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, July 27, 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.

Global Balanced Portfolio Benchmarks

Since the publication of last week’s newsletter July 13, 2015: Pain in Tactical Portfolios, several users have pointed out the incompleteness of just merely comparing our Tactical Asset Allocation(TAA) based portfolios against S&P 500 stock index fund (VFINX (Vanguard (S&P 500) Index)). It would provide a more complete and balanced view by comparing with some global balanced portfolio benchmarks. 

The main reason to compare with a global balanced portfolio instead of a single stock index is that in practice, most investors invest in a diversified portfolio. This is true for both do it yourself investors or those who rely on investment advisors. For example, the two most popular ‘Robo’ advisors Wealthfront and Betterment have sizable exposures in international and emerging market stocks (see Faber’s studies here). Furthermore, Weathfront’s portfolios have exposure in REITs and commodities also. These are certainly the major asset classes we at MyPlanIQ have been using. 

Today, even in a retirement plan such as 401k or 403b, international stock funds are pretty much standard options. Many provide other investment options including emerging market stocks, Europe stocks and REITs. So it is again not uncommon for investors to have a global oriented portfolio. 

Furthermore, global oriented portfolios had done better than US centric portfolios from late 90s to 2007, mostly due to the out performance of emerging market stocks and the weakness of US dollar. It has been very much advocated as the benefit of diversification. 

In this newsletter, we look at two types of global balanced benchmarks. The first is just a simple straightforward equal weight portfolio. The second one is a common US centric allocation. For example, the following two portfolios have risk profile 33 (i.e. 33% should be allocated to bonds): 

Global Equal Weight Stock Bond Benchmark Portfolio allocation:

USStocks VFINX 22.4%
EuropeStocks VEURX 22.3%
PacificStocks VPACX 22.3%
USBonds VBMFX 33%

Global US Centric Stock Bond Benchmark Portfolio allocation:

USStocks VFINX 45%
EuropeStocks VEURX 14%
PacificStocks VPACX 8%
USBonds VBMFX 33%

In the first portfolio, after 33% is allocated to bonds, the rest 67% is evenly divided into the three stock funds. On the other hand, in the second US centric one, US stock fund VFINX has roughly 2x more allocation than the Europe and Pacific stocks combined. Most likely, your portfolios will be in between. For example, in the Betterment moderate portfolio (again, see here), its total allocation to US stocks is 31% vs. 30% of international and emerging market stocks combined) while in Wealthfront’s W60 model portfolio, it is 34% US stocks vs. 28% international and emerging market stocks combined. 

As a comparison, our SAA Optimal moderate portfolio such as Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate has 22% US stocks & 7% US REITs vs. 26% international and emerging market stocks combined. 

Readers should know that since US stocks have done remarkably better than international and emerging market stocks since 2009, the recent performance can be skewed heavily depending on the relative allocation in US stocks. Thus, our 2 times US stocks allocation in the US centric portfolio should serve as an upper bound for most global portfolios. 

We use the same TAA portfolio (as in the previous newsletter) P Relative Strength Trend Following Six Assets. The reason to use this portfolio is solely because it has longer back testing history than other portfolios such as P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds or our basic TAA portfolios like Six Core Asset ETFs Tactical Asset Allocation Moderate. In this portfolio, foreign stocks are diversified geographically into European and Pacific stocks instead of the more popular ones such as International Developed Country stocks and Emerging Market stocks. 

Comparing Global Stock Benchmarks

We construct three equal weight static portfolios and one US centric portfolio. All of these have risk profile 0, meaning they don’t have any allocation to bonds. The following shows how these portfolios are compared with the TAA portfolio:

Portfolio Performance Comparison (as of 7/17/2015):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since Inception Max. Drawdown
Global Equal Weight Stock Benchmark Portfolio 7.3% 3.3% 14.5% 11.6% 6.3% 7.5% 57.8%
Global Equal Weight Stock REITs Benchmark Portfolio 4.8% 4.3% 13.2% 12.6% 6.8% 7.6% 60.6%
Global Equal Weight Stock REITs Gold Benchmark Portfolio 3.0% 0.4% 8.5% 10.0% 8.0% 7.7% 47.5%
Global US Centric Stock Benchmark Portfolio 5.8% 6.9% 16.4% 14.3% 7.1% 9.0% 56.3%
P Relative Strength Trend Following Six Assets -0.8% -0.4% 10.9% 10.5% 10.3% 10.7% 17.3%

See year by year more detailed comparison >>

As usual, we can see that the TAA portfolio still out performed all of the global benchmarks in the last 10 year or since inception (1991, about 24 year) periods. However, in several periods including the last 5 years, it didn’t do as well as the US centric benchmark but has matched closely with other equal weight global portfolios. 

