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, September 15, 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.

Remember Risk

As stock markets keep rallying, markets have become extremely accommodating. For one,  S&P 500 stock index has not under gone a 10% or more correction since October, 2011, almost 3 years ago (see, for example, more discussions on 10% or more stock market corrections in July 7, 2014: Portfolio Behavior During Market Corrections). Furthermore, stock volatility has been very muted, as shown by the S&P 500 option implied volatility index VIX in the following chart: 

It is thus very easy to be complacent, after all, the last several bear markets have become more and more distant in our memory. We see employment rate is picking up, internet and tech companies are making load of money, U.S. energy sector is booming. What’s not to like?

Economic risk does not equal to market risk

Even though we are seeing an improved economic picture, we do believe there are several under currents that can adversely affect US and world economies. However, even assuming economy is doing well, it does not equal to low market risk. In fact, the following chart shows how US recessions are correlated with bear markets or market corrections. 

Click to enlarge


From the above chart, one can see that when a stock bear market (a bear market is defined as 20% or more S&P 500 index loss) occurs, economy always enters or experiences a recession.  For example, US economy did not experience a recession during the stock market crash in 1987.  In fact, economy expansion periods are often punctuated with double digit percent corrections such as the 18% one between July 1998 to August 1998, a period that saw Russian government bond default and the Long Term Capital Management (LTCM) crisis. 

Similarly, an economy recession does not necessarily imply a stock bear market, even though it often ensures a correction. For example, the recession between July 1990 to March 1991 only saw a 16% stock correction that ended in October 1990. 

In short, economic risk does not equal to market risk, even though both are tightly related.  It is possible for the stock market to enter a deep correction even when the economy is doing well. 

Current risk factors

Although we do acknowledge an improved economic picture, we do want to point out not all are rosy. For example, we see the following: 

  • Geopolitical risks: Ukraine crisis, middle east conflicts, China and Japan conflict and south China sea conflict. 
  • Deflationary European economic risk
  • Emerging market (especially China) economy sector rebalance adjustment risk and its impact on world economy including the U.S. 
  • Federal Reserve Quantitative Easing (QE) exit and rising rate risk

Yes, we know, there are always risks at any given time. But coupled with the following high stock market valuations, things become trickier: 

  • Robert Shiller CAPE10: 63% over valued. 
  • Warrent Buffett Total Market Value to GNP ratio: 139%, indicating a significant overvalued stock market. 
  • Hussman peak PE is also 61% over valued.

See Market Indicators for up to date info. 

The problem is when stock markets are highly overvalued, markets can decline without much warning initially. The best example is the 1987 stock market crash. Interested readers are referred to the following articles in this subject:

High risk does not equal to getting out of markets

However, high risk does not necessarily mean one should automatically get out of stock markets or eliminate risk asset exposure. For example, in the above VIX chart, one can see VIX can stay low for an extended long period of time, sometimes for multiple years. Stocks were highly overvalued by Shiller’s CAPE10 standard in late 1990’s and the stock market didn’t go to a bear market correction until 2001. 

We have written several articles dealing with this topic, please refer to August 11, 2014: What To Do In Overvalued Stock Markets

To summarize, currently, coupled with high valuation, stock markets are in a very unstable condition that can be tiptoed into an abrupt loss. The fragile economic recovery does not help much either. What we advocate is to maintain a risk level one is comfortable and if desired, adopt a more active tactical approach to manage risk. 

This is not a time to be risk oblivious. 

Portfolio Reviews

We compare the performance of several excellent allocation mutual funds. These funds can be found on SmartMoneyIQ Managers, a page that monitors allocations of these funds. 

Fund Performance Comparison (as of 8/25/2014): 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Moderate 6.7% 13.8% 8.2% 9.0% 11.1% 0.98
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 6.4% 11.9% 9.4% 9.0% 6.6% 0.43
VBINX (Vanguard Balanced Index Inv) 7.0% 15.0% 15.0% 12.0% 7.5% 0.54
PRWCX (T. Rowe Price Capital Appreciation) 8.3% 16.2% 19.0% 14.0% 9.4% 0.59
LCORX (Leuthold Core Investment Retail) 7.6% 18.0% 11.2% 8.2% 8.6% 0.53
MALOX (BlackRock Global Allocation Instl) 3.8% 11.2% 9.5% 8.4% 8.9% 0.7
PASDX (PIMCO All Asset D) 6.8% 11.5% 7.0% 8.5% 6.4% 0.67
GRSPX (Greenspring) 0.7% 4.9% 11.4% 8.5% 7.0% 0.57

*: NOT annualized

More year by year comparison >>

Market Overview

S&P 500 reached historical record high today. US stocks again exhibit strong up trend, along with emerging market stocks. On the other hand, long term bond yield continued to dwell on 52 week low. As stated earlier, we call for caution and don’t believe an excessive risk taking is warranted. 

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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