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 6, 2017. You can also find the re-balance calendar for 2017 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.

Strategic Asset Allocation Review

As we just said goodbye to 2016, we will have a series of newsletters to review our portfolios. In this newsletter, we look at our  Strategic Asset Allocation (SAA) portfolios.  

As we pointed out previously, our SAA portfolios are globally diversified in order to capture returns and spread out risk through various global assets, especially among US stocks, developed market stocks, emerging market stocks, REITs (Real Estate Investment Trusts), commodities and bonds. For the past several years, global allocation hasn’t done as well as domestic allocated portfolios. This is mainly because of the strength of US stocks, which have continued to do well. However, surprisingly, in 2016, US stocks were not the strongest main asset class. 

Major asset class performance in 2016

Let’s first look at how the major asset classes fared in 2016. 

2016 Asset Class Performance (as of 12/30/2016):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr Sharpe
VTI (Vanguard Total Stock Market ETF) 11.7% 8.5% 14.6% 0.32
VEA (Vanguard FTSE Developed Markets ETF) 1.4% -1.2% 6.8%  
VWO (Vanguard FTSE Emerging Markets ETF) 12.2% -1.6% 1.4% 0.04
VNQ (Vanguard REIT ETF) 7.7% 13.0% 11.3% 0.13
VNQI (Vanguard Global ex-US Real Estate ETF) 0.9% 0.9% 8.4%  
DBC (PowerShares DB Commodity Tracking ETF) 19.2% -14.9% -10.0% -0.21
GLD (SPDR Gold Shares) 8.1% -1.7% -6.3% 0.26
BND (Vanguard Total Bond Market ETF) 2.7% 2.8% 1.9%  
TLT (iShares 20+ Year Treasury Bond) 1.6% 7.9% 2.3% 0.4

In 2016, commodities (DBC), long languishing in  a bear market, finally broke out. It was the best performing asset class. Equally surprising, the second best performing asset is emerging market stocks (VWO). 2016 was a year US dollar exhibited unusual strength and many were pessimistic on these two assets because of the main concerns on the emerging market economies (especially China). However, the Chinese economy managed to avoid a hard landing. This, along with the inflation pressure in the US, pulled the commodities out of their slump.

Strategic Asset Allocation Portfolios in 2016

Because of the stronger performance in the two assets, our global diversified SAA optimal portfolios did reasonably well: 

Portfolio Performance Comparison (as of 12/30/2016):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Etrade All Star ETFs Strategic Asset Allocation – Optimal Moderate 8.3% 3.3% 5.8% 4.6% 0.29
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 7.7% 3.4% 6.0% 4.2% 0.28
VBINX (Vanguard Balanced Index Inv) 7.5% 6.0% 9.3% 6.2% 0.47
Vanguard ETFs Strategic Asset Allocation – Optimal Moderate 7.2% 3.6% 6.4% 5.1% 0.34
Retirement Income ETFs Strategic Asset Allocation – Optimal Moderate 7.2% 4.0% 6.1% 4.5% 0.31
MyPlanIQ Diversified Core Allocation ETF Plan Strategic Asset Allocation – Optimal Moderate 6.6% 3.5% 5.6% 4.2% 0.3
TD Ameritrade Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 6.5% 2.5% 5.1% 3.0% 0.19
Fidelity Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 5.4% 2.9% 5.9% 4.4% 0.3
Schwab Commission Free ETFs Strategic Asset Allocation – Optimal Moderate 4.5% 2.0% 4.5%    

The simplest Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate portfolio did better than many other portfolios that have more funds to choose from. This indicates a mixed bag on using fund selection to boost performance within an asset class, at least in 2016. Simply put, 2016 is still a year broad base index funds reined. 

Strategic Asset Allocation outlook

Let’s first take a look at major assets. 

  • US stocks have been consistently strong for the past 5 years. It’s been in a bull market for 7 years since 2009. Its valuation is at a historically high level (see Market Indicators for some of long term stock valuation metrics). President-Elect Trump promises to spur economy growth with various infrastructure spending, corporate tax cut and deregulation. Though it’s likely this can result in a short term boost to the US economy, it does face many risks including his other possibly offsetting policies and factors such as trade policy, debt, higher interest rates and stricter immigration policy. Regarding this asset, we can only be cautiously optimistic. We believe it will be volatile. 
  • Developed market stocks (Europe and Japan): depending on half full or half empty views, one can be optimistic because many problems have been contained or pessimistic because the ongoing problems in banking and immigration, to name a few. Regardless, at this moment, the problems in these market continue. Furthermore, if US dollar continues to rise against these currencies, it will only make the stocks, priced in US dollar term, cheaper. 
  • Emerging market stocks: we still maintain our long term less optimistic view on emerging market economies, especially on China. We believe that it’s still very likely that the high debt burden will eventually surface as a major shock. Trump’s main trade policy will only exacerbate these problems. 
  • US REITs: this asset class is closely tied to interest rates. Rising rates will at least make investors pause. However, since many REIT firms have (re)financed long term loans with low interest rates, we don’t believe they will be immediately affected as dramatically as what markets are currently pricing them. We will have a future newsletter to discuss this asset class in more details. 
  • Commodities can be an interesting asset class to watch. On one hand, inflation and Trump’s infrastructure spending can drive their prices higher. On the other hand, the emerging market weakness as well as the possible US economy growth stall are not good to them. 
  • Bonds are again going to be very testing to investors. On one hand, many investors are certain that they will suffer as interest rates are rising. On the other hand, the economic uncertainty can wreak havoc such a theory and deflation force can come back to stop or even lower interest rates. We believe bonds, especially intermediate and long term bonds, should be viewed more as a hedge instead of being an income generating asset in 2017. 

As we stated in our previous newsletters, US large companies have already had a large inherent exposure to international economies. For example,  many companies in the S&P 500 index are multi-national companies (see November 21, 2016: International Exposure Of U.S. Large Companies). Considering the upcoming Trump’s policies, we believe that it’s prudent to take this fact into account and at an appropriate time, adjust international stock exposure accordingly. 

Finally, we remind our users that strategic asset allocation is based on a sound long term equity and bond return observation: 

we have maintained that equity investments should command a risk premium over cash and even safer investments such as bonds. What that means is that regardless of the macro economic situation, company stocks should give investors (their owners) a better return. since a company owner would demand higher returns compared with just simply putting money into a bank: otherwise, the owner would just simply closes the company and get similar or better returns in a bank without much risk and work. In aggregate, equities in general should return more than cash or even safer fixed income  (October 31, 2016: Economy Power And Long Term Stock Returns). 

It is thus important to keep a long term view and prepare to ride out any short term volatility.

Market Overview

US stocks started the new year strong, reversing their weakness since Christmas. All other asset classes rose in the last week, indicating the year end weakness is likely a short term year end adjustment. At the moment, keeping a diversified portfolio and maintaining the sound strategy are still the best way to enjoy the new year and prepare for any possible wide ride. 

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

As now we have a president elect who promised to challenge the status quo and make substantial structural change (such as infrastructure building), we are now in a wait and see period: as the nation is posed to invest, the most important factor to watch is how productive the investments will be. Simply put, productive investments will result in better return on investment (ROI), tangibly or intangibly. They should also increase productivity that in turns will improve our standard of living. Capital misallocation can result in a higher growth but might not improve the real standard of living, which is the ultimate goal of economic activities.

In terms of investments, 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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