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, April 13, 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.

More About Brokerage Specific Core Mutual Fund Portfolios

We mentioned several brokerage specific mutual fund portfolios in the previous newsletter March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios. This caused several confusions that we would like to clarify:

  • Confusion 1: “We are moving away from ETFs”: In fact, the opposite is true. We are an advocate of low cost ETFs based portfolios. The portfolios mentioned in the previous newsletter are meant for investors who prefer using mutual funds instead of ETFs. But that does not mean we are abandoning ETFs. 
  • Confusion 2: “You will still support the brokerage selected mutual fund portfolios, together with the core mutual fund portfolios”: Our intention is to transition to core mutual fund only portfolios. At the moment, we are still getting more feedback from our users. Furthermore, even after the transition,  expert users can still maintain the plans themselves. We will still have these plans and their portfolios available but just not actively maintaining them officially. 
Please actively give us feedback by replying to Brokerage Specific Core Mutual Funds Plans: Suggestions & Opinions in our forum

Investment Arithmetic for Long Term Investments

Noises and misconceptions are abundant in popular financial media. To make convincing and simple enough arguments for those who are impatient, experts usually resort to sound bites to teach masses. For example, when investors are discussing an overvalued stock market, an often cited statement is “I’m a long term investor, so I’ll simply holding the investments”. 

For most people, this statement implies that if your investments are long term, you should care less about where the markets are right now. Whether it is overvalued or undervalued, if your investment horizon is ‘long’ enough, current market conditions do not really affect the outcome after a long time. 

Is this true? 

The answer is a resounding no. 

First, as stated in our previous newsletter June 9, 2014: The Arithmetic of Investment Mistakes, when you invest at a peak of the market and then subsequently the markets goes down 50%, compared with another portfolio that only begins to invest at the market bottom, your portfolio will be forever 50% (half) of the second portfolio, assuming both are using the same investment strategy. This is true regardless of how many years you are going to invest. 

The other more subtle point is about the annual growth rate of your portfolio. Many might think that even though I start to invest in a peak, if I hold the investment long enough, my average return will eventually converge (or roughly equal) to the long term average market return. 

This is also not true. Let’s look at the following chart:

In the above chart, the X-axis indicates the correction percentage after the investment. The investment is held for 20 years and assumed to grow 10% annually (a normally assumed long term stock market average annual return) after the correction. 

One can see that if the market goes through a 50% correction after the investment, the investment will have only 6.3% annual return, compared with the 10% return if one would invest after the correction. Similarly, if the investment goes through 30% correction, after 20 years, you will only achieve 8.1% annualized return, a far cry from 10%.

How about if you hold the investment for even longer? Let’s look at the following chart: 

So even after holding for 40 years, you would only achieve 8.1% annual return, 1.9% less than 10%. You would need to hold the investment for 80 years to achieve 9.1% annual return. Similarly, if the correction is 30%, after 40 years, you would achieve 9% annual return (not shown in the above chart). 

The takeaway from the above data is that it matters at what market condition you invest, regardless how long you are going to hold your investment. In fact, it matters a lot. 

Certainly, one could argue that there is no way to predict markets, so the blindly investing at any point might be a reasonable way to do so, so long you hold the investment for a long time. However, as demonstrated above, it is certainly true that such a long time can be really long to achieve a reasonable return. Furthermore, as we stated numerously times, though it is hard to predict market movement in a short time, predicting stock market return for a long term such as more than 10 years is reasonably easy and more accurate. Intuitively, markets have a long term growth trend, so when they deviate from the trend line significantly (such as way above or way below), they will eventually revert to their means.

For example, currently, S&P 500 total return (including dividend reinvestment) is estimated to deliver 1-2% annually for the next 10 years. It is definitely overvalued. Put it another way, it is hard to believe that at the current 2100 level, S&P 500 won’t have a correction below 2000 or even lower. 

The magic of compounding

 The Wall Street Journal published an article this weekend Route to an $8 Million Portfolio Started With Frugal Living. It reported that Mr. Ronald Read left his $8 million portfolio after he passed away recently. As a maintenance worker and janitor at J.C. Penney and before that, a gas station service man, Mr. Read has accumulated this fortune through frugal living and astute stock investing. As fascinating as it sounds, the key for Mr. Read to achieve this is through long term consistent saving and investing. 

Let’s first understand how compounding work. 

To do so, one should know the famous Rule of 72: to roughly double your money, it will take 72/percentage of growth number of periods. For example, if the investment grows at 10% per year, it would take 72/10=7.2 years to double the money. That would mean in 42 years, at 10% return, you would roughly accumulate 42/7.2=6 or 2^6 (2 to power 6) = 64 times money. Put it another way, Mr. Read would just need $125K at age 50 to begin with to accumulate the $8 million portfolio. 

The above assumes there is no tax paid. For a 50 year old American, it is fairly common to have accumulated a $125k retirement account either through work place retirement 401k plan, an IRA or even a low cost variable annuity (such as Vanguard personal annuity). Many people do have the means to achieve what Mr. Read has done, if they can put the money aside and invest consistently. 

Certainly, if you invest in a taxable account, assuming paying 30% tax annually, you would need 72/7% or about 10 years to double your money. On the other hand, since you are paying tax every year, you would only need to accumulate the after tax amount of $8 million dollars which, at 30% tax, would be $5.6 million. That implies you need $350k at age 50 in a taxable account to accumulate $5.6 million at age 90 or so. Again, this is not entirely impossible. 

The above examples are all about the one off investment at age 50. For many young people, saving and investing consistently can definitely result in a large wealth. Whether it is the same as Mr. Read’s or not, the point here is that this is a reasonable and doable task. 

For some more astounding compounding numbers, just play with a retirement calculator such as ours

Market Overview

S&P 500 continued to recover, approaching its all time high. Furthermore, international stocks (European and Japan) have risen much more this year: 

Ticker/Portfolio Name 1 Week
1Yr AR
DBEF (Deutsche X-trackers MSCI EAFE Hedged Eq) 2.0% 13.0% 21.2%
EFA (iShares MSCI EAFE) 4.1% 7.9% 4.0%
HEDJ (WisdomTree Europe Hedged Equity ETF) -1.4% 19.0% 28.2%
VGK (Vanguard FTSE Europe ETF) 4.6% 6.6% -0.4%
SPY (SPDR S&P 500 ETF) 2.2% 2.4% 14.3%

See up to date detailed comparison >>


Again, removing the currency impact, equities in Europe have done well. In general, with Euro zone doing the similar quantitative easing right now, their risk assets are performing just like how the US stocks did in the past. We will see whether the trend can sustain or not. 

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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