4, 13, 26 and 52 weeks!

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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