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, June 22, 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.

Because of the long weekend holiday, this newsletter has been delayed. We will resume our regular Tuesday morning publishing schedule next week. 

Cash, Bonds and Stocks In A Rising Rate Environment

In this newsletter, we  continue our understanding on how cash, bonds and stocks have behaved in a secular long rising rate environment. Previously, we discussed long term bond behavior in the two newsletters: 

It is important to understand how the returns of these assets in the period from 1940-1982 (or 1949 to 1982), a secular long period when interest rates rose, as can be seen by the chart we are familiar with: 

Cash, Bonds & Stocks Returns

In general, one can use 90 days Treasury Bills (T-Bill) as the proxy of cash. T-Bond represents 10 year Treasury note. Using the same NYU Stern’s data, we calculated the following returns: 

  T-Bill (Cash) T-Bond S&P 500
1928-2014 (All Period) 3.49% 5.00% 9.60%
1949-1982 (Rising Rate) 4.65% 3.66% 11.43%
1940-1982 (Flat & Rising Rate) 3.74% 3.37% 10.59%

From 1940 to 1949, interest rates were relatively low and flat. Even though it might or might not represent the current environment, it serves as a possible reference. 

The data clearly show that in the rising rate period, cash returned better than all the period (from 1928-2014) as well as the flat & rising period. On the other hand, long term bond (T-bond) did worse than cash in both rising and flat & rising periods, conforming to the conventional wisdom that bonds with long maturity will suffer when rates are rising. It is also true it returned less than the whole period. One thing interesting though T-bond did better in the pure rising rate period (1949-1982) than in the both flat & rising period that includes the rising rate period. This indicated that T-Bond did worse in a flat low interest rate environment. 

Looking at stock returns represented by S&P 500, we also find that in the rising period, it did much better than in the whole period or in the flat & rising period. This too some extent seems to confirm the popular belief that in a rising rate environment, stocks tended to do better while in the meantime, bonds suffered. 

We also want to confirm the above findings in corporate bonds. The following chart from a Deutsche Bank document shows the corporate bonds’ returns:


The highlighted portions clearly show that in the period, corporate bonds also did worse than other periods. Notice that real returns represent returns over inflation rate. 

Rising rate environments

Before we jump to the conclusion to ditch bonds, however, we have to ask ourselves a critical question: are we in a similar period as that from 1940-1982 or even from 1949-1982? 

The main similarity is that we are at a historical low interest rate environment, probably at the tail end of the long declining rate period. The key differences: 

  • In the 1940-1982 or even 1949-1982 periods, the world was in the World War II and then in a path to recover. After the WWII, the US solidified its position as the world leading economic power and had benefited greatly from economic recover activities in Europe and Japan. Today, globalization has propelled many poor countries to become some emerging economic powers (China and India, for example). 
  • In that period, the US was the manufacturing center in the world. The goods made in USA were exported to other countries. Today, the country has become service and consumption oriented. On the positive side, we still have the leading edge technology and intellectual properties, even though other countries are rapidly catching up. 
  • Because of the above, economy had experienced a fast growth and in general, stocks benefited. Today, with so many other economic regions are competing (globalization), it is hard to imagine the country will go back to a high growth mode soon. 
  • In that period, after the Great Depression, the financial system has been structurally reformed while today, after the Great Recession, we still have and incur too much debt. 

Maybe we will continue to be in a period similar to that in Japan: a long period of low interest rate with anemic economic growth or maybe we will be in a period of stagnation, meandering in a still low interest rate environment for a long time, in order to deleverage and and and then rebuild or upgrade our infrastructure. In such a period, even though we will experience a few interest rate hikes, the interest rates can not go too high. In this sense, we agree with the recent speech by Fed’s Stanley Fischer that states investors should not put too much weight into the first rate hike, instead, should focus on how rates are going in a longer period of time. 

To summarize, interest rates are at the bottom. Even though the history from 1940-1982 can shed light on the upcoming decade, one should not automatically assume that we will be in a similar period. Furthermore, even in a period of rising rates, there is no guarantee that stocks will do better than other times. In the next newsletter, we will discuss this bond ditching issue in more details. 

Portfolio Review

Our strategic asset allocation (SAA) portfolios have done better that US centric balance fund index VBINX year to date, as they all benefit from the strength of international and emerging market stocks: 

Portfolio Performance Comparison (as of 5/22/2015):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 3.9% 4.5% 8.5% 8.3% 6.1% 0.4
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate 3.7% 4.7% 8.2% 8.7% 7.8% 0.55
Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate 3.3% 4.1% 8.3% 9.0% 6.9% 0.49
VBINX (Vanguard Balanced Index Inv) 2.8% 9.7% 12.5% 11.5% 7.3% 0.53

Market Overview

As we are now approaching the end of May, the ‘sell in May and go away’ adage reminds us that there might be more trouble for stocks ahead in the summer. US, international and emerging market stocks are all having difficulty to break out at the moment. 

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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