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, November 24, 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.
Strategic Portfolios with Managed Volatility
As stock markets are in the midst of a retreat from an extended overvalued state, investors should be prepared for more fluctuation in their portfolios, especially in strategic portfolios. In general, markets tend to retreat in a step wise fashion. In the absence of 1987 one day large drops, stock markets usually experienced a sequence of successive daily losses and then recovered some and then repeat the above pattern. This has been evident in almost all of bear markets or large corrections such as the one in 2000-2002 and 2008-2009.
What is more, stocks tended to undershoot during a severe stress that sometimes might start from some minor bad news and then continued the downward movement when more bad news surfaced.
At the moment, we see a similar situation, though it is no where close to that in 2008. Furthermore, it is still possible that the central banks’ intervention might be able to delay the process. But that is the nature of any investment strategy: no one can predict the future and any investment is bound to ‘fail’ in some occasions. What matters is the average outcome that can be only exhibited in a long period of time.
In this type of situation, as we stated in our previous newsletter, strategic portfolio investors should be ready for some large (maybe 20% plus) loss while tactical portfolio investors should be prepared for some possible frustrating whipsaw or small losses along the way.
Conventional strategic portfolio performance review
The following table shows some basic conventional strategic portfolios’ recent performance. By conventional, we mean they are constructed mostly using stocks and bonds.
Portfolio Performance Comparison (as of 10/20/2014):
| Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|
| Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate | 2.8% | 3.5% | 8.0% | 7.2% | 6.2% | 0.4 |
| Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate | 1.4% | 1.2% | 6.2% | 6.1% | 6.5% | 0.42 |
| MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate | 1.8% | 2.5% | 8.0% | 7.7% | 7.9% | 0.56 |
| MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Equal Weight Moderate | 1.0% | 0.6% | 6.1% | 7.0% | 7.3% | 0.57 |
| Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate | 1.9% | 2.8% | 7.9% | 8.2% | 7.1% | 0.49 |
| Retirement Income ETFs Strategic Asset Allocation – Equal Weight Moderate | 2.0% | 2.2% | 7.2% | 6.7% | 6.5% | 0.43 |
| VBINX (Vanguard Balanced Index Inv) | 4.3% | 7.8% | 12.5% | 10.4% | 7.1% | 0.5 |
See year by year detailed data >>
All of the portfolios are still in black year to date. However, if one looks at these portfolios more closely, one should not overlook the maximum drawdowns of these portfolios (and the fund VBINX) have been more than 33%, or 1/3 of portfolio value was lost at a some point of a time (they were all during 2008-2009).
Conservative balanced portfolios
To manage volatility or fluctuation, one can utilize some of the following techniques.
Permanent portfolio and its variations
We have covered these types of portfolios in many occasions. We advocate the portfolio and its four pillar based investment framework. These portfolios have done well so far this year, thanks to the strength of long term bonds and relative hedging among gold, bonds and stocks. See
- February 25, 2013: Risk Parity All Weather & Permanent Portfolio Review
- August 6, 2012: Four Pillar Foundation Based Portfolio Review
| Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|
| Bridgewater All Weather Portfolio Risk Parity | 5.2% | 4.3% | 4.0% | 5.7% | 5.9% | 1.26 |
| Bridgewater All Weather Portfolio | 4.8% | 3.9% | 4.8% | 6.9% | 7.3% | 1.1 |
| Harry Browne Permanent Portfolio | 6.3% | 5.1% | 3.1% | 6.3% | 7.2% | 0.86 |
| Permanent Income Portfolio | 9.0% | 8.0% | 6.9% | 8.1% | 6.5% | 0.93 |
| PRPFX (Permanent Portfolio) | 1.0% | -0.2% | 1.7% | 5.4% | 7.3% | 0.58 |
| VFINX (Vanguard 500 Index Investor) | 3.6% | 10.9% | 18.6% | 13.9% | 7.6% | 0.32 |
| VBINX (Vanguard Balanced Index Inv) | 4.3% | 7.8% | 12.5% | 10.4% | 7.1% | 0.5 |
Again, we would like readers to pay attention to these portfolios’ maximum drawdown (click on the year by year detailed link and see these data). These hedge based portfolios usually hold up much better during a market downturn than other conventional strategic portfolios.
Strategic and tactical mix (core-satellite)
We are also an advocate on core-satellite portfolios that usually consist of a strategic portfolio and a tactical portfolio. See
- February 3, 2014: Alternative Investment Funds & Diversified Portfolios
- December 2, 2013: Versatile Multiple Portfolio Construction
- July 15, 2013: Portfolio of Portfolios & Core Satellite Portfolios
- November 12, 2012: Multiple Portfolios As Another Diversification Dimension
In the following table, Harry Browne Permanent Portfolio Core Satellite is a core satellite portfolio that has half allocated in Harry Browne Permanent Portfolio and half in Vanguard ETFs Tactical Asset Allocation Moderate. One can certainly use our normal strategic portfolios (such as those mentioned in the above) instead of a permanent portfolio.
