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.


Several readers wrote to us, pointing out an error in our total return bond performance table in the previous newsletter. Specifically, PIMCO Income fund PONDX‘s 2016 total return should be 8.3%, not 2.8%. This error only occurred in our comparison and quote methods. It does not affect our strategy algorithm. It has been corrected. We thank the users for their help!

Brokerage Specific Conservative Portfolios

In addition to the total return bond fund portfolios we reviewed last week, we are also an advocate on conservative portfolios using a combination of stock index funds and total return bond funds. We detailed this type of portfolios in our previous newsletter April 11, 2016: Construction of Sound And Conservative Portfolios. In that newsletter and other previous newsletters, we pointed out the advantages of investing in these conservative portfolios:

  • Conservative portfolios usually have the best risk adjusted returns (in terms of Sharpe ratio) among stock and bond asset allocation portfolios. The reason being that by scaling down stock (risk asset) allocation to a level that can be matched with bonds in terms of risk, one can maximize returns with the least risk taken. 
  • Conservative portfolios can be used tactically when a stock market is way overvalued, such as the current market. It can be used an an anchor to wait till the valuation becomes more reasonable without completely sacrificing the returns of late stage stock markets. 

In the previous newsletter, we introduced two portfolios that have the following allocations: 

Conservative Total Return Bonds REITs Dividend Stocks

USStocks VDIGX 20%
TotalReturnBond P_46880 70%

VDIGX (Vanguard Dividend Growth Inv) is Vanguard’s (index) dividend appreciation fund. VGSIX is Vanguard REIT Index fund. 

The other portfolio uses Vanguard 500 index fund (S&P 500) VFINX instead of VDIGX. 

The fixed income is P_46880 (Schwab Total Return Bond)

In this newsletter, we officially introduce conservative portfolios designed specifically for major brokerages. For a brokerage other than Schwab, we simply substitute the Schwab total return bond portfolio with the brokerage’s specific total return bond portfolio. 

We choose dividend fund VDIGX for stocks instead of using a broad base stock index fund such as Vanguard 500 VFINX (S&P 500 fund) because dividend stocks not only offer a comparable total return in the long term, they also offer lower volatility and thus can slightly reduce risk. Furthermore, many conservative investors are income investors seeking dividends and interests. Users can tweak the risk exposure (i.e. the dividend stocks and REITs) using other more diversified funds such as a combination of small cap, large cap US stocks and foreign stocks. We believe, however, for a conservative investor, US stocks and REITs assets only exposure offers a simple but good enough solution. 

A note on using Vanguard index funds for REITs and dividend stocks: though many brokerages charge transaction fees on Vanguard funds, one can actually use their corresponding Vanguard ETFs as substitutes, i.e., Vanguard Dividend Appreciation ETF VIG for VDIGX and Vanguard REIT ETF VNQ for VGSIX. 

These portfolios can be viewed on Brokerage Investors (What We Do -> Brokerage Investors).  

Portfolio performance

These portfolios have done very well historically, outperforming the famed VWINX (Vanguard Wellesley Income Inv) for the past 5, 10 years and since 2002. They closely match VWINX for the past 1 and 3 years. 

Portfolio Performance Comparison (as of 1/27/2017):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Schwab Conservative Total Return Dividend Portfolio 0.6% 9.8% 6.1% 7.8% 8.0% 1.09
Fidelity Conservative Total Return Dividend Portfolio 0.6% 6.7% 5.1% 7.2% 7.6% 1.03
TDAmeritrade Conservative Total Return Dividend Portfolio 1.6% 9.9% 5.9% 8.0% 8.1% 1.07
Folioinvesting Conservative Total Return Dividend Portfolio 0.6% 9.8% 6.1% 7.8% 8.0% 1.09
Etrade Conservative Total Return Dividend Portfolio 1.7% 7.6% 6.1% 7.8% 8.0% 1.09
Merrill Edge Conservative Total Return Dividend Portfolio 0.6% 7.0% 6.1% 8.2% 8.3% 1.23
Vanguard Conservative Total Return Dividend Portfolio 0.6% 9.8% 6.1% 7.8% 8.1% 1.1
VWINX (Vanguard Wellesley Income Inv) 0.5% 10.4% 6.2% 7.1% 6.8% 0.94

More detailed year by year comparison >>

We make the following observations:

  • The portfolios outperformed one of the best conservative mutual funds VWINX consistently. We attribute the outperformance to their use of our total return bond fund portfolios. These fixed income portfolios consistently outperform some of the best total return bond funds such as PIMCO total return, Double Line total return and TGW total return fund. 
  • These portfolios again reveal a thesis we have maintained for years: it’s much easier to derive/squeeze returns from the fixed income bonds than from stock funds. For large portfolios, if you are concerned about the volatility from stocks, you can choose to use a tactical portfolio such as MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Most Aggressive (for global allocation) or those as simple as P SMA 200d VFINX Total Return Bond As Cash Monthly. However, this comes with the expense of  more maintenance or more frequent trading, which, for a conservative investor, might be too much to deal with. 
  • It’s possible to choose brokerage specific index (or broad base) NTF (no transaction fee) no load dividend stock or REIT mutual funds or commission free ETFs instead of Vanguard funds or ETFs. 

Market Overview

Last week, Dow Jones industrial index finally surpassed 20,000 and this caused much hoopla in financial media. Stocks rose sharply. The Trump induced rally seems to continue. However, as we pointed out before, reality for the new US administration will soon to settle in and the road ahead will definitely not be as smooth as it seems. Again, it calls for a methodological and disciplined approach in such an euphoric and overvalued market. 

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

Now that the Trump administration is officially sworn in, the new president is facing the reality to deliver his many promises to make substantial changes. 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. Whether the new president can truly achieve this goal is still yet to be seen. One thing is certain: we will see more market volatilities. 

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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