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 2014 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.

Asset trend review

We are now entering the post Halloween period, a period traditionally favorable to stocks. The sell in May and come back after Halloween’s strategy (see STS Seasonal Timing Using VFINX) has shown such an observation does have a statistical significance. It is thus a time for us to review the trends. 

As U.S. stock market embarked on a vertical recovery, major asset trends have changed again (see Asset Trends & Correlation): 

Asset Class 1 Weeks 4 Weeks 13 Weeks 26 Weeks 52 Weeks Trend Score
US REITs 2.6% 9.9% 6.9% 10.6% 19.2% 9.8%
US Stocks 3.0% 3.1% 4.3% 7.5% 15.3% 6.6%
Long Term Treasuries -0.6% 1.0% 4.2% 7.0% 13.7% 5.1%
Global Real Estate 4.2% 5.3% -2.1% 4.3% 3.8% 3.1%
High Yield Bonds 0.2% 0.7% 1.8% 1.7% 5.8% 2.0%
Emerging Mkt Stocks 3.8% 0.4% -3.4% 5.6% 3.6% 2.0%
National Muni Interm -0.3% 0.0% 1.3% 2.4% 6.1% 1.9%
US Bonds -0.4% 0.2% 0.8% 1.8% 4.1% 1.3%
Cash 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Intl Stocks 2.2% 0.0% -5.1% -3.2% 0.5% -1.1%
Intl Bonds -2.3% -1.5% -5.5% -5.4% -3.2% -3.6%
Gold -5.0% -3.3% -9.5% -11.1% -11.6% -8.1%
Commodities 0.1% -4.3% -12.6% -15.6% -12.6% -9.0%

This is a familiar trend table that has been here for the most part of this year. What we can see is that, other than US asset classes, all other assets including international developed market stocks, emerging market stocks and commodities have been really weak. A notable trend here is that gold finally broke down after the ending of QE (Quantitative Easing) be the Federal Reserve and now it is firmly in a bear market territory. 

This recovery has several notable divergences: first, high yield bonds have recovered much less than US stocks, indicating an anemic enthusiasm from fixed income investors. Also, if we look at several styles of stocks:

 we see that other than S&P 500 (SPY), both mid cap stock index (MDY) and small cap stock index (IWM) have not recovered to the previous highs. 

In a word, we are still seeing a one trick pony in a global picture and even among domestic stocks, only large stocks continue to pull ahead strongly. So even though the US stocks as a whole possess a strong up trend, it is not an all clear signal. 


We continue to hold the following beliefs: 

  • US economy is the best and the cleanest among all the regions. There are two major concerns, however. First, the US stock market valuation has been elevated, way above the historical norm. In fact, Shiller’s Cyclically Adjusted Pirce Earnings ratio  is now 27.04), 1.63 over its long term average. Or put it another way, US stock market is 63% overvalued. See Market Indicators for more details. Furthermore, regardless how well the economy has recovered, we are still not seeing a fundamental structural reform in key areas such as  infrastructure investment, education and manufacturing. We find the interview with FPA fund manager Robert Rodriguez is an interesting read, his strong ideological view point notwithstanding. 
  • European economy is on the verge of a recession and is suffering from deflation pressure. 
  • Emerging markets, especially the larger part that is influenced by Chinese economy, is in a mixed or stagnant state. The structural reform and rebalance needed for these economies will be hard and slow. Regardless how it goes, it is hard to imagine a booming capital market for now, especially now that the US QE has ended and the capital flow will reverse eventually. 

It is therefore important to manage investment risk in the current environment. Diversification and dynamically responding to market conditions are the keys to achieve a balance risk managed portfolio. 

My alternative hedge fund with traditional balance fund

As much as we advocate  Tactical Asset Allocation (TAA), we understand its deficiencies (see, for example,  July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly). We thus advocate mixing Strategic Asset Allocation (SAA) with TAA to form a core satellite composite portfolio.  Such a composite portfolio balances out fluctuations for each style of portfolio. 

My Alternative Hedge Fund has drawn quite some interests from users (see October 20, 2014: Strategic Portfolios With Managed Volatility). However, many users complained that some of those balance funds are not either not available in a brokerage or closed to new investors. As an exercise, we present an even simpler portfolio that uses the standard 60%/40% balance index fund Vanguard VBINX as follows: 

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%
traditional_balance VBINX (Vanguard Balanced Index Inv) 30%

This portfolio My Alternative Hedge Fund With Index Fund has compared well against the others, not only in returns but also in terms of risk such as Maximum drawdown in the last 10 years. 

Portfolio Performance Comparison (as of 11/3/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe Max Drawdown
My Alternative Hedge Fund With Index Fund 4.5% 7.5% 10.2% 10.5% 10.4% 0.99 18%
My Alternative Hedge Fund 3.6% 6.1% 8.8% 9.8%     N/A
VBINX (Vanguard Balanced Index Inv) 7.9% 11.0% 12.5% 11.9% 7.3% 0.53 36%
VFINX (Vanguard 500 Index Investor) 10.8% 16.7% 19.6% 16.5% 8.1% 0.35 55.3%
MALOX (BlackRock Global Allocation Instl) 2.4% 5.3% 8.1% 7.6% 8.3% 0.65 33%
PRWCX (T. Rowe Price Capital Appreciation) 10.1% 14.0% 16.0% 14.0% 9.2% 0.58 42%

See year by year comparison details >>


Note 1: many users are not aware that our static portfolio feature exists (also free to anyone). It allows you to build the above portfolios with funds or portfolios of your choice. You can invoke this feature by going to your dashboard. 

Note 2: we often present portfolio ideas, most of them are for the purpose of illustration or research. In general, we support SAA and TAA portfolios and any portfolio appearing on our web pages. If you would like to see other portfolios supported, please send us email to let us know. 

Market Overview

As reviewed above, markets again recovered with several noticeable divergence.  Regardless, we will let our pre-defined strategies work through it.

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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