Portfolio Performance Comparison (as of 10/20/2014):
| Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|
| Harry Browne Permanent Portfolio Core Satellite | 4.1% | 4.4% | 6.0% | 7.4% | 7.9% | 0.86 |
| Harry Browne Permanent Portfolio | 6.3% | 5.1% | 3.1% | 6.3% | 7.2% | 0.86 |
| Vanguard ETFs Tactical Asset Allocation Moderate | 1.9% | 3.5% | 8.8% | 8.4% | 8.5% | 0.64 |
| VBINX (Vanguard Balanced Index Inv) | 4.3% | 7.8% | 12.5% | 10.4% | 7.1% | 0.5 |
Custom TAA portfolios mixed with some excellent special purpose balanced funds
We first mentioned My Alternative Hedge Fund in December 2, 2013: Versatile Multiple Portfolio Construction. The portfolio consists of the following components:
| Asset | Fund in this portfolio | Percentage |
|---|---|---|
| stocks | P_51098 (MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Most Aggressive) | 42% |
| bonds | P_46880 (Schwab Total Return Bond) | 28% |
| balanced | PRWCX (T. Rowe Price Capital Appreciation) | 10% |
| permanent | PRPFX (Permanent Portfolio) | 10% |
| risk_parity | ABRRX (Invesco Balanced-Risk Allc R) | 5% |
| conservative | BERIX (Berwyn Income) | 5% |
The advantage of such a portfolio is that various types of funds and portfolios behave differently in various market conditions, thus they tend to smooth out the portfolio behavior when put together.
Conservative no load mutual fund upgrade portfolios
These brokerage specific portfolios (see Conservative Allocation Fund Portfolios) choose a top ranked conservative fund to invest. Even though in the following table, their returns are not as good as the two excellent conservative funds (BERIX (Berwyn Income) and VWINX (Vanguard Wellesley Income Inv)), they nonetheless incurred lower maximum drawdowns during 2008 crisis:
Portfolio Performance Comparison (as of 10/20/2014):
| Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|
| Schwab Conservative Fund Upgrade | 0.8% | 2.8% | 5.6% | 5.5% | 5.9% | 0.93 |
| Fidelity Conservative Fund Upgrade | 3.4% | 4.5% | 5.1% | 5.7% | 6.3% | 1.01 |
| TDAmeritrade Conservative Fund Upgrade | 4.3% | 5.3% | 6.0% | 5.2% | 5.2% | 0.75 |
| ETrade Conservative Fund Upgrade | 2.4% | 4.8% | 6.8% | 6.6% | 7.0% | 1.17 |
| VWINX (Vanguard Wellesley Income Inv) | 4.7% | 7.3% | 9.6% | 9.1% | 7.1% | 0.92 |
| BERIX (Berwyn Income) | 1.0% | 3.6% | 9.3% | 7.9% | 7.3% | 1.08 |
To summarize, there are several ways for investors to construct a portfolio that can reduce fluctuation while still retaining buy and hold or strategic portfolio characteristic. Users who are interested in constructing such portfolios can use MyPlanIQ’s simulation platform and Static Portfolio features to research various alternatives.
Portfolio Review
Our asset allocation portfolios on Advanced Strategies have done relatively well so far in the current market turmoil.
| Strategy | Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR |
|---|---|---|---|---|---|---|
| Goldman Sachs Global Tactical Asset Allocation | P Relative Strength Trend Following Six Assets | 2.2% | 5.3% | 11.6% | 10.5% | 11.1% |
| Goldman Sachs Global Tactical Asset Allocation | P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds ETFs | 3.5% | 5.6% | 10.4% | 8.8% | |
| Doug Roberts Follow the Fed Strategy | P Doug Roberts Follow the Fed Add Treasury Note One Month Simple Constant Indicator | 10.1% | 9.6% | 7.5% | 9.9% | 9.8% |
| Momentum Scoring | P No Load Conservative Mutual Funds Upgrading Quarterly | 3.6% | 5.8% | 7.3% | 6.6% | 8.2% |
| Diversified Timing On Endowment Asset Allocation Model | P Diversified Timing On Endowment Asset Allocation Model SMA 10 Months With Long Treasury | 6.8% | 7.7% | 5.7% | 5.0% | 6.4% |
Looking ahead, we expect these portfolios will again shine in trouble time.
Market Overview
Stock markets have stabilized a little. However, as what we stated in the above, this might be just part of a step wise decline process as most of risk assets are in a clear downtrend. We have learned that it is important to stick to a sound and systematic strategy consistently instead of second guessing.
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.
Latest Articles
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- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
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- August 11, 2014: What To Do In Overvalued Stock Markets
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- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
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- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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