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.

Quest For The Best Investment Strategy

It’s our human nature to constantly look for a better solution. In investing, it’s thus very understandable that investors are pondering and switching to new ways of investing. Since we started MyPlanIQ service in 2009, we have observed a striking behavior: when one of our strategies such as Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA) lagged behind and the other one was doing well, many investors inquired and changed to the other strategy. When both strategies lagged behind US market index such as S&P 500, some of them bailed and looked for a greener pasture. 

At the start of the service in 2009-2010, investors, fresh out of one of the biggest financial crises in history, were looking for something that can manage risk, our TAA thus attracted many users. However, as time went, SAA started to out perform, investors switched. In the last two years, US stock market index has been the sole winner, some just simply gave up and went for individual US stock or sector investing. 

By doing so, investors essentially abandoned the very first principle in portfolio management: diversification. By solely investing in US stocks, not only investors gave up global diversification, but also abandoned risk management. At some point last year, because of the historical low bond yield, even financial media started to tout a bond replacement: dividend yield stocks. For them, history was quickly forgotten, dividend stocks were safer than bonds, US stocks would just keep rising. 

In the meantime, we also noticed that some users started to explore momentum based individual stock investing. We even received a user’s email proclaiming that he has been using another service and had produced xxx returns, far out pacing the pitiful returns of our portfolios.  

Switching an investment strategy in real time is dangerous

However, simply picking an investment strategy that has performed well in real time without a systematic way is dangerous. In fact, this is probably the most often made mistake by individual investors. Many investors were attracted to a particular investment strategy, being buy and hold or tactical (dynamic), without doing enough home work. They were usually disappointed (remember Murphy’s law) when their portfolio started to under perform. They then tried to find another one (one can find plenties, especially in this internet age) and then latched on the best one, only to be disappointed again. 

The reality is that these investors will be disappointed again and again. This is because no strategy can always stay as the winning one in any particular time period. What’s worse, as they started to invest when a strategy has done exceptionally well, an often the sign that strategy has peaked. They often not only did not get what they want: outperformance. Instead, it is quite possible that they lost money in that strategy. 

It is thus extremely important to remind yourself that chasing a hot strategy in some impulsive way is very dangerous. The key here is to always perform enough due diligence before taking a plunge into a strategy. 

Due Diligence

We have written about this subject several times. In March 11, 2013: How To Evaluate Investing Strategies, we pointed out that the two key issues when selecting an investment strategy:

  • Strong Intuitions and Plausible Reasons behind a Strategy: a strategy should have a simple and plausible intuition behind it. We explained these about MyPlanIQ’s SAA and TAA.
  • Understanding the pros and cons: It is especially important to understand a strategy’s weakest link. Not only one should understand this numerically, she/he should understand and simulate through this in a more realistic personal setting. In July 13, 2015: Pain in Tactical Portfolios, we stated:

    To make things worse, if you were a trend following investor in 90s, you had been busy rebalancing every month (or at least once a quarter or once two months) and your portfolio did worse than just simply buying and holding there without doing anything. A very typical “much ado about nothing”!

    To make things even worse, the whole financial media, your neighbors and virtually everyone else had been raving about the good market returns and their stock portfolios while yours just meandering (in fact, a close to 10% or even higher average annual return is anything but meandering, but you would feel so when compared with others)!

    We emphasized this again and again to our new subscribers as every investor should get comfortable with the worst part of a strategy so that she/he can be be well prepared when the situation arrives. As a reference, we outlined our two strategies’ ugly parts in 

The other important factor one should look at is the full market cycle: markets go through up and down in a secular fashion. A full market cycle can be defined as a peak to peak or trough to trough period. For example, in the following chart, we can see one or two market cycles: 

The previous peak to peak cycle is from 8/2000 to 10/2007 or trough to trough from 9/2002 to 2/2009. If the recent high in July 2015 indeed turns out to be the peak of the recent bull market, we will have another peak to peak cycle from 10/2007 to 7/2015. Just as a reference, from 10/1/2007 to 7/1/2015, SPY had an annualized total return (dividend reinvested) 6.1% while P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds had an annualized 10.3% return. 

To summarize, one should perform a full due diligence before committing to a particular portfolio. Investors should be prepared for a long term commitment after adopting a strategy. Of course, one should have an exit strategy (see ‘Enough is enough’ in March 11, 2013: How To Evaluate Investing Strategies) if a strategy is totally out of expectation based on your already thorough research.  

Multiple strategies

After thorough research, if you still can not find a strategy that is comfortable to you, you might want to consider making some tradeoff by adopting multiple strategies so that they can complement with each other. In the previous newsletter, we discussed a core satellite portfolio that employs both strategic and tactical portfolios. The goal for such combination is to alleviate under performance (and thus anxiety) in a time period when one strategy consistently lagged behind the other. In December 1, 2014: Two Key Issues of Investment Strategies, we listed the following table that compares SAA and TAA:

  Early Bull Late Bull Bear Side Way
Strategic Asset Allocation Good:rebalancing actually enables more exposure (allocation wise) to beaten down risk assets Good:always riding on risk assets and rebalancing actually takes some profit off the table Bad:holding falling assets can actually ride the falling trends all the way down

OK: no loss for risk assets but bonds can actually generate some income. Risk assets with dividends can cushion more

Tactical Asset Allocation Miss: It has a lag due to confirmation of rising trends Good:invest in high performing assets that can even outperform market indices Good:reduced risk asset allocation and exposure to other ‘safe’ assets such as treasury bonds Bad:frequent switching results in buy high sell low. These can amount to large loss over time

Looking at the period from 2009 to now, we can see the market for sure has passed early bull market stage. Whether it is in late bull market stage or already at the beginning of a bear market is still hard to tell. However, mixing the two strategies together for sure will help to reduce anxiety and underperformance up to now since 2009.

Market Overview

As expected by most, the Federal Reserve left the interest rate unchanged last week. However, it is not surprising that markets experienced a further weakness. At this moment, we expect that fundamental economic news will start to dominate the markets: if global economy can stabilize and start to grow again, stocks will recover and have further room to go, reaching an even bigger bubbly state. However, if economy further deteriorates, the current bull market is likely to end and stocks will have a much sharper decline than the one we just had. Whatever the outcome, we shall stick to our plan and invest accordingly. 

Current market condition also presents a trickier situation than even 2008: bonds are not necessarily hedge when stocks decline, considering the prolonged low interest rate environment we have been. However, regardless of what our hunches are, the best way is still to stick to our preset investing plan. 

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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