Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

We just had a rebalance today. For regular SAA and TAA portfolios, the next re-balance will be on Monday, July 7, 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.

Tips on portfolio rebalance

As usual, we had several questions from users on today’s portfolio rebalance. We would like to address Frequently Asked Questions (FAQs) related to rebalancing in this newsletter. 

Asset allocation first, fund selection second

We emphasize that when it comes to rebalancing, one should obey the principle that the very first goal is to have a proper asset allocation: i.e. allocation percentages to major asset classes. Only after making sure you have a proper allocation, you then work on fund selection. Regarding the importance of asset allocation and fund selection, an often cited research result is a  a study by Gary Brinson, Randolph Hood and Gilbert Beebower that states asset allocation is responsible for over 90% of variations in portfolio return. Even though it is still debatable for the accuracy and applicability of this study, the result has strong intuition backing:  whether a portfolio is heavily exposed to stocks or not certainly has more effects 0n the portfolio’s return than what stock or bond funds used in this portfolio. For example, in an extreme case, a 100% stock portfolio will behave drastically different from a 100% bond portfolio. For more on this topic, refer to  asset allocation page

For portfolio rebalancing, asset allocation checkup sequence is

  1. Total risk asset allocation: Make sure the overall risk asset exposure and bond asset exposure makes sense. For example, a moderate risk profile 40 portfolio should have at least 40% in bonds. For a strategic portfolio, the risk asset exposure and bond asset exposure should stay relatively stable. For a tactical portfolio, when stock markets are in up trend, the risk asset exposure can be as much as its target allocation, which is 100%- risk profile percent. For example, for a risk profile 40 moderate tactical portfolio, that means risk asset allocation can be as high as 100-40=60%. But what one should watch out is that whether such tactical portfolios are reducing the exposure in risk assets. When market trends are turning, the risk asset exposure can be reduced to a lower percentage or even as low as 0%. 
  2. Each major asset allocation: You then want to make sure how much percentage is allocated to each major asset class. As we state throughout our website and many newsletters, the major asset classes we care most are US stocks, International developed country stocks, emerging market stocks, REITs, commodities and bonds. 

So, on a rebalance day such as today, you want to first look at and/or tally up allocation percentages for each major asset class. These should serve as the bottom line when performing rebalancing. 

After making sure that you take care of the allocation percentages to asset classes, you then proceed to handle the actual fund trading. Here users can encounter various issues as follows. 

Trading restrictions for funds

Many times, when you try to rebalance an account in a brokerage account, you find that the brokerage does not allow to purchase a fund. For example, on today’s rebalance, Fidelity users who are following Retirement Income ETFs tactical portfolios found out that Fidelity does not allow to purchase AMJ, an ETN selected to be purchased in a tactical portfolio. 

What to do: the first you can do is certainly asking for help on our support forum or just email to use. On the other hand, you can follow the following rules:

  1. Comparable fund in the same category: Find a comparable high ranked fund in the same asset class. You should first try to find a fund in the same fund category such as Large Blend, Mid Cap Value, Foreign Small Cap etc.
  2. Go up one level in asset hierarchy: If there is no more fund in the plan that is available for this category, you then go up to one more level to find a fund in that asset class. For example, if you are trying to find a fund that has Small Value category but you couldn’t find one, you will want to go up one level in asset hierarchy. In this case, it is US stocks. You then try to find a fund in this category. 
  3. Use index or diversified funds in the major asset class: When in doubt or as a last resort, use low cost index fund for this major asset class if you can’t find any other fund. For example, you can use an index fund such as Fidelity Total International Equity (FTIEX) or Fidelity Diversified International (FDIVX) if you have a trouble to purchase a Foreign small cap fund in a Fidelity account that follows a portfolio in Fidelity Extended Fund Picks plan. 

Redemption, round trip or minimum waiting period issues

When you encounter a mutual fund trading restriction such as redemption, round trip or minimum waiting period, the most possible cause is that the model portfolio you are following on MyPlanIQ is out of sync with your actual account. 

The strategies are designed to take the trading restrictions specified for a fund in a plan (to see a fund’s trading parameter, go to the plan page such as Fidelity Extended Fund Pick and then click on ‘All Fund Parameters‘ tab below ‘Investment Options‘. The strategies do NOT violate the trading restrictions for a model portfolio. 

The most often caused problem for the out of sync issue is that a user often just simply follows an existing model portfolio that has existed for a while or just has a start date that is before the user starts to follow a portfolio. The correct way to do this is to customize a new portfolio instead of following an existing one. Since in your customized portfolio, the fund purchased history is recorded when you customize/follow the portfolio, if you mirror your actual account precisely, you won’t have an issue for these trade restriction violation. 

However, it is possible that the parameters in a plan are wrong. In this case, we would like users to inform us and we will correct and rerun the rebalance. 

Funds not in a plan

This can be caused by 

  • Out of date plan: in this case, please inform us and give us the change and we will update the plan. 
  • Proxy funds: it is possible that for certain 401k or annuity plans, non-mutual funds such as pooled investment portfolios or separate managed accounts are used. In these plans, we have to find mutual funds that are comparable or similar to these portfolios/funds. For these funds, you can see that their ‘Descriptions’ are different from the funds’ names. In these cases, you should use the Description to match the actual fund in your account and rebalance accordingly. 

Fractional percentages

Sometimes, due to dividend distribution and suboptimal nature of our algorithms, a fractional percentage such as 0.54% may be  issued to purchase a fund A. In this case, users can simply ignore these fractional percentages and allocate the fractional percentages to other funds. 

Missing or late rebalances

If you miss a rebalance, it is easier to rebalance a strategic portfolio. However, for a tactical portfolio, it can be easy or very tough to get back on track depending on both market and portfolio conditions at that time:

  • Your account’s major asset allocations match those in the model portfolio: this is the easiest and you probably can simply wait till next rebalance or simply do rebalance right now if your account is not on mutual funds or there isn’t much trading restrictions for funds in your plan/brokerage. 
  • Your account’s major asset allocation do not match but you have a same or similar risk asset exposure as that in the model portfolio: in this case, you can try to rebalance your account by switching some risk assets to other risk assets. 
  • Your risk asset exposure does not match that in the model portfolio: an extreme example is that your stock exposure is 100% while the model portfolio has been 0% in stocks for a while. There are many different scenarios in this category. Depending on how markets have moved: if markets have moved for your advantage, you can simply latch on to the suggested model portfolio holdings. However, if markets have moved against your advantage (an example would be your account is still holding stocks that have dropped quite a bit but the model portfolio has existed from stocks), you might have to make a guess on how markets will move or just simply force your account to be in sync with the model portfolio. 
Missing or late rebalances for a tactical portfolio can be very tough to handle. We have discussed this in several newsletters such as July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly. To avoid such issues, you should be prepared for yourself to be disciplined enough or if you can’t handle it, find a professional to handle this. 
To summarize, one can follow the above guidelines for rebalancing. However, the toughest and messiest issues are those that miss rebalances for a tactical portfolio. 

Market Overview

Stocks market indices have been persistently at high level recently. Specifically, REITs have shown good strength while emerging market stocks have made some upward move recently. However, we do see that small cap stocks are still ranked below all of other style stocks in terms of trend score ranking. Furthermore, commodities have dropped back to negative trend recently. Long bonds are still in favor. Furthermore, it has been pointed out many times that the recent stock market rallies have had very low volume. In a word, we are cautious and be prepared for market weakness, which will eventually happen. 

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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