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, 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.

There are always lottery winners

As we pointed out several times before, the biggest open ‘secret’ in investing is the consistency. Investors’ biggest enemies are themselves, who are constantly struggling between greed and fear, exacerbated by 24/7 noises in today’s internet era. Every now and then we hear that some investors have done so well and envy those who make big fortunes. What is worse, human nature drives us to follow the foot steps of these fortunate ones, only to be disappointed. 

Warren Buffett, one of the greatest investors, has written many witty and insightful essays for everyday investors. In the following, we would like to analyze the example he gave in a talk at Columbia University in 1984 (The Superinvestors of Graham-and-Doddsville): 

I would like you to imagine a national coin-flipping contest. Let’s assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping.

Assuming that the winners are getting the appropriate rewards from the losers, in another ten days we will have 215 people who have successfully called their coin flips 20 times in a row and who, by this exercise, each have turned one dollar into a little over $1 million. $225 million would have been lost, $225 million would have been won.

By then, this group will really lose their heads. They will probably write books on “How I turned a Dollar into a Million in Twenty Days Working Thirty Seconds a Morning.” Worse yet, they’ll probably start jetting around the country attending seminars on efficient coin-flipping and tackling skeptical professors with, ” If it can’t be done, why are there 215 of us?”

By then some business school professor will probably be rude enough to bring up the fact that if 225 million orangutans had engaged in a similar exercise, the results would be much the same – 215 egotistical orangutans with 20 straight winning flips.

So, we all laugh and understand that these coin-flipping winners have earned their keep merely by luck, no matter how hard they argue it’s due to their skills. 

If we replace the coin-flipping contest with purchasing lottery tickets in the above example, everybody would simply envy the winners’ luck not their skills too. If anyone tries to participate in this lottery activity, she/he understands it is the luck they are playing with, nothing else. If someone else wins big this time, will you entrust this winner with your hard earned money to take a bet next time for you? Well it is highly doubtful. At least, even if you choose to do so, you know what you are getting into. 

If instead of taking part in  the coin flipping contest, participants are now entrepreneurs who are building businesses. Year in and year out, some entrepreneurs win big.  What can we say about them?

Most of us would agree that majority of these winners do so not by chance but by skills and hard work. However, we also note that there are still these ‘great’ business men who are flash in the pan. They might build their businesses by chance, go to IPO or get purchased in the right place at the right time. Their businesses disappear or collapse quickly.  We have seen this movie before, especially in the internet bubble during 2000-2002. At that time, many companies did not even have a business but ‘investors’ lined up to get a piece of these super stocks, only holding empty bags afterwards. 

So we know there are always lottery winners somewhere, even in business world. 

Now if  we replace the coin-flipping contest with purchasing stocks and bonds, these participants (or ‘orangutans’ as Buffett put it) are now  investors or fund managers, things get murky: year in and year out, some investors will emerge as winners. Now what do we say about them?

It turns out that many of them are lucky winners, or shall we say, lottery winners. It has been widely reported that many mutual funds have inconsistent performance records: in one year, they might rank on top but next year, they might rank at the bottom. If we stretch our time frame to a long period, such as 15 years, we will see few winners left. For example, based on a Vanguard report The bumpy road to outperformance, it found that only 18% of US equity mutual funds have outperformed their benchmarks (a study on the 15 year time span through December 2012): 


So, only 18% or 247 out of 1540 funds outperformed their benchmarks. But other than that we know it is very hard to outperform low cost  index (benchmark) funds, nothing is wrong here, you might say. However, Vanguard further pointed out that nearly every one of these 247 successful funds underperformed in at least five of the 15 years. Furthermore, two-thirds of them experienced at least three consecutive years of underperformance. 

Even worse, we all know that even among these 247 winners, there are still quite some who are lottery winners. They might start to underperform from now on! An example is the famed fund manager Bill Miller who managed to outperform S&P 500 index in a 15 year streak that ended in 2006. The fund might or might not recover, but for his investors, many of them will be hurt for good (imagine how many of them invested when the fund was at its high and how many have bailed out). 

The lesson here is that there will always be lottery winners in any field in our life. Although one should not simply go overboard to the other extreme to dismiss every winner as a lottery winner,  putting things under this ‘lottery’ perspective alleviates the pain when your investments are underperforming.  At least, this should give us a healthy does of skepticism to begin our due diligence. 

For the due diligence, we encourage you to read the rest of Buffett’s essay.  Or read some of our previous newsletters such as July 16, 2012: Understand The Behavior of Investment Strategies

Portfolio Overview

We first mentioned these time diversification portfolios in March 24, 2014: Time Diversification In Portfolio Rebalance.  Here is the latest performance of these portfolios: 

Portfolio Performance Comparison (as of 6/13/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
P GS 2 Week 0 5.2% 15.6% 9.6% 11.2% 0.73 16.2% 1
P GS 2 Week 1 4.6% 19.0% 10.7% 12.6% 0.78 14.6% 0.85
P GS 2 Week 2 5.3% 18.8% 10.6% 16.5% 1.03 15.7% 0.91
P GS 2 Week 3 5.9% 20.1% 10.6% 14.0% 0.86 17.1% 1.02
P GS 2 TimeDiversify 5.1% 18.1% 9.5% 13.9% 0.89 15.8% 0.97
VFINX (Vanguard 500 Index Investor) 5.8% 20.7% 17.5% 17.8% 1.06 7.6% 0.32

*: NOT annualized

**YTD: Year to Date

See year by year detailed comparison >>

Again, week 0 and week 3 have been consistently doing better, even year to date. 

Market Overview

Risk assets continue to hang on at their historical high levels. Cash is sitting at the very bottom in our trend ranking table. All asset classes are inflated at this moment. Investors should be prepared for a loss at this level and a possible market rout here. Even though it is not in a visible sight, there is no guarantee that it can not happen quickly. 

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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