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.

Fixed Income or Cash

Many popular investment strategies usually pay more attention to risk assets than fixed income assets, especially cash. Many investors treat cash as a boring asset and thus simply let their money lying around there, picking up whatever interests paid by a brokerage or a bank. However, utilizing cash or fixed income (bond) assets smartly can make a very material difference on investment returns without incurring much additional risk. 

The following portfolio P SMA 200d VFINX Total Return Bond As Cash Monthly is similar to P SMA 200d VFINX Monthly that was mentioned in our newsletter October 27, 2014: Investment Loss, Mistakes And Market Cycles. It uses 200 days simple moving average (SMA) of S&P 500 index total return (using Vanguard 500 index fund VFINX) as a signal: when VFINX is above its 200 day moving average, it buys or holds VFINX, otherwise, it buys ‘cash’. This buy or sell decision is tested once a month, on the last trading day of a month. The difference here is that when it buys ‘cash’, it actually switches to Schwab Total Return Bond, a total return bond portfolio that one can find on page Fixed Income Bond Fund Portfolios (for total return bond fund portfolios, see for example  June 3, 2013: Total Return Bond Fund Portfolios For Major Brokerages). 

Portfolio Performance Comparison (as of 11/10/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe Since 1/2/2001
P SMA 200d VFINX Total Return Bond As Cash Monthly 12.0% 17.3% 19.8% 15.1% 13.1% 0.95 12.8%
P SMA 200d VFINX Monthly 12.0% 17.3% 19.7% 13.4% 11.7% 0.87 10.1%
VFINX (Vanguard 500 Index Investor) 12.0% 17.3% 19.8% 16.0% 7.9% 0.33 5.3%
VBINX (Vanguard Balanced Index Inv) 8.5% 11.6% 12.6% 11.6% 7.2% 0.51 6.1%

More detailed comparison >>

In the last 1 and 3 years, this portfolio didn’t improve much over  P SMA 200d VFINX Monthly, which uses CASH (represented with 3 month T-Bill interest rate). The reason is because there hasn’t been much switching in the last 3 years. Moving beyond to 10 year time frame, one can see a major improvement: 13.1% vs. 11.7%, a 1.4% difference with higher Sharpe ratio too. This is because there was a substantial period from 2008 to 2009 that the portfolios went to ‘cash’. 

If we extend the period to 1/2/2001, that is the start date for the total return bond portfolio Schwab Total Return Bond, we see 2.7% difference (12.8% vs. 10.1%) in the annualized returns for the two moving average portfolios. The testing period now covers almost two bear markets: the technology bubble from 2000 to 2002 and 2008 financial bubble. 

The key finding here is that whatever used for ‘cash’ makes a meaningful or substantial difference. Instead of going to cash or money market when a risk asset is in a downtrend, investing in a total return bond fund that is doing well at that time can boost returns. 

Improved Diversified Timing Asset Allocation Portfolio

P Diversified Timing On Endowment Asset Allocation Model SMA 10 Months With Long Treasury was first mentiond by Meb Faber as an idea for his global tactical asset allocation concept. What the portfolio does is to allocate 20% each to US stocks, international stocks, commodities, REITs and fixed income (long term treasury bonds). However, each of these allocations is controlled by a 10 month moving average so that if an asset index falls below its 10 month moving average, the allocation should go to cash. 

The problem with the above approach is that many times, some of assets can be in a long period of downtrend, resulting in cash holding for quite some time for that part of the portfolio. For example, at the moment, 40% of the portfolio is in cash due to the weakness in international stocks and commodities. In fact, in the last 2 or 3 years, the portfolio has 40 to 60% in cash. The substantial cash holding might affect the performance seriously. But how serious?

The following static  portfolio P Diversified Timing Asset Allocation Portfolio With Total Return Bonds allocates 20% each to a 200 days moving average portfolio that uses total return bond portfolio as cash substitute.  We remind users of the static portfolio feature, which can be accessed from your dashboard for free. 

Asset Fund in this portfolio Percentage
USStocks P_61056 (P SMA 200d VFINX Total Return Bond As Cash Monthly) 20%
IntlStocks P_61057 (P SMA 200d VGTSX Total Return Bond As Cash Monthly) 20%
REITs P_61058 (P SMA 200d VGSIX Total Return Bond As Cash Monthly) 20%
Commodities P_61059 (P SMA 200d QRAAX Total Return Bond As Cash Monthly) 20%
LongTermTreasuryBonds P_61060 (P SMA 200d VUSTX Total Return Bond As Cash Monthly) 20%

This new portfolio compares very favorably with the one that uses cash: 

Portfolio Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Diversified Timing Asset Allocation Portfolio With Total Return Bonds 8.4% 10.4% 7.2% 7.6% 8.9% 0.84
P Diversified Timing On Endowment Asset Allocation Model SMA 10 Months With Long Treasury 8.2% 10.0% 6.3% 5.3% 6.5% 0.65

If you look at the year by year comparison, you will also find out the portfolio has also smoothed out year by year portfolio returns with less number of losing years. The only caveat with this portfolio: it lost -7% in 2008, compared with -1.2% loss in the one using cash only. 

Readers are encouraged to construct their own static portfolios with different weights/allocations. By putting cash to be in more productive fixed income (bond) funds instead of cash, one can alleviate ‘sitting on cash’ pain in a market timing portfolio. 

The conclusion here is that, using total return bond fund portfolio as cash substitute in many portfolios can boost returns substantially. The concept can be applied to many other portfolios such as Tactical Asset Allocation(TAA) portfolios. 

Portfolio Review

The three long term timing portfolios on Advanced Strategies have gone to cash for a while now, due to the  substantial overvalued US stock markets (see Market Indicators):

Strategy Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
Warren Buffett Total Stock Market Value to GNP Ratio Strategy P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy 0.0% 0.0% 11.9% 10.6% 10.2%
Shiller Cyclically Adjusted PE 10 Stock Market Timing Strategy P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly 0.0% 1.6% 14.8% 12.3% 11.0%
Hussman Peak PE Market Timing Strategy P Hussman Peak PE SO SU Market Timing Strategy Weekly 0.0% 0.0% 13.6% 11.6% 10.4%

Cash substitute can be used for these portfolios. Right now, for example, is a perfect example period that instead of getting 0.1% cash interest, one can enjoy a very competitive return in total return portfolios that have returned over 5% year to date. 

Market Overview

Markets are again back to elevated levels for US stocks, with all other risk assets lagging. We again caution that such a state can’t be permanent and will be resolved one way or the other. So far Market participants have adopted a risk on attitude. For us, we believe risk is again heightened and  a proper risk management and a consistent process are essential to navigate through this period. 

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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