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, June 6, 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.

Boost Your Dull Summer Investments

When it comes to investing, there are few stock market anomalies that still can’t be fully accounted for (or explained) by so called ‘efficient market hypothesis’. Though many of them out there are purely noise, strategy like Sell in May and Go Away Seasonal Timing is one of the few that consistently shows its benefits.  It’s been said that summer is a unfavorable period to stocks. Or a bit more precisely, from May to the end of October (Holloween day), investors should leave the stock market and only invest in the rest of a year. Surprisingly, it has been found such a simple strategy has performed consistently well, not only in the U.S. markets, but also in 36 other countries (see The Halloween Indicator paper). 

The STS Seasonal Timing Using VFINX listed on our Advanced Strategies uses a modified strategy that incorporates a moving average timing (MACD) strategy to time buy and sell of an S&P 500 index fund. Though it hasn’t called for selling stocks and going to cash this year so far, we suspect that the time to do so is getting closer.  

However, just like many other strategies, left unsaid is on what to do when your portfolio goes into cash. We have shown several times that using a total bond market index fund such as Vanguard Total Bond Market Index (VBMFX) or a total return bond fund portfolio (such as Schwab Total Return Bond listed on Brokerage Investors page), one can boost returns without incurring much risk. The following are some of these newsletters that show the benefits for several long term timing based portfolios: 

In this newsletter, we again show that using a bond fund or a total return bond portfolio can help enhance returns by some very meaningful margins. 

Sell in May and Go to Bond Index Fund

Instead of cash, the following portfolio invests in VBMFX during the summer period: 

Portfolio Performance Comparison (as of 5/9/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR AR Since 7/1/1990 Max Drawdown
STS Seasonal Timing Using VFINX Bond VBMFX 1.4% 2.7% 8.2% 10.7% 8.9% 9.4% 29%
STS Seasonal Timing Using VFINX 1.4% 1.5% 7.3% 9.1% 6.4% 8.2% 33%
VFINX (Vanguard 500 Index Investor) 1.4% -0.7% 10.2% 11.3% 6.7% 9.1% 53%

The portfolio outperformed buy and hold S&P 500 index (VFINX) for the past 10 years and 26 years (since 1990).  1990 the earliest year we have data for VBMFX. It’s remarkable for the portfolio to outperform VFINX as it includes the roaring 1990s that saw stocks soared. This is a clear example that stock markets are not efficient. 

Notice portfolio STS Seasonal Timing Using VFINX which goes to cash in summer does no better than VFINX for the past 26 years. It’s probably one of the reasons many experts dismissed such a strategy (as it still underperforms buy and hold VFINX).  

The first portfolio has done better than the cash one with 1-2% return every year on average for the past 26 years. 

Of course, both these portfolios have less than 2/3 maximum drawdown of VFINX. Often, even though summer is dull, stock markets can behave violently, just like in August/September 2008 when Lehman Brothers imploded. Avoiding stocks in such a period does improve overall portfolio volatility. 

Sell in May and Go to Total Return Bond Fund Portfolio

Well, if we invest in a total return bond fund portfolio Schwab Total Return Bond listed on Brokerage Investors page, we actually can boost the returns even further. Unfortunately, since Schwab Total Return Bond has only data back from 1/2/2001, we can only compare the past 16 years performance since then. 

Portfolio Performance Comparison (as of 5/9/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR AR Since 1/2/2001
STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash 1.4% 1.7% 7.2% 10.7% 9.6% 9.1%
STS Seasonal Timing Using VFINX Bond VBMFX 1.4% 2.7% 8.2% 10.7% 8.9% 7.9%
STS Seasonal Timing Using VFINX 1.4% 1.5% 7.3% 9.1% 6.4% 5.9%
VFINX (Vanguard 500 Index Investor) 1.4% -0.7% 10.2% 11.3% 6.7% 5%

See year by year detailed comparison >>

We again see a substantial (1.7%) return improvement for the past 10 years and 1.3% improvement for the past 16 years. Compared with VFINX, both our portfolios that use bonds as cash have an outperformance margin as large as 4.1% annually!

Cash in A Moving Average Portfolio

We turn our attention to the recent performance of a related portfolio: P SMA 200d VFINX Total Return Bond As Cash Monthly. It uses 200 days simple moving average to time whether to invest in VFINX (S&P 500) or otherwise goes to cash or bonds. We mentioned this portfolio in April 13, 2015: Total Return Bond Funds As Smart Cash

Portfolio Performance Comparison (as of 5/9/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
P SMA 200d VFINX Total Return Bond As Cash Monthly 2.0% -4.9% 8.7% 9.6% 11.6% 0.85
P SMA 200d VFINX Monthly 0.2% -7.3% 7.8% 8.7% 9.7% 0.72
VFINX (Vanguard 500 Index Investor) 1.4% -0.7% 10.2% 11.3% 6.7% 0.28
VBINX (Vanguard Balanced Index Inv) 2.3% 1.3% 7.0% 7.9% 6.3% 0.46

More detailed comparison >> 

Again, we see a big outperformance. The simple timing portfolios not only have reduced risk, but also can outperform if investors treat cash smartly. 

To summarize, stocks are definitely not the only game in town. In addition to the usual diversification benefits, utilizing bond funds or total return bond funds in a traditional simple long term timing strategy can boost returns by some big margins with little extra risk incurred. In fact, it can even beat the stock markets just on the return basis. 

Market Overview

By the end of last week, based on Factset, 87% of S&P 500 companies had reported Q1 2016 earnings. It turned out that earnings picture continued to improve: the combined earnings (estimated and reported) declined -7.1% than a year ago, better than the one expected a week before (-7.6%) and the -8.7% expectation on March 31, 2016. Nevertheless, this quarter still marks the fourth consecutive earnings decline. Furthermore, recent commodity strength looks like a short lived speculation and commodities have since retreated. We maintain that we are in a challenging investment environment. 

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 6 years. Since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Even though U.S. stocks have had a recent correction, their valuation is still at a historical high level.  It is thus not a good time to take excessive risk. 

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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