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, March 13, 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.

Asset Classes for Retirement Investments

When it comes to retirement investments, it’s paramount to construct a portfolio that can deliver a reasonable return with acceptable risk. This is where the asset allocation comes into play. One should carefully choose funds that represent asset classes. These asset classes should deliver reasonable returns in the long term. Furthermore, by carefully weighting allocations to them, one can balance out risk because of the correlation of these assets (funds). Intuitively, by correlation we mean when one asset price zigs, others zag or at least they are not completely in sync to fall together. 

In a word, the criteria to choose asset classes should be

  • Returns: these asset classes should deliver reasonable long term returns.
  • Risk: they are more or less uncorrelated. Ideally, they can hedge each other. Individually, they should pose as little risk as possible 

Asset allocation (weighting in different assets) is the one of the main factors that affect a portfolio’s overall return and risk.  In a study of hundreds of US pension funds by Gary Brinson, Randolph Hood and Gilbert Beebower, it was found that asset allocation is responsible for over 90% of variations in portfolio return. Even though it’s still arguable on how much asset allocation impacts on a portfolio’s return, it’s very intuitive and compelling that asset weighting (allocation) is one of the main determining factors. One thus needs to take asset class selection seriously. 

Long term asset class returns

There are two major asset classes that a balanced asset allocation portfolio should possesses: equities or stock ownership and debts or bonds. Other major asset classes worth considering are so called alternative assets. In the following, we look at these assets in more details. 


Equities represent fractional stock ownership. Owning stocks means that you become a shareholder that can claim part of the underlying company. A shareholder shares the company’s profit or loss. It’s a direct participation of the business’ success or failure. In a previous article, we stated that equities should deliver extra returns over cash or bonds (so called risk premium) in the long term. The main reason 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, for example. In aggregate, equities in general should return more than cash or even safer fixed income. 

Equities directly represent the underlying economic activities. However, in a fair capital market, in the long term, even in an economy that grows slowly, the equity premium should still exist and thus they still offer better returns than other fixed income and cash. 

In a globally diversified portfolio, there are three main equity assets. 

  1. US stocks. As the biggest economy in the world, US stocks have consistently shown a 5%-6% extra annualized returns over inflation (the real return, i.e. nominal return minus inflation). In fact, for the past 90 years till 2015, Figure 1 shows US stocks delivered 6.6% annualized real return or 9.5% annualized nominal return. 
  2. The second major economic bloc is the Europe and Japan, the developed markets. These stock markets also delivered similar long term returns as the US. For example, in Figure 2, for the past 116 years till 2015, UK equities (one of the largest economy in this bloc) returned 8.9% annually or 5.0% annualized real return. 
  3. The third major economic bloc is the emerging markets. For the past 30 years, emerging markets like India, China, Taiwan, Brazil, eastern European countries and Singapore have grown rapidly. Depending on the definition, the aggregate emerging market economy accounts for around one third of the world GDP. In the table below, one can see that emerging market equity has delivered a reasonable return, though it was hurt recently. 

Figure 1: Long term US stock returns


Figure 2: Long term UK stock returns

Table 1: Major stock and bond returns (as of 3/3/2017):

Asset Index Fund 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15 Yr AR Since 12/31/96
VTSMX (Vanguard Total Stock Mkt Idx Inv) 23.0% 10.3% 13.8% 7.9% 7.6% 8.1%
NAESX (Vanguard Small Cap Index Inv) 27.1% 7.6% 13.6% 8.5% 9.6% 9.2%
VGTSX (Vanguard Total Intl Stock Index Inv) 15.2% 1.1% 4.1% 1.6% 6.2% 4.7%
VEIEX (Vanguard Emerging Mkts Stock Idx) 22.3% 3.0% -0.4% 3.0% 9.1% 5.8%
VGSIX (Vanguard REIT Index Inv) 10.5% 10.9% 11.1% 5.1% 10.6% 9.6%
VBMFX (Vanguard Total Bond Market Index Inv) 0.7% 2.1% 1.9% 4.0% 4.3% 5.0%


Bonds are debt (loan) contracts that allow a lender to get the principal back when the contracts are mature. In addition, the bond holder (lender) also derives interest payment periodically. Bonds are thus called fixed income. In general, bonds are more stable than stocks even though they are also subject to the risk of default or missed interest payment. If investors want to sell bonds before they mature in a secondary market, they are also subject to the interest rate risk as bond price can fall or rise depending on the prevailing interest rate at the time of selling. 

Bonds are an essential asset class that offers stability when stock prices fall. In a falling stock market, demand of ‘safer’ investments such as bonds rises and thus bonds can compensate for the loss of stock investments. Though bonds have been in a secular bull market since early 1980s and many investors fear that once the bull market ends, they will suffer great loss in their fixed income investments, historical evidence indicates that situation is less dire: even in a bond bear market, bonds can still offer positive nominal returns as the interest rate rises slowly and the capital loss are compensated by the interest payments and the periodic repurchase of new bonds because the old ones become mature. 

