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, October 5, 2015. You can also find the re-balance calendar for 2015 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.

Core Satellite Portfolios In Market Turmoil

In the last week’s newsletter, we showed there are a few of ways to utilize a market downturn to reposition or start a new portfolio, specifically for MyPlanIQ’s  Strategic Asset Allocation (SAA) or Tactical Asset Allocation(TAA) portfolios. In this newsletter, we continue our discussion for another type of portfolios: core satellite portfolios.  As markets are languishing, we believe this discussion is still pertinent to many users. 

Regular readers should have known that we are an advocate of core satellite portfolios. A core satellite portfolio consists of core subportfolios and satellite subportfolios. A core (sub)portfolio is a strategic portfolio that can be SAA portfolios or static (lazy) portfolios such as Permanent Portfolios (see, for example, Lazy Portfolios). A satellite (sub)portfolio is a tactical portfolio that can be  TAA or other advanced portfolios that can dynamically adjust their risk exposure. 

Typical Core Satellite Portfolios

Let’s first review some typical core satellite portfolios. 

The most straightforward one is a combo of a SAA and a TAA portfolio. The following table shows a typical portfolio:

Portfolio Performance Comparison (as of 9/11/2015):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Fidelity Core Mutual Funds SAA TAA Combo Moderate -1.6% -2.8% 7.2% 8.2% 8.9% 0.87
Fidelity Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 0.9% -0.3% 7.5% 9.1% 6.9% 0.49
Fidelity Core Mutual Funds Tactical Asset Allocation Moderate -3.3% -4.5% 7.0% 7.6% 10.2% 1
VBINX (Vanguard Balanced Index Inv) -1.6% 1.1% 8.6% 10.0% 6.4% 0.46
VFINX (Vanguard 500 Index Investor) -3.4% 0.1% 13.2% 14.3% 6.8% 0.29

See detailed year by year comparison >>

Fidelity Core Mutual Funds SAA TAA Combo Moderate consists of 40% SAA Moderate portfolio and 60% TAA moderate portfolio. In the above table, one can see that its portfolio sits between the core SAA and the core TAA. Doing so can smooth out some anxiety in a bull market (when an SAA portfolio usually outperforms a TAA portfolio). 

There are many ways to tweak a core satellite portfolio by focusing on the core part of the portfolio or the satellite part of the portfolio. For the core part, in addition to a traditional MyPlanIQ’s type SAA, one can utilize some well known lazy portfolios (see, for example, Lazy Portfoliospage) or some other ‘alternative’ portfolios such as permanent portfolios (see, for example, July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework). One can further use multiple SAA portfolios to construct the core part. 

A more illustrative example is My Alternative Hedge Fund portfolio that consists of the following:

Asset Fund in this portfolio Percentage
stocks P_51098 (MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Most Aggressive) 42%
bonds P_46880 (Schwab Total Return Bond) 28%
balanced PRWCX (T. Rowe Price Capital Appreciation) 10%
permanent PRPFX (Permanent Portfolio) 10%
risk_parity ABRRX (Invesco Balanced-Risk Allc R) 5%
conservative BERIX (Berwyn Income) 5%

Regular readers should be able to recall we reviewed this portfolio several times in a year. 

For the satellite part, in addition to the typical MyPlanIQ TAA portfolios, one can also use those listed on Advanced Strategies that can be moving average based timing portfolios, seasonality based portfolios or even long term valuation based portfolios (such as Buffett’s the ratio of total stock market capitalization over total GNP or Shiller’s CAPE). Again, one can be creative and not be limited to just a single dynamic portfolio. 

Core Satellite Adjustment In Current Situation

A core satellite portfolio alleviate both steep loss from SAA portfolio or uneven loss/fluctuation from TAA portfolio rebalances. Similar to what we discussed in the previous newsletter, current situation presents a good example: at the moment, many tactical portfolios are calling for no or little risk exposure. If one were to invest 100% in such a portfolio, she/he has a legitimate concern that what if stocks have a strong rebound and then further rise for quite a while, a tactical portfolio would miss out some of the profit before it catches the trend again.  This can become very painful when stock markets start to fluctuate again. However, if the investor has some capital invested in a buy and hold strategic portfolio (the core part), at least part of the missing profit can be captured. There are many other scenarios that present benefits of adopting core satellite portfolios. 

If you are fully in tactical portfolios and would like to have a portion convert to an SAA portfolio, it is a good time to start to pay attention or take actions. You can adopt the multiple chunk/DCA approach outlined in the previous newsletter. Similarly, you can do the same when you have a new chunk of money to invest or you just want to start a core satellite portfolio based investment. 

If you are fully in strategic portfolios would like to have a portion convert to a TAA portfolio, it is a time to pare down your risk exposure. As stated above, it is not too late to reduce risk exposure at this level of the market. Given the current global economy condition and market condition, we are certainly very cautious. It is also a good time to start a core satellite investment by reducing your risk exposure (i.e. selling some stocks). 

To summarize, when stocks experience a downturn or correction, regardless what portfolios you have been using, it is a good time to start a core satellite portfolio. 

Market Overview

The upcoming Federal Reserve policy meeting this week will certainly add a big complication to an already trickier situation: a slow down economy and a reasonably overvalued and tired stock market. Both the world’s number 1 and number 2 economies (US and China) are having uncertainties in the near term. Tread carefully!

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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