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, May 22, 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.
Cash: Banking Or Investing?
Many investors are opt to traditional banking for their short term cash. Using a traditional bank not only gives a customer peace of mind as banks are considered to be ultra safe: even in 2008-2009 financial crisis, banks eventually withstood the disaster because of the federal government’s intervention (though some money market funds broke the buck, investors were still able to make their money back). In general, FDIC insurance further covers up to $250,000 to checking, saving, CDs deposits in a bank. Banks also offer much more convenience with their extensive physical branches.
However, online electronic money transfer and ease of investing in index funds or ETFs have provided another way for investors to derive better returns without incurring substantially more risk and sacrificing ease of use. Let’s first take a look at short term bond fund returns vs. CD returns
Short term bond funds vs. CDs
The following chart compares one year returns of investing in VBISX (Vanguard Short-Term Bond Index Inv) or purchasing 1-year CD from 1995 to 2016 (as the fund started in mid 1994). The historical 1-year CD yield is from bankrate.com.
|Compound Annualized||Average Annual|
|1 Year CD Yield (%)||1.60%||2.60%|
- In the past 21 years, there were only three years when the short term bond fund returned less than 1-year CD.
- The average bond fund one year return is 1.8% more than the CD. The annual compound average (i.e. assuming reinvesting every year) is 1.4% higher.
- There was no losing year for short term bond fund in these 21 years, even in 2008 and 2011, when many ultra short term bond funds lost money (see below).
- There were three periods when CD yields rose (meaning interest rate rose): 1996-1998, 1999-2001, 2004-2007. In all of the three periods, the bond fund returned less than CD in the first (1996, 1999) or the second year (2005) but then returned in later years of these periods.
Based on Vanguard, the bond fund’s average effective maturity is 2.9 years, meaning on average, the bonds held in the fund mature in 2.9 years, longer than one year.
The Vanguard index fund has $3,000 minimum and 0.15% expense ratio which is not ideal as a cash substitute. However, its ETF equivalent fund BSV (Vanguard Short-Term Bond ETF) has only 0.06% expense ratio (the expense ratio is lower than many money market funds). If you can trade this commission free such as in TDAmeritrade, Merrill Edge or Vanguard, this fund can be a very good candidate. The following table shows the ETF has a similar or even a slightly better return than VBISX:
|1Yr AR||3Yr AR||5Yr AR||10Yr AR|
|BSV (Vanguard Short-Term Bond ETF)||1.0%||0.5%||1.3%||1.1%||2.8%|
|VBISX (Vanguard Short-Term Bond Index Inv)||0.7%||0.4%||1.2%||1.1%||2.8%|
Electronic ‘banking’ through investment accounts
Consumers usually have very different views on traditional banking and investing. However, if we look at more closely how one invest in a 1-year CD or in a short term short index ETF or mutual fund, we can see many differences are small enough:
- Purchasing and redemption: to purchase a CD, one would go to a bank or visit a bank online and make a purchase. A mature CD would be redeemed automatically and your money is back to your checking or savings account. To purchase a bond fund, one would mostly place a purchase order in his/her online investment account. To redeem, one has to place a sell order.
- The main difference here is that to invest in a bond fund, cash has to be first deposited in an investment account. Furthermore, once redeemed, one has to withdraw/transfer money to a bank account.
- Many variations on how to transfer money between a bank account and an investment account. Several brokerages also have banking accounts. These include Merrill Edge/Bank of America, Schwab and Fidelity. You can easily transfer between your bank account and investment account. The transfer is usually instant. However, if your bank does not offer an investment account or your investment account is in another brokerage, you probably need to use electronic transfer such as ACH (usually free). ACH can take a one or two days. That’s the inconvenience.
- Some brokerage investment accounts provide many banking features such as bill pay, check writing, debit and credit cards. This basically eliminates the need of a banking account. TDAmeritrade’s cash management and Fidelity provide these features. The disadvantage here is that one can mix up a basic ‘banking’ or ‘cash’ account with a general investment account that also invests in some long term holdings or even trading of ETFs, mutual funds or stocks. This sometimes can complicate and confuse investors. To avoid this, you can set up a separate ‘cash’ investment account that’s different from a long term investment account. However, these ‘cash’ investment accounts are still not as feasible as a traditional banking account, which, for example, allows automatic salary deposits.
