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
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
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


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


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


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



P SMA 200d VFINX VFINX Monthly [speculator]


-1.8% -2.3% 14.6% 12.2% 10.5%

since 12/31/1991


VFINX (Vanguard 500 Index Investor) [investor] 3.4% 2.8% 16.6% 14.2% 7.3%

since 12/31/1991



Detailed year by year comparison >>


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. 

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