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, September 19, 2016. You can also find the re-balance calendar for 2016 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.
Overvalued Markets and Long Term Timing Strategies
Let’s first look at August market performance:
While rate sensitive assets including long term bonds, gold and REITs all had some loss, emerging market stocks (Vanguard emerging market stock index VEIEX) gained most (almost 2%). Other stock assets including international stocks (VGTSX) and US stocks (VFINX) were also positive. This happened in a backdrop where US stocks were near all time high.
Stocks in August were also in one of the least volatile periods in history, S&P 500 index was in a tight range. It’s also one of those summers in which stocks had a reasonable gain: S&P 500 gained about 4.6% since the end of May. On the other hand, users who were concerned about stock weakness in the summer (so called ‘sell in May and go away’ seasonality) didn’t fare badly either: bonds have also had a respectable gain: 2.4% since 5/31/2016. If, instead of investing in bond index such as BND or VBMFX, investors put their money to one of our total return bond fund portfolios such as P_46880 (Schwab Total Return Bond), they would have gained 4.4% since the end of May, matching S&P 500’s.
Stocks continue to be significantly overvalued
Stocks are stubbornly overvalued. Based on Market Indicators:
- Buffet Stock Market Indicator: On Sep 2, 2016, the ratio of the total stock market capitalization to GNP is 152%.
- Shiller CAPE10: On Sep 2, 2016, the ratio of Real Price to the average of last 10 year Real Earnings(CAPE10)(28.12) to its long term average (16.69) is 1.68.
In general, stocks are significantly overvalued (50% and up) based on popular long term valuation metrics. Interested readers can also look at other metrics from dshort.com.
Long term timing strategies
Interestingly, year to date, the long term timing based portfolios are doing as well as S&P 500:
Ticker/Portfolio Name | YTD Return** |
1Yr AR | 3Yr AR | 5Yr AR | 10Yr AR | 10Yr Sharpe |
---|---|---|---|---|---|---|
P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy Total Return Bond Funds As Cash | 8.1% | 7.6% | 4.8% | 11.2% | 11.9% | 0.88 |
P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly Total Return Bond Funds As Cash | 8.1% | 7.6% | 7.7% | 12.6% | 12.6% | 0.91 |
VFINX (Vanguard 500 Index Investor) | 8.2% | 14.2% | 12.3% | 15.5% | 7.4% | 0.33 |
These portfolios were first mentioned in April 13, 2015: Total Return Bond Funds As Smart Cash. They are listed on Advanced Strategies. These portfolios have done so well, thanks to the ultra low interest rates across all bond spectrums (long bonds, corporate bonds and even municipal bonds).
What if a bear market strikes?
Several users have voiced concerns about the current market environment: not only stocks are overvalued, bonds are also at a historically high level (or their yields are historically low). So if a substantial stock market downturn does strike in the near future, what will happen? Traditionally, when stocks are in a bear market, bonds tend to hold up their value or even have some gain. That would benefit the above long term timing based portfolios as they are now in some total return bond funds. However, is this time different?
Let’s answer this question by analyzing two possible scenarios:
- A Fed interest rate hike induced bear market: in this case, because of the concern that rising interest rates could derail economy growth and even possibly stoke up inflation, investors will exit not only stocks, but they will also dump bonds, especially long term and high yield bonds. Fortunately, for portfolios that have invest in one of our total return bond fund portfolios as a cash substitute, these portfolios will rotate out of bond funds that are sensitive to both interest rates and credit worthiness. As a last resort, they will exit bond funds all together and instead invest in cash.
- A deflation induced bear market: in this case, similar to those in 2000 and 2008, bonds, especially government bonds will hold up really well, still preserving the normal stock and bond negative correlation. Portfolios that invest in a total return bond fund should not have problem to switch to a fund that has invested in high quality bonds.
Regardless of the scenarios, there will be some pains in a portfolio because of the turn of markets (trend change). But such a short term dislocation is a price one has to pay, especially for a trend following portfolio such as our Tactical Asset Allocation(TAA) portfolio or our total return bond fund portfolio. Unfortunately, this time around, such a short term pain has become more likely because of scenario 1 or the current ultra low interest rates.
To summarize, both stocks and bonds continue to be at an extended elevated level. It’s increasingly possible to create some short term gyration for strategic, tactical, strategic or even long term timing portfolios (which have now totally avoided stocks and invest in bonds). Investors should adopt a more vigilant attitude and prepare for the possible event (and pain).
Market Overview
As can be seen in the previous chart, US REITs have weakened for the past one month, mostly due to their high prices and the concern of upcoming interest rate hike. Similarly, gold has also retreated a bit. Depending on what angle you are looking, one can say markets are waiting for another shoe to drop or waiting for earnings to recover (or resume growth) in the next quarters. Unfortunately, for many value investors, they are usually early in predicting a market downturn. On the other hand, as markets continue to ascend, risk will only become bigger. As always, staying on a course that has been well designed and vetted will serve investors well.
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.
Latest Articles
- August 29, 2016: Your 401K Finally Draws Attention
- August 22, 2016: Inflation Protected Securities TIPS For Current Overvalued Markets
- August 15, 2016: Risk On: Emerging Market Stocks And Small Cap Stocks
- August 8, 2016: Portfolio Construction Using Stock ETFs And Bond Mutual Funds
- August 1, 2016: Adding Value To Your Own Investments
- July 25, 2016: Tactical Asset Allocation Funds Review
- July 18, 2016: Strategic Asset Allocation & Lazy Portfolio Review
- July 11, 2016: Asset Trend Review
- June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- May 2, 2016: Low Cost Index Fund Investing
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- April 18, 2016: Asset Class Trend Review
- April 11, 2016: Construction of Sound And Conservative Portfolios
- March 28, 2016: Total Return Bond ETFs Review
- March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles
- March 14, 2016: Are Tactical And Timing Strategies Losing Steam?
- March 7, 2016: Defined Maturity Bond Fund Analysis
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- February 22, 2016: Be Cash Smart
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- 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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