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, December 14, 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.
Investors and Speculators Combined
It is a well known fact that investors would like to be a true investor: someone who buys and holds an investment based on its fundamental. It will only sell such an investment when its fundamental has changed substantially or when the investment becomes way more expensive. Warren Buffett perhaps is one of the most well known investors in this category. However, other than a few (and most of them are institutional investors who manage assets that have their perpetual purpose such as a university endowment), most average investors don’t have a luxury or patience to wait it out when investments become expensive. For example, our P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly Total Return Bond Funds As Cash listed on Advanced Strategies can go into ‘cash’ for a long time when a long term stock market valuation Shiller Cyclically Adjusted PE (CAPE) becomes over valued. In this portfolio, we mitigate this idle ‘cash’ holding issue by investing in a total return bond portfolio instead.
However, even with such an approach, investors can still be out of stock markets for years, if it is not months. For many, this could test their real patience. To make the matter worse, when you are out of stock markets for a long time, stocks can defy the conventional wisdom and keep rising for a long time until it becomes a bubble that eventually bursts. It is certainly excruciating that in those years, you see stocks run up double digits every year.
Certainly, one can adopt the core satellite investment approach we advocate by always allocating a portion of capital in a core strategic buy and hold portfolio and the rest into a tactical or long term valuation based timing portfolio (the satellite). By doing so, you will not be out of stock markets even when markets are expensive. But doing so leads to another issue: how much should one allocate to the ‘core’? Allocating too much could lead to a big portfolio drawdown or loss when markets experience a severe downturn such as those in 2001-2002 and 2008-2009, not to mention a lower return in subsequent years when markets are highly overvalued (such as right now, based on Hussman, GMO and many others, average stock market returns in the coming seven years or longer will be either negative or close to zero). On the other hand, allocating too little to the core would result in a period of under performance from the timing or tactical portfolio in later years of a bull market that can last several years.
Investors thus often ask whether there is any other way to behave like an investor when markets are under valued and behave more like a speculator when markets are expensive. In our previous newsletter August 11, 2014: What To Do In Overvalued Stock Markets, we tried to answer this question by suggesting an approach that when stock markets are over valued, one switches to a tactical portfolio instead. Basically, you are an investor when stocks are cheap and you become an active investor, or speculator or whatever you prefer to call when stocks are expensive.
In the following, we extend this approach and look at a simpler way to implement this methodology.
Long Term Stock Valuation Metrics
MyPlanIQ maintains several long term stock valuation metrics. The portfolios are listed on Advanced Strategies page and they are:
Equity/Stock Strategies
Strategy | Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR |
---|---|---|---|---|---|---|
Warren Buffett Total Stock Market Value to GNP Ratio Strategy | P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy Total Return Bond Funds As Cash | 0.1% | -0.6% | 10.2% | 10.5% | 12.0% |
Shiller Cyclically Adjusted PE 10 Stock Market Timing Strategy | P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly Total Return Bond Funds As Cash | 0.1% | -0.6% | 11.8% | 11.4% | 12.4% |
Hussman Peak PE Market Timing Strategy | P Hussman Peak PE SO SU Market Timing Strategy WeeklyTotal Return Bond Funds As Cash | 0.1% | -0.6% | 10.6% | 10.7% | 11.6% |
These strategies and portfolios have been discussed many times in our previous newsletters such as April 13, 2015: Total Return Bond Funds As Smart Cash. So far these strategies have all indicated a very overvalued stock market. Interested readers can click on the strategy links in the table to get more detailed description.
Among these 3 indicators, Warren Buffett’s total stock market valuation over GNP ratio is the most intuitive and easiest to use. Shiller CAPE 10 has been widely discussed also.
Long Term Stock Valuation Metrics And Long Term Timing Combined
Even though in August 11, 2014: What To Do In Overvalued Stock Markets, we proposed to switch to a tactical asset allocation portfolio when stocks become over valued, many have argued that since our tactical portfolio may invest in many other risk assets such as international stocks and REITs, strictly speaking, it does not belong to an US stock investment asset class. In the following, we use a simpler and more intuitive method when US stocks become expensive. Basically, when US stocks become expensive, the portfolio switches to a long term timing based portfolio such as P SMA 200d VFINX VFINX Monthly.
