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, February 2, 2015. 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.

When Forecast Fails

2014 is by no means a non-eventful year. Let’s first look at the returns of major asset classes: 

It is a human nature to try to understand and control our destiny. Forecasting is an inherent part of our human DNA. Let’s review what many pundits/experts predicted at the earlier of 2014: 

  • US stocks: this turns out the least surprising for many bullish analysts. In fact, for man bullish forecasters, many predictions turned out to be less aggressive. However, for cautious (us included) or bearish forecasters, 2014 turned out to be yet another disappointing year. The US stock market defied so many naysayers. 
  • International stocks: who could have predicted yet another lackluster year for European stocks? In fact, as we speak right now, Euro zone is again in trouble. 
  • Emerging market stocks: we remember many reputable firms including PIMCO favored emerging market stocks, coming into 2014. This was another year that emerging market economies went through rebalancing. 
  • US bonds/Treasuries: this was one of the biggest surprises. Coming to 2014, there were so many bearish calls. The consensus was that 10 year Treasury bond yield will be above 3%, instead, it closed close to 2%. A surefire was a misfire!
  • REITs: another big surprise! Its 26%+ return in 2014 didn’t cause many to take notice of. Unlike many, we believe REITs is a major asset class and that carried our portfolios in last year (for those plans that have this asset as a candidate asset). 
  • US dollars: again, for many doomsayers of US dollars, its strength was remarkable. 
  • Gold: remember how many people had predicted that gold would bottom out in 2014. It turned out that it was a roller coaster year for this asset. A dramatic drop followed a dramatic rise earlier in the year. gold miner stocks did even worse, reaching to 2008-2009 lows and even lower. 
  • Crude oil: who could’ve predict the vertical drop at the year end? The effect of $50 dollar or even lower oil is still to be unfolded. 

At any rate, it is extremely hard to predict the future. This has been proven again and again. 

What to do when forecast fails?

Unfortunately, we also saw again and again that many investors, professional or amateur alike, bet on their forecasts and make a wager. For them, if their forecast and bet turn out to be correct, they will reap a big reward. However, they often forget about the other side of the coin, or at least they tend to avoid this until it hits them: what happens when the forecast fails? 

Again, for us, we realize the following:

  • It is futile to rely on an accurate forecast.
  • What is more important is to deal with the situation if our forecast turns out to be incorrect? Would that damage our portfolios to the extent that it is hard to recover? Remember The Arithmetic of Investment Mistakes? It takes 100% return to recover a 50% loss. The asymmetric nature of loss and win should convince anyone to place risk as the very first factor to consider in investing, not the returns!

We are very disheartened to hear that some of our readers have been hurt some ‘spectacular’ funds like Good Harbor Tactical (GHUAX) that lost a whopping 21% in 2014. 

So to understand what happens when one’s forecast fails is the foremost factor when you are contemplating investing in a fund or a portfolio (ours included) . We shall remember Warren Buffett’s rules of investing: 

  • Rule No. 1: Never lose money
  • Rule No. 2: Don’t forget rule No. 1

Diversification and Tactical

Asset allocation or diversification and being tactical in a balanced portfolio are the keys to help us to alleviate our incapability of forecasting. As it turned out, 2014 was a year that didn’t favor much on global diversification. But even so, our Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA) had done as expected: eking out a small gain. 

The following table shows how global diversified portfolios did in 2014: 

Portfolio Performance Comparison (as of 1/2/2015):

Ticker/Portfolio Name 2014 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate 1.7% 2.7% 5.6% 5.8% 5.8% 0.37
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 4.4% 5.2% 7.9% 7.2% 5.7% 0.36
Aronson Original 3.7% 4.3% 6.8% 5.7% 4.3% 0.39
7Twelve Original Portfolio 2.5% 3.4% 7.9% 7.3%    
Fund Advice Ultimate Buy and Hold Lazy Portfolio 3.2% 4.0% 7.4% 6.7% 5.9% 0.39
Scott Burn`s AssetBuilder DFA Model Portfolio 09 0.0% 0.6% 5.6% 4.8%    

See detailed year by year comparison >>

These global diversified portfolios certainly didn’t do as well as those US stocks or assets centric portfolios: 

Portfolio Performance Comparison (as of 1/5/2015):

Ticker/Portfolio Name 2014 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Moderate 3.9% 5.2% 8.3% 6.9% 10.4% 0.93
VFINX (Vanguard 500 Index Investor) 12.9% 11.8% 19.3% 14.7% 7.3% 0.32
VBINX (Vanguard Balanced Index Inv) 9.2% 8.8% 12.5% 10.9% 6.8% 0.49

On the other hand, our tactical portfolios did what were expected. 

Finally, we caution that performance of many of our portfolios and funds has been skewed lower because of year end dividend and capital distribution of funds. They will be updated once we have obtained the data. 

Market Overview

The new year has not been kind to risk assets. US stocks promptly lost over 3% in the last one week. Other than US REITs, we are seeing a risk off retreat across the board. In the meantime, long term Treasury bonds spiked up. With crude oil price continuing to crash, risk assets including high yield bonds and other stocks are at an ominous start. However, knowing full well that we can not rely on our subjective views, we will rely on our systematic strategies to guide us through. 

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

Enjoy Newsletter

How can we improve this newsletter? Please take our survey 

–Thanks to those who have already contributed — we appreciate it.

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.