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, July 11, 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.

Secular Cycles For Tactical And Strategic Investment Strategies

Recently, a user posted a very pertinent question in our online support forum: 

Among tactical professionals there has long been a recognition that one of the most difficult parts of the job is to convince clients to stick with it even through periods of underperformance relative to some benchmark. 

With that in mind and considering that tactical methodologies (especially trend and RS) may now be “value” strategies, has MyPlanIQ done any studies showing subsequent performance after multiple rolling periods of underperformance?

for which, we have had a few of studies: 

Our goal is to revisit this topic regularly, at least once a year. As a firm believer on both Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA) investment strategies, we want to maintain this study in a live and long period to gain objective insights into one of the most important and  controversial investment topics: the value of tactical and strategic strategies. 

Tactical vs. strategic: secular cycles over the last 24 years

The following annotated charts clearly illustrate there exist secular cycles among the two strategies in terms of performance: 

Circled years represent S&P 500 outperformance. 

The first chart shows year by year performance for both S&P 500 (strategic) and our tactical/relative strength based benchmark portfolio P Relative Strength Trend Following Six Assets. The second chart shows the rolling 5 year annualized returns between the two benchmarks. All of them are total return including dividend reinvested. 

It’s very clear that there have been two major cycles where S&P 500 outperformed the tactical portfolio for the rolling 5 year performance: from 1995 to 2000 and from 2013 to 2015 (and ongoing?). In between, there are 12 years where the rolling 5 year returns of the tactical did better than S&P 500. 

It is thus very hard for a tactical investor to have patience to withstand a long period of underperformance: from 1991 to 1999 (9 years) and from 2009 to 2015 (and counting? see discussion below). 

However, it’s also clear that there will be secular cycle change. The question is when? Unfortunately no one can have a definite answer, and that is why it makes investing so hard. 

About the tactical benchmark portfolio P Relative Strength Trend Following Six Assets, we want to emphasize that it’s for benchmarking purpose only. The funds used in the portfolio have longer history than many index funds that were introduced in the last 10 years or so. We are planning to change the above data by switching to recent performance numbers of a more practical and better benchmark portfolio  P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds, which will be used as the benchmark portfolio going forward.  

Of course, in real life, there are many other important factors to consider when it comes to strategy selection. For this, we strongly suggest readers the following newsletters: 

Again, we find both strategies can complement with each other. But understanding their behavior so that one can be truly prepared for a long investment journey is still critical. 

The tide is turning?

Since the beginning of this year, markets seemed to have entered a late stage bull top formation period. The following table shows some comparison: 

Portfolio Performance Comparison (as of 6/27/2016):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 0.3% -2.6% 5.7% 7.3% 11.5% 0.88
Six Core Asset ETFs Tactical Asset Allocation Moderate 4.9% 2.5% 4.6% 4.3% 8.9% 0.85
VFINX (Vanguard 500 Index Investor) -1.6% -3.3% 9.6% 11.4% 6.9% 0.31
VBINX (Vanguard Balanced Index Inv) 1.0% -0.5% 7.1% 8.0% 6.6% 0.5

The Goldman tactical portfolio outperforms VFINX (S&P 500) so far and the six core moderate TAA portfolio did better than its benchmark VBINX (60 stocks/40 bonds).  

Finally, we want to stress that no one knows for sure whether this is the beginning of cycle change. However, the odds of such a change are increasing as global economic, financial and political events are unfolding. 

Market Overview

In an unstable market, some major or even minor events can act as a trigger to instigate cascade chaining responses to take the market down quickly. This is precisely what has happened since last Thursday, after UK’s Brexit referendum voting result indicated the majority wanted to exit the European Union. Though the actual political and economic impact will take much longer to materialize, financial markets reacted violently. Major global stock market indexes have all been down substantially.  However, we also recognize that market response so far has not been an all out risk off: for example, REITs and even commodities have received much muted treatment. On the other hand, just like in 2008 or 2000, a major bear market can take months or even years to emerge. For now, the best response is to pare down risk to a level one is comfortable with and stay on course in a good investment plan. 

For more detailed asset trend scores, please refer to 360° Market Overview

We would like to remind our readers that since the financial crisis in 2008-2009, we have not seen substantial structural change in the U.S., European and emerging market economies. Economies have heavily relied on low interest debts. Capital might be misallocated to unproductive investments and consumption. U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

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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