The following table compares several of such portfolios:
Portfolio Performance Comparison (as of 11/27/2015):
Ticker/Portfolio Name | YTD Return |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | Since Inception | Max. Drawdown |
---|---|---|---|---|---|---|---|
P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days Total Return Bond As Cash And Strategic Switch Monthly 1x | -1.1% | -1.6% | 14.9% | 12.6% | 11.7% |
since 1/2/2001 11.7% |
28.7% |
P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days Total Return Bond As Cash And Strategic Switch Monthly 0.8x | -1.1% | -1.6% | 14.9% | 12.6% | 12.6% |
since 1/2/2001 12.3% |
17.5% |
P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days And Strategic Switch Monthly 1x | -1.8% | -2.3% | 14.6% | 12.2% | 11.0% |
since 12/31/1991 11.3% |
27.5% |
P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days And Strategic Switch Monthly 0.8x [investor and speculator combined] | -1.8% | -2.3% | 14.6% | 12.2% | 11.5% |
since 12/31/1991 11.5% |
19.2% |
P SMA 200d VFINX VFINX Monthly [speculator]
|
-1.8% | -2.3% | 14.6% | 12.2% | 10.5% |
since 12/31/1991 11.1% |
22.4% |
VFINX (Vanguard 500 Index Investor) [investor] | 3.4% | 2.8% | 16.6% | 14.2% | 7.3% |
since 12/31/1991 9% |
55.3% |
Detailed year by year comparison >>
Descriptions:
- P SMA 200d VFINX Total Return Bond As Cash Monthly: if VFINE (Vanguard S&P 500) is above its 200 day Simple Moving Average (SMA), it invests in VFINX, else it invests in a total return bond portfolio such as P_46880 (Schwab Total Return Bond).
- P SMA 200d VFINX VFINX Monthly: similar to the above but it invests in cash when S&P 500 is below its 200 day SMA.
- P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days Total Return Bond As Cash And Strategic Switch Monthly 1x: when CAPE10 > 1x its average, switch to P SMA 200d VFINX Total Return Bond As Cash Monthly. Its start date is 1/2/2001 as this is the earliest day when the Total Return Bond portfolio has data.
- P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days Total Return Bond As Cash And Strategic Switch Monthly 0.8x: similar to the above except that it switches to P SMA 200d VFINX Total Return Bond As Cash Monthly when CAPE10 > 0.8x its average.
- P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days And Strategic Switch Monthly 1x: when CAPE10 > 1x its average, switch to P SMA 200d VFINX VFINX Monthly. Its start date is 1/2/2001 as this is the earliest day when the Total Return Bond portfolio has data.
- P Shiller Cyclically Adjusted PE 10 SO SU SMA 200 Days And Strategic Switch Monthly 0.8x: similar to the above except that it switches to P SMA 200d VFINX VFINX Monthly when CAPE10 > 0.8x its average.
We apologize for the complexity of the above table. Basically, we can conclude the following:
- One should become an investor (i.e. buying and holding S&P 500) when CAPE 10 is cheap. In fact, it is more rewarding to be a bold investor when CAPE 10 is cheaper (such as 0.8x its average instead of 1.0x its average).
- When in an over valued market, going to total return bond portfolio instead of cash when S&P 500 falls below its 200 day SMA can boost annual return by almost 1%, not a small margin.
- Since 1991 (or for the past 24 years), being an investor and speculator combined can be better than just being a speculator (i.e. using P SMA 200d VFINX VFINX Monthly all along): 11.5% annual return vs. 10.5% (1% difference) and also better (smaller) risk: 19.2% vs. 22.4% maximum drawdown. It becomes much better when compared with being an investor (i.e. just buy and hold VFINX) all along: 11.5% annual return vs. 7.3% (4.2% difference!) and also much better (smaller) risk: 19.2% vs. 55.3% maximum drawdown.
The takeaway:
The above method can be summarized as simply as when stocks are cheap, become a buy and hold investor; when stocks are getting expensive, become a ‘speculator’ and adopts a simple moving average guarded method.
From the data, it is absolutely more rewarding to adopt a pragmatic approach in investing: being an investor and speculator combined results in the best returns and smallest risk.
Market Overview
We are now getting close to the end of the year. In general, this would be a strongest period in a year for stocks. However, we are also approaching to the time when the Federal Reserve will decide to raise interest rate or not. Recent geopolitical events don’t help either. At any rate, this December will be more volatile than many previous ones. At the moment, markets are still searching for a firm footing.
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.
Latest Articles
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment
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