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, October 24, 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.

Momentum Investing Review

It’s been more than a year since we reviewed various momentum investing portfolios/funds (see July 27, 2015: Performance Dispersion Among Momentum Based Portfolios). As markets have persistently behaved in some strange way, we would like to review these portfolios again.

Just to recall, the taxonomy of these portfolios is as follows: 

  • m1: A group of individual stocks such as Dow Jones 30 or Nasdaq 100 etc. — Can be Effective, but volatile. 
  • m2: A group of industrial stock funds such as Fidelity’s famous Fidelity Select funds. – Can be Effective, but volatile. 
  • m3: A group of stock sector funds such as SPDR’s S&P sector ETFs such as SPDR Select Energy (XLE) etc. – Can be Effective, but volatile. 
  • m4: A group of stock style funds such as Russell large, mid and small cap stock ETFs. – Effective and comparable risk. 
  • m5: single stock index (fund) buy/sell decision. – Fickle though might be on par with buy and hold. 
  • m6: A group of diversified and somewhat uncorrelated asset classes such as stocks, bonds, real estates (REITs) and their minor asset classes such as long term bonds, international bonds, gold etc. – Effective and lower risk.

Furthermore, at MyPlanIQ, we always advocate the momentum driven strategy at asset allocation level, or m6 in the above categories. This is what our  Tactical Asset Allocation(TAA) strategy is based on.

Let’s first review the funds at the first level m1.

Individual momentum stock funds are lagging behind US index

For individual stock momentum portfolios, we look at the following representative funds:

Momentum fund recent performance (as of 10/10/2016):
Fund YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR
PIE (PowerShares DWA Emerging Markets Mom ETF) 9.7% 2.9% -3.4% 3.1% 0.16  
EEM (iShares MSCI Emerging Markets) 18.0% 8.9% -1.3% 2.8% 0.13 3.4%
AMOMX (AQR Momentum L) 3.3% 5.1% 9.3% 14.9% 0.92  
PDP (PowerShares DWA Momentum ETF) 1.1% 2.4% 7.7% 13.8% 0.92  
SPY (SPDR S&P 500 ETF) 7.7% 9.7% 11.5% 15.5% 1.12 7.0%
AIMOX (AQR International Momentum L) -0.5% 0.2% -1.2% 6.4% 0.4  
EFA (iShares MSCI EAFE) 1.8% -0.3% 0.4% 6.9% 0.38 1.6%
ASMOX (AQR Small Cap Momentum L) 4.6% 4.7% 4.4% 15.5% 0.75  
IWM (iShares Russell 2000) 10.3% 9.0% 6.6% 15.2% 0.85 6.8%

More detailed year by year comparison >> 

Highlighted are indices. 

Year to date or in the last one year, all momentum stock funds have performed worse than their respective indices (other than AIMOX vs. EFA for the past 1 year, which both performed closely). In fact, even if one looks at the last 5 year performance, these funds don’t have much edge. However, in a longer term, it’s possible for the momentum stock funds perform better than indices.

Momentum at higher levels

Moving up to industries, sectors, styles and multiple assets, we have the following:

Portfolio Performance Comparison (as of 10/10/2016):
Portfolio/Fund Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR AR since 1/2/2001
[m2]P Sector Rotation Fidelity Select Funds Top 2 Monthly Adjust with Cash 15.8% 18.4% 14.0% 18.2% 10.9% 10.8%
[m3]P Momentum Scoring Sector ETFs 8.4% 8.2% 8.7% 10.5% 6.6% 7.0%
[m4]P Momentum Scoring Style ETFs and Treasuries 2.7% -0.6% 2.7% 9.3% 8.0% 8.4%
[m5]P SMA 200d VFINX Total Return Bond As Cash Monthly 8.1% 7.4% 9.1% 12.7% 11.9% 11.7%
[m6]P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 4.4% 4.2% 4.8% 7.9% 10.9% 13.7%
[m1]AMOMX (AQR Momentum L) 3.3% 5.1% 9.3% 14.9%    
SPY (SPDR S&P 500 ETF) 7.7% 9.7% 11.5% 15.5% 7.0% 5.3%

More detailed year by year comparison >>

Year to date, other than the industries rotation one (m2), all other portfolios underperformed S&P 500 SPY. In fact, this phenomenon extends to the last 5 years. However, in the last 15+ years (since 1/2/2001), the multi-asset momentum portfolio (m6) still has the highest annualized return (AR) 13.7% while all other momentum portfolios (other than AMOMX which does not have enough data) have done better than SPY, which has only 5.3% annualized return. 

The above data indicated that recently,  it’s been a difficult period for many momentum based portfolios. Even the finest granularity portfolio (individual stocks) can’t take advantage of the recent market behavior. Even though the industries rotation portfolio has done best for the past one year or year to date, it does come with a price: in the last one week, the portfolio had -6% drop. Overly concentrated only on two industries at a time, this portfolio can deliver high returns in a period (for example, it has 18.2% annualized return in the past 5 years) but it can also lose value quickly. 

The single index buy/sell portfolio m5 has done very well recently. It’s also one of the best in the 10 and 15+ year periods. However, we caution that when US stocks lose their strength (as it is very likely going forward because of their elevated overvalued valuation), such a moving average based portfolio might not be able to repeat such a stellar performance. 

Market Overview

Rate sensitive assets including REITs and long term bonds had a very bad week. REIT stocks are now in general in a negative trend. Furthermore, gold has retreated noticeably, thanks to the US dollar strength and the upcoming rate hike jitter. Though investors seem to pin their hope/decision on the US presidential election, given the current overvalued markets, we believe markets will undergo certain substantial correction once the election dust settles, regardless who wins the election. Again, we call for a well planned strategy that can manage risk. 

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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