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, November 9, 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 A 401k Account

One of the most frequently asked questions on how to use MyPlanIQ asset allocation portfolios is that it is often hard to just implement a Tactical Asset Allocation(TAA) in such an account.  The main reason is that for many active 401k accounts, investors are still contributing (adding) new salary deduction money per pay check to the account. The inflow of the new money makes it hard to keep track of the holding periods of funds invested, thus making the rebalance of the more active TAA much harder not to violate minimum holding periods imposed by funds or the plan. 

Fortunately, there is an easy and good solution to this if you decide to implement a core satellite portfolio instead of a pure TAA portfolio in a 401k account. We regularly discussed a core satellite portfolio methodology, as most often in the recent newsletter September 14, 2015: Core Satellite Portfolios In Market Turmoil. Interested readers can refer to our core satellite section in Newsletter Collection for more background readings.

Implementation details of a core satellite portfolio in a 401k account

The best way to implement a core satellite portfolio in a 401k account is to construct an SAA (core) subportfolio that invests the newly added (salary deduction per pay check, for example) and a TAA (satellite) subportfolio that invests old money. A normal process would look like the following:

  • In a newly established 401k account (i.e. for people who just start a job in a new firm and the 401k account starts from 0 money), you would designate all of the new money in an SAA portfolio for a couple of years. Month in and month out, you just keep adding the new money to the funds you select. In general, you change your fund (and asset allocation) selection infrequently, such as once a year. 
  • Depending on your design (based on your risk profile and own personal taste), when the account grows to a certain level that you deem to need to have capital protection (it can be after 1 year or as long as after 5 years), you now start to allocate some of this old money to a satellite TAA subportfolio. But you always keep the core SAA to invest the new money. 
  • Once a year, you would move some money in the SAA subportfolio to the TAA subportfolio. However, you will always keep the SAA at a level such that it holds money added in the more recent year (at least one year, for example). 

The following picture illustrates the concept: 

Note: if you move a 401k account to a new 401k account due to job change, you should consider that portion of money as old and allocate it in both SAA and TAA subportfolios, again depending on the allocation breakdown between the SAA and TAA. 

Basically, the above process would result in designating new contribution to the SAA holdings while you manually allocate and rebalance the existing account based on the SAA and TAA breakdown. 

Assuming you maintain at least one year or so new money in buy and hold SAA holdings, the process eliminates messy holding period concern and guarantees that no minimum holding period restriction is violated for the newly contributed money. Of course, for the TAA part, you would still need to obey the minimum holding period restriction. By default, MyPlanIQ assumes 3 month minimum holding period for each fund and that is usually more than enough to satisfy the requirement. 

In general, many 401k plans (such as those on Fidelity or Schwab 401k platforms) allow you to instruct the system what funds to invest for the contributions and what funds to invest for the existing money (rebalances). To some extent, many 401k plans are better designed to implement an asset allocation portfolio compared with brokerage accounts that usually don’t have a basket rebalance mechanism available to clients. 

Core satellite portfolio advantage in 401k

The main advantage of core satellite portfolios is their use of two often complemented strategies (strategic and tactical) that can smooth out portfolio’s returns in various of market conditions.  However, adding constant new contributions to a core SAA while investing a more substantial part of ‘old’ money in a satellite TAA has several advantages: 

  • The regular added contributions will be able to capture market downturns and get a better investment price when markets are low. This has a distinct advantage over just putting money to ‘safe’ money market or bond funds when markets have a down trend (and because TAA dictates moving to cash). The core SAA will serve as a buy low mechanism in this case. 
  • You regularly rebalance the overall account (once per year, for example, as suggested in the above) between the SAA and TAA, thus you can take profits from the SAA portion when markets are high, thus sell high in this case. 
  • A more advanced version would be you only move part of the excessive SAA portion to TAA when TAA calls for a risk reduction. What that does is that it is possible to let your profit run until markets hit a soft patch instead of taking profits too early. You can also decide to skip such SAA to TAA moves if you find that you are comfortable with the risk. 

Finally, perhaps the most important advantage of this approach is that it is easier to implement and it does not make your account completely subject to either one’s weakness, thus reducing emotional anxiety that usually tests many investors’ patience. 

For working year employees who contribute to a 401k account, core satellite portfolio approach, implemented as above, can be an effective and practical solution. 

Market Overview

Stocks underwent a surge after Friday’s payroll report which missed the expectation by a big margin. It is hard to pinpoint the cause of the rally. As stated before, markets go through a couple of decline and rally phases, even in a downtrend. At the moment, it looks like markets are increasingly hinging on the third quarter earnings and some other fundamental data. Based on Thomson Reuters, earnings of S&P 500 companies are expected to decline by over 4.2% in the third quarter. This is the headwind to the current markets. In the interest rate side, it does look like it is less likely the Fed will be able to raise the rate in the near months. Regardless, market valuation is still high and we are still in a downturn trend at the moment. Investors should exercise caution. 

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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