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.

What About Commodities?

Commodities have been in a dog house for a long time. First, let’s take a look at the recent returns: 

Performance Comparison (as of 10/12/2015):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR
DBC (PowerShares DB Commodity Tracking ETF) -14.6% -30.5% -18.1% -8.9% -0.56  
GLD (SPDR Gold Shares) -2.4% -5.8% -13.4% -3.4% -0.19 8.9%
SPY (SPDR S&P 500 ETF) -0.6% 6.6% 14.1% 13.9% 0.9 7.5%

It is not a pretty picture. In fact, since its inception on 2/17/2006 (more than 9 years now), DBC has an annualized -3.6% return (cumulatively, has lost about 30% of value)!

It is no doubt that commodities have been in bear market for a long period of time, since 2012. 

Long term commodity returns

It is also controversial whether commodity could be used an a productive asset class, even in the long term. For example, gold has been bashed by famous value investor Charlie Munger as barbarian’s investments:  “I think gold is a great thing to sew onto your garments if your a Jewish family in Vienna in 1939 but I think CIVILIZED people don’t buy gold.” It is also been illustrated to have a meager return since 1802: 

Comparison of annual real returns (1802 to 2013)

Asset Real return, adjusted for inflation
Cash -1.4%
Gold 0.6%
Treasury bills 2.7%
Treasury bonds 3.5%
Stocks 6.7%

SourceStocks for the Long Run, by Jeremy Siegel

However, the historical returns of gold have been skewed by the so called gold standard that had lasted until 1971. In fact, based on our data, gold has returned 7.1% since 1971 to today, far higher than the figure given by Siegel in the above table. 

The main argument why gold is a barbarian investment is that gold (and other commodities) do not have productive values such as stocks (equities) that derive a risk premium (or excessive value over inflation) in a capitalism based market place. This is especially true for gold because it does have little practical application. 

However, even taken the recent bear market into account, commodities based index total returns have been reasonable. For example, based on 7 Twelve Portfolio, from 1970 to 2014, commodities have returned 8.03% annually, compared with US large stocks’ 10.48% and no US stocks 9.02%. One should be aware that since we are measuring the returns when commodities are in a bear market, it does affect the annualized returns to some extent. For example, if instead we measure the returns from 1970 to 2007, commodities actually had a higher return (11.99%) than stocks (11.03%) based on 7Twelve’s Israelsen

What to do in asset allocation portfolios

Now that we are in a commodity bear market and there is no sight that it will come out of it soon, one might be tempted to abandon it. This is precisely against the very principle to include such an asset in your portfolios in the first place. However, we do understand there are different scenarios for many investors. We offer the following suggestions: 

  • For a strategic asset allocation portfolio, if you have invested in commodities, it is precisely the worst time to bail out from it. Unless the evidence (such as the ones we present in the above) has been so much different from what you had when you started the portfolio, you should stick to your original plans. These portfolios include Permanent Portfolio and other diversified portfolios such as Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate
  • If you just start a strategic asset allocation portfolio and you don’t feel comfortable with the theory that commodities can deliver similar returns as stocks in the long term (there are plenty of investors in this camp, including Charlie Munger), you can omit commodities and still construct a diversified portfolio such as Five Core Asset ETFs. As we stated numerous times, ultimately, it is extremely important that you, as an investor, feel comfortable with the investments. Without this due diligence and confidence, your portfolios will suffer from frequent alteration and change of directions, all are very harmful. 
  • If you invest in a Tactical Asset Allocation(TAA) based portfolio, we believe that having commodities index such as DBC or even gold (GLD or IAU) as candidate funds can still help to achieve higher returns and lower risk in the long term. Even though its inclusion might have distracted recent portfolio performance somewhat, when commodities enter a secular bull market (and for sure, it will), it will more than compensate the recent bad performance. 

To summarize, it is gloomy to look at commodities at this moment. Furthermore, as the world is still struggling with deflation and de-leveraging, there is no sight of the ending of the current commodity bear market. However, we believe that commodities are still valuable to be an asset class for tactical portfolios. For strategic portfolios, if you have already invested in it, it is not a good time to abandon it. If you have not invested in it, you can choose to omit this controversial asset class. 

Market Overview

We are taking a note that stocks and other risk assets (such as REITs) have rebounded somewhat. We suspect that we are now in a period of ‘bad news are bad news’ as stocks will be driven by economic fundamentals more now that Federal Reserve’s interest rate action is cleared up (at least in the near months). The key concerns here are the 3rd quarter’s earnings and emerging market economies. At the moment, it is very encouraging to see that there have been many job opennings. However, realizing employment and payroll indicators are usually the lagging indicators, we are cautious here. 

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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