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, February 22, 2016. 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.
Alternative Portfolios Review
In MyPlanIQ, we advocate a core satellite portfolio approach. In this approach, instead of investing in a single Strategic Asset Allocation (SAA) or Tactical Asset Allocation(TAA) portfolio, investors divide the investment into two parts: one is in SAA portfolios and one is in TAA portfolios. For those who are not familiar with, please refer to the section in our Newsletter Collection.
For the core portfolios, investors can further diversify in investing in our SAA portfolios that are more traditionally based or some other alternative portfolios. The alternative portfolios include the portfolios in the following table:
Portfolio Performance Comparison (as of 1/25/2016):
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||10Yr Sharpe||10 Yr Max. Drawdown|
|My Alternative Hedge Fund||-1.3%||-6.1%||3.2%||5.1%||8.5% (5 year)|
|Harry Browne Permanent Portfolio||0.1%||-7.9%||-0.5%||3.1%||5.4%||0.64||15.3%|
|Permanent Income Portfolio||-0.5%||-3.4%||3.3%||6.1%||5.9%||0.85||17.5%|
|Bridgewater All Weather Portfolio Risk Parity||-0.5%||-3.2%||-0.1%||3.2%||4.9%||1.05||15%|
|Bridgewater All Weather Portfolio||-1.2%||-5.3%||-0.4%||3.4%||5.6%||0.85||20%|
|VFINX (Vanguard 500 Index Investor)||-8.1%||-6.7%||10.0%||10.1%||6.0%||0.27||55.3%|
|VBINX (Vanguard Balanced Index Inv)||-4.9%||-5.0%||6.3%||7.3%||5.7%||0.43||36%|
See detailed year by year comparison >>
We have reviewed these portfolios many times. Most of these portfolios belong to conservative or close to conservative allocation risk category. Allocating some part of one’s core portfolios to these portfolios can further diversify and smooth out the volatility often found in traditional SAA portfolios. However, these portfolios are often not in sync with general stock market movement and thus can create some anxiety in a bull market. In fact, for the past 5 to 7 years, we have seen these portfolios lagged behind traditional US stocks and US bonds balance portfolios/funds.
Alternative Portfolios Might Outshine in 2016
Compared with traditional SAA portfolios, these alternative portfolios might prove to be relatively ‘safe’ in 2016. From the above table, the 10 year returns of these portfolios are not closer to VBINX (Vanguard Balanced Index Inv), but with much less maximum drawdown, a metric that measures a peak to following troughs loss.
Year to date, these portfolios have avoided large loss mostly due to their smaller allocation in stocks. Harry Browne Permanent Portfolio even managed to stay positive because of the strengths in long term Treasury bonds and gold. The following table shows year to date performance for funds used in these portfolios:
Portfolio Performance Comparison (as of 1/25/2016):
|MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Most Aggressive||-1.7%||-10.1%|
|Schwab Total Return Bond||0.9%||-1.0%|
|VUSTX (Vanguard Long-Term Treasury Inv)||4.0%||-3.6%|
|VWESX (Vanguard Long-Term Investment-Grade Inv)||1.5%||-4.3%|
|VGSIX (Vanguard REIT Index Inv)||-4.8%||-10.3%|
|VFINX (Vanguard 500 Index Investor)||-8.1%||-6.7%|
|GLD (SPDR Gold Shares)||4.6%||-14.6%|
|PRWCX (T. Rowe Price Capital Appreciation)||-4.6%||0.2%|
|VWINX (Vanguard Wellesley Income Inv)||-2.1%||-2.0%|
|BERIX (Berwyn Income)||-1.4%||-5.3%|
|ABRRX (Invesco Balanced-Risk Allc R)||-2.8%||-9.1%|
|PRPFX (Permanent Portfolio)||-2.3%||-12.9%|
If 2016 turns out to be a year in bear market, we expect strength in long term bonds, especially in long term Treasuries. Furthermore, gold will probably do well. Other relatively safe convertible bonds or preferred securities that are often employed by funds like PRWCX, VWINX and BERIX will perform better. Also, the TAA portfolio will do better to avoid large loss, compared with a stock index. All of these indicate that these alternative portfolios might do better than a straight stock and bond allocation fund such as VBINX this year. However, this is based on the thesis that stocks will perform poorly in 2016, about which no one can be sure. That is why we need to still maintain some allocation in traditional SAA portfolios.
Permanent portfolios have not done well for the past several years. 2015 proved to be difficult to this portfolio again.
We just updated our Long Term Harry Browne’s Permanent Portfolio Performance table:
Long Term Harry Browne’s Permanent Portfolio Performance (as of 12/31/2015):
We discussed the permanent portfolio’s prospective performance in February 16, 2015: Where Are Permanent Portfolios Going?. From the above table, one can see that the first half of this decade has been very challenging so far. Unfortunately, we expect it will still endure some more challenges before the two major issues: over valuation of stocks and extremely low interest rates, are resolved.
For those who are not comfortable with investing in gold, Permanent Income Portfolio has proved to be a viable portfolio. In 2015, it lost -3.4%.
My Alternative Hedge Fund Portfolio
This portfolio allocates bulk of its capital to a tactical equity portfolio and a tactical total return bond portfolio (70% total). The rest of 30% is spread in a traditional balance fund, permanent portfolio, risk parity and a conservative fund:
Allocation of My Alternative Hedge Fund:
tactical stock portfolio (P_51098) 42%
tactical total return bonds (P_46880) 28%
balanced PRWCX 10%
permanent PRPFX 10%
risk_parity ABRRX 5%
conservative BERIX 5%
This portfolio is of conservative risk. Investors can alter the allocations based on their risk tolerance. In addition, we would suggest that the permanent portfolio fund PRPFX be replaced by Harry Browne permanent portfolio to reduce expenses. Furthermore, if it is hard to invest in a risk parity fund, the allocation can be redistributed to other funds. VWINX (Vanguard Wellesley Income Inv) is an excellent substitute for BERIX.
Other good alternatives for the risk parity or permanent portfolio allocations can be alternative funds such as those reviewed in February 3, 2014: Alternative Investment Funds & Diversified Portfolios.
There are also several ways to invest for the tactical stock portfolio part. In addition to the P_51098 (MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Most Aggressive), one can use advanced tactical portfolios and/or simple timing (moving average, for example) based portfolios.
With the tumultuous markets ahead, we are optimistic that this portfolio will perform reasonably well as what its name implies: hedging with alternative methods.
As expected, stocks staged a feeble recovery and had a small positive return last week. However, as Jason Zweig at the WallStreet Journal pointed out, Market ‘Capitulation’ Is Nowhere in Sight (So Far). Up till now, the selling or so called distribution of stocks have been orderly. If a bear market indeed happens, S&P 500 might drop to 1500 to 1700 level. Bear in mind that even at that level, S&P 500 is only back to its long term average valuation level. It is thus prudent to review your risk exposure at this moment regardless whether you are a strategic, a tactical investor or both. It is still not too late to scale back to a risk level you are comfortable with.
On the other hand, as an investor, we also want to emphasize that as markets drop, it creates more opportunities. Though at the moment, it is still too early to venture into the market bravely, we expect the time will come if markets continue their descent.
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.
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- 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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