Alternative assets

In addition to the two major asset classes, in the past 10 years, with many new investment instruments becoming available, other useful asset classes have found a way to help diversify and enhance portfolios. For retirement investments, we believe REITs (Real Estate Investment Trust) are particularly useful. An REIT invests in real estates or properties that primarily derive income from rental. Furthermore, it can incur capital appreciation or loss if the price of underlying properties increases or decreases at the of liquidation. By law, an REIT has to distribute at least 90% of its earnings as dividend to investors. In essence, REITs are investments for income investors. However, even for overall capital growth, REITs have delivered comparable total return (dividend reinvested) in the long term. In the above table, Vanguard REIT index fund VGSIX has had the best total returns in the past 15 and 20+ years. Based on NAREIT, from Dec. 31, 1978, through March 31, 2016—total returns for exchange-traded U.S. Equity REITs have averaged 12.87 percent per year compared to just 11.64 percent per year for stocks. 

However, REITs can be volatile. In fact, Vanguard REIT index fund VGSIX has a 71% maximum drawdown during the financial crisis in 2008-2009, compared with 55% of Vanguard 500 index fund (S&P 500). It also underperformed VFINX in the past 10 years. 

David Swensen, the known Yale endowment manager, and many other well known investors have pointed out that REITs can be a good portfolio diversifier that enhances overall returns. For example, Swensen recommends 20% REIT exposure in an individual portfolio (see P David Swensen Yale Individual Investor Portfolio Annual Rebalancing). 

Another prominent alternative asset class is commodities. However, for average investors, we dont recommend it unless you follow a well defined sound investment strategy. 

Sub asset classes to boost returns

Within the major asset classes, one can invest in sub assets to boost returns. For stocks, investors should consider getting exposure to the following sub asset classes if they are available.

Small capitalization stocks

Small companies that have market capitalization less than $2b are considered to be small capitalization. These companies in general grow faster than larger companies, thus offer better returns in the long term. In Table 1, small cap index fund NASEX outperformed large cap index fund VFINX for the past 10, 15 and 20+ years by about 1% or so. 

Ibbotson has tracked the long term performance of small cap stocks. In the following, it shows that from 1926 to 2015, small cap stocks outperformed large stocks by 2%. 

Another stock sub asset class worth considering is the dividend stocks. In the long term, dividend stocks have had a similar total return compared with broad market stock indexes. But they offer more steady dividend income and have less volatility. In the following table, one can see dividend stocks is very comparable with S&P 500 in a long period. 

Dividend stocks vs. S&P 500 (as of 3/3/2017)
Index fund 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 3/31/93 AR
VFINX (Vanguard 500 Index Investor) 22.0% 11.1% 14.0% 7.7% 7.0% 9.2%
VDIGX (Vanguard Dividend Growth Inv) 15.3% 9.8% 12.6% 8.7% 7.8% 8.2%

Fixed income

Many investors overlook the importance of sub asset classes in bonds. Some of sub asset classes of bonds can be very effective to help enhance returns or hedge stock loss. We believe it’s possible to actively manage exposures to these sub assets to deliver market beating returns. 

There are two main risk spectrums in bond investment: interest risk and credit risk. Interest risk is related by the maturity length of a bond. Roughly we can divide bonds into short term,intermediate term and long term bonds.

Credit risk is about the risk of principal and interest payment. In general, one can divide them into investment grade and high yield. US Treasury bonds are considered to be of highest credit and thus they belong to a separate class, different from investment grade corporate bonds.  High yield bonds offer highest returns but also possess highest risk. For example, Vanguard high yield bond index fund VWEHX had 6.3% annualized return for the past 10 years, better than the total bond market index fund VBMFX’s 4%, but it lost 21% in 2008, compared with VBMFX’s 5.1 gain in that year.

Other important bond assets include inflation-protected bonds, emerging market bonds, foreign bonds and municipal bonds.  

Because of the wide spectrum of bonds to select from, we believe a good active bond investment strategy can be relatively esy to outperform a bond index fund. For more details, see September 26, 2016: Fixed Income Investing: Actively Managed Funds vs. Index Funds.

Asset allocation strategies

Given the plethora of asset classes to choose from, average investors can go from a Simpler Is Better (SIB) approach that only works with the core asset classes or venture into more sub asset classes. On the other hand, choosing and weighting assets goes hand in hand with an asset allocations strategy. One needs to choose a sound long term strategy and be disciplined to stick to it. There are two well known asset allocation strategies:  Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA). Interested readers can refer to our asset allocation page for more information. 

Market Overview

US stocks and foreign stocks continued their rise last week. However, all other assets including REITs, emerging market stocks and various bonds fell.  Federal Reserve has indicated it’s highly likely to raise interest rate this month. The unusual long period of stock rise since the election is probably due for a correction. We are in a very over valued market. On the other hand, no one can predict future and again the best way is to stick to a well defined strategy and react accordingly when conditions change. 

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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