Investing in a short term bond fund can possibly boost your cash returns around 1% or even more in a long term. However, the fluctuation of a bond fund price is certainly the biggest threat to using it as a cash substitute. We want to offer the following rule of thumbs:
- If you have some cash that’s not needed for at least a year and would like to purchase a CD with maturity one year or longer, you can consider to purchase a short term bond fund instead of purchasing a CD. At any given year, there is no guarantee that a short term bond fund returns more than a CD, or even doesn’t lose money. However, if your cash can be replenished periodically (such as salary or regular earned income) and you are consistently doing such investment for a long time, it’s most likely you will derive the extra returns. Notice this kind of cash is different from other cash that you can invest in a long term portfolio, i.e. in stocks or longer term bonds.
- If you want to invest this kind of cash in a more predictable way, you might consider purchasing individual short term Treasury bills or investment grade bills directly. Remember a CD is really a bank’s way to invest in some short term debts. The return of a CD is after bank’s fees and insurance fees. Purchasing debts directly by yourself removes these fees. In today’s online world, investing directly is no longer a hassle. For example, for ultra safe Treasury bills, notes and bonds, one can use TreasuryDirect.gov. We will have more on this in a separate newsletter.
Again, we want to emphasize that if you estimate that you will invest in a short term bond fund repetitively, it’s very likely that you can gain a better return than a bank CD. However, if your cash is only a one time event, a short term bond fund might not be a good idea. You should consider purchasing a fixed maturity Treasury bill or even a CD. Our observation tells us that many people have just too much cash lying around constantly in a bank account since they are unsure when to need them (but knowing they might need them in some future time).
Markets are behaving like how they have been for the past two years: calm and persistently showing no much fear. For now, as last quarter’s earnings reports are almost over, investors are encouraged with the good year over year earnings growth. Emerging market and international stocks have outperformed US stocks this year. Regardless, U.S. stocks are extremely overvalued and interest rates are still extremely low. Breaking one or the two will surely happen sometime in the future. As we have no predictive power on the near term, we want to emphasize proper risk management and risk allocation. Stay on course.
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.
- May 1, 2017: Debate on Risk vs. Volatility
- April 24, 2017: The Long Term Stock Market Timing Return Since 1871
- April 17, 2017: Risk vs. Volatility: Long Term Stock Market Returns
- April 10, 2017: Total Return Bond ETFs And Portfolios
- April 3, 2017: Quarter End Asset Trend Review
- March 27, 2017: Practical Consideration For IRAs And 401k Accounts
- March 20, 2017: Fund Fees: That’s (Still) Outrageous
- March 13, 2017: Long Term Stock Valuation Review
- March 6, 2017: Asset Classes for Retirement Investments
- February 27, 2017: Fidelity Total Bond Fund Review
- February 20, 2017: Long Term Stock Timing Based Portfolios And Their Roles
- February 13, 2017: Alternative Investment Portfolios Review
- February 6, 2017: Tax Free Municipal Bond Investments Review
- January 30, 2017: Brokerage Specific Conservative Portfolios
- January 23, 2017: Fixed Income Portfolio Review
- January 16, 2017: Long Term Trend Following Portfolio Review
- January 9, 2017: Tactical Asset Allocation Review
- January 3, 2017: Strategic Asset Allocation Review
- December 12, 2016: Enhanced Index Funds
- December 5, 2016: Review Of Broad Base Core Mutual Funds For Brokerages
- November 28, 2016: Core Index ETFs Review
- November 21, 2016: International Exposure Of U.S. Large Companies
- November 14, 2016: Asset Trends After The Election
- November 7, 2016: Rising Rate And Current Bond Trend
- October 31, 2016: Economy Power And Long Term Stock Returns
- October 24, 2016: Current Commodity Trend And Managed Futures
- October 17, 2016: Investment Mistakes And Good Or Bad Investment Strategies
- October 10, 2016: Momentum Investing Review
- October 3, 2016: Survey & Feedback
- September 26, 2016: Fixed Income Investing: Actively Managed Funds vs. Index Funds
- September 19, 2016: Stock Investing: Actively Managed Funds vs. Index Funds
- September 12, 2016: Newsletter Update
- September 5, 2016: Overvalued Markets And Long Term Timing Strategies
- 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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