The other important parameter that several users suggested we should highlight is the maximum drawdown: the TAA portfolio had only 17% max. drawdown compared with the whopping 50-60% in all other global benchmark portfolios. 

Now, let’s look at closely how these portfolios have done in terms of year by year and rolling 5 year returns, just like what we did in the last newsletter: 


Circled are those years when trend following out performed global benchmark equal weight.

Looking at the rolling 5 year return distribution, one can still observe a similar pattern as in the previous newsletter: the US centric portfolio still out performed the trend following portfolio in terms of rolling 5 years from 1995 to 1999. However, compared with the equal weight portfolio, trend following had done better. In fact, in 1990s, trend following closely matched the equal weight one. Even since 2009, it has out performed the equal weight 3 out of 5 years. It actually did better than the equal weight one in 2014 in terms of the rolling 5 year performance.

What we can draw from the above comparison is that when comparing with a global balanced benchmark or portfolio, trend following portfolios or TAA portfolios matched closely with the benchmarks in bull markets (albeit still slightly lagged, but not by a big margin anymore) but excelled in bear markets. It thus delivers better overall returns but with 1/3 or so maximum loss (risk).

It is also clear that if an asset class (such as US stocks) performed best in an extended period (such as in 1990s and since 2009), a TAA portfolio will suffer from some obvious under performance in those years. Remember, TAA will never be able to out perform the best winner in a period when this winner was the best consistently. What it can do is to deliver a closely matched performance in those periods and then out performed in other periods when this ‘winning’ asset lagged. 

Comparing Global Balanced Benchmarks

Since our trend following portfolio delivered better returns with much less risk, we think it is interesting to construct global balanced portfolios that have about 33% allocated in bonds. These are more widely followed portfolios, lying between moderate and growth risk levels. 

Portfolio Performance Comparison (as of 7/17/2015):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since Inception Maximum Drawdown
Global Equal Weight Stock Bond Benchmark Portfolio 4.8% 2.7% 10.2% 8.9% 6.1% 7.4% 40.1%
Global Equal Weight Stock Bond REITs Benchmark Portfolio 3.1% 3.4% 9.3% 9.6% 6.5% 7.3% 40.9%
Global Equal Weight Stock Bond REITs Gold Benchmark Portfolio 1.9% 0.8% 6.1% 7.8% 7.1% 7.2% 32.3%
Global US Centric Stock Bond Benchmark Portfolio 3.8% 5.2% 11.6% 10.8% 6.6% 8.5% 39.2%
P Relative Strength Trend Following Six Assets -0.8% -0.4% 10.9% 10.5% 10.3% 10.7% 17.3%

See year by year more detailed comparison >>

We make the following observations: 

  • The all stock portfolios didn’t do much better than their balanced counter parts, even if we look at the whole 20 something year period since their inceptions. 
  • Even though maximum drawdowns for these balanced portfolios have been reduced, but they are still way too large for a moderate or conservative investor. The 30 to 40% maximum drawdown is a harsh psychological barrier for many. 
  • The balanced benchmarks still did worse than the relative strength one, both in terms of returns and maximum drawdown. In fact, the relative strength portfolio has about a similar standard deviation (SD) as these balanced benchmarks (not shown in the table, please click the link above to see these data). 

Overall, what we can say is that TAA portfolios are under performing right now. But when comparing with a global portfolio, their under performance is not as big as comparing with a single US index, or so called headline benchmark. 

Even though there is no a single agreed upon global benchmark portfolio, we encourage our readers to pick some as their benchmarks. These can be lazy portfolios such as those mentioned in our Lazy Portfolios page, or our SAA equal weight portfolios, or our SAA optimal portfolios or the portfolios we construct above. Keeping a balanced long term view is an essential trait to succeed in investing. 

Market Overview

Markets seem to have had a major relief after the resolution of the Greek debt issue. For now, S&P 500 and Nasdaq are both in record territory. Emerging market stocks and REITs, however, are still in negative trends. Bonds are in general in some pressure, they have year to date negative return so far. 

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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