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, June 26, 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.
Alternative Assets And Their Role In Portfolios
MyPlanIQ maintains several alternative portfolios on Brokerage Investors (What We Do -> Brokerage Investors). These portfolios emphasizes some alternative assets such as gold. Financial media have defined alternative assets in various ways. In this newsletter, we would like to discuss this concept in some details.
The simplest and most popular definition is that any asset other than traditional stocks and bonds are defined as alternative assets. By this definition, not only commodities and gold are called alternative assets, even REITs (Real Estate Investment Trust) and TIPS (Inflation Protected Securities) are classified as alternative. Other definitions vary.
We look at this problem from a different angle. Our key yardstick is so called intuitively productive assets.
Productive assets vs. speculative assets
By intuitively productive assets, we mean those assets that can intuitively perceived to produce value in a long term. Let’s look at the asset classes we have frequently discussed and used by MyPlanIQ:
- Stocks: stocks represent (fractional) ownership of a business. In a fair marketplace, in aggregate, businesses have to produce extra returns in excess of cash or safer bonds. In a more technical details, that would mean businesses owners can derive extra cash (flow) in a long term. Otherwise, business owners will abandon their risky enterprises and simply invest in bank deposits or lending (bonds). We have discussed long term stock returns in many newsletters such as the latest April 17, 2017: Risk vs. Volatility: Long Term Stock Market Returns. It is easy and intuitive to comprehend this. Thus, stocks in aggregate are a productive asset. Notice that we use ‘in aggregate’ as for any single stock (business), there is no guarantee that business can definitely derive extra returns above cash or bonds even in a very long period. Furthermore, in a long term, stock value can be estimated as the total free cash flow it produces. It is thus relatively easy to estimate stock fair value (in a long term).
- Bonds: bonds are lending certificate with interests. Again, the value of a bond in its lifetime can be relatively easily estimated. It’s very intuitive to comprehend its value. Bonds are a productive asset also.
- REITs: REITs are a subset of stocks that specialize in real estate investments. It’s actually very easy to comprehend REIT’s value by looking at its cash flow (or in REIT terminology, FFO or Funds From Operation). Again, as a major asset for any business, in aggregate, one can easily infer that in the long term, REITs should produce higher returns than cash.
- TIPS: Inflation protected bonds or securities are relatively new (well more than 20 years now). Some still classify it as an alternative asset as its value consists of inflation adjusted interest and the final inflation adjusted principal, which seems to be convoluted. However, though not as conventional as traditional bonds, TIPS definitely are of productive value.
- Commodities: this leaves commodities whose value is hard to estimate. Though one can claim that the prices of commodities should rise with inflation in the long term, the problem is that their prices are also (mainly) determined by the supply/demand relationship. For commodities such as agricultural products and industrial metals that are useful or essential for business or human livelihood, their value can still be weakly comprehended as supply/demand eventually should obey fair capital market rules. However, even with this, it’s still hard to comprehend its excessive value over inflation rate.
- Gold and silver: these precious metals are mostly used for display of perceived value. They are more subjective than other commodities. In human history, gold is viewed to be able to preserve value. However, its extra value above inflation is again very hard to estimate and comprehend.
To summarize, commodities, gold and silver are really not intuitively productive assets. It’s hard to estimate their fair value. From this angle, we would classify them as alternative assets while we classify stocks, REITs and bonds as productive assets.
In general, alternative assets should be used with care. For a Strategic Asset Allocation (SAA) portfolio, alternative assets should only be used within certain mega trends or major themes. At the moment, MyPlanIQ SAA portfolios have some exposure to these alternative assets. The reason is that the US and global central banks have adopted ultra loose monetary policies that will erode the value of paper currencies eventually. Globalization in the past 20 years has unleashed strong demand to natural resources. Furthermore, given the current geopolitical situations and the overvaluation of stocks and bonds, we believe these alternative assets can serve as a hedge. However, we don’t expect the allocation and the holding of these assets will be forever, unlike stocks and bonds. Regardless, we believe investors should only have some small portion allocated to alternative assets in their overall investments because of their speculative nature.
For a Tactical Asset Allocation(TAA) portfolio, we view the alternative assets more like candidate trading assets that can give our portfolios more opportunities. But we caution that these assets behave more speculatively and investors should treat them as such also.
Alternative portfolios review
The following are the alternative portfolios that we often review:
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||10Yr Sharpe|
|Harry Browne Permanent Portfolio||5.7%||4.5%||3.9%||3.8%||6.0%||0.81|
|Permanent Income Portfolio||2.8%||3.2%||4.5%||4.8%||5.8%||0.9|
|My Simple Alternative Hedge Fund||3.8%||6.3%||2.7%||7.0%||8.3%||1.01|
|Bridgewater All Weather Portfolio Risk Parity||3.3%||5.2%||3.0%||3.1%||5.2%||1.23|
|Bridgewater All Weather Portfolio||4.8%||7.0%||3.5%||4.0%||5.9%||1|
|VWINX (Vanguard Wellesley Income Inv)||3.9%||6.8%||5.6%||7.5%||6.7%||0.95|
These portfolios have kept up with VWINX (Vanguard Wellesley Income Inv) well. The performance of the alternative assets:
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||10Yr Sharpe|
|GLD (SPDR Gold Shares)||10.0%||3.9%||0.0%||-4.6%||6.4%||0.31|
|DBC (PowerShares DB Commodity Tracking ETF)||-6.1%||0.9%||-17.4%||-10.6%||-4.9%||-0.26|
|VIPSX (Vanguard Inflation-Protected Secs Inv)||1.5%||1.7%||1.0%||0.3%||4.1%||0.59|
|LTPZ (PIMCO 15+ Year U.S. TIPS ETF)||2.7%||3.0%||2.1%||0.6%|
|TLT (iShares 20+ Year Treasury Bond)||4.3%||-2.9%||5.7%||2.6%||7.1%||0.45|
|LQD (iShares iBoxx $ Invst Grade Crp Bond)||3.1%||3.5%||3.5%||4.1%||5.6%||0.6|
A few noticeable points:
- Gold (GLD) has done very well YTD. It also has a reasonable return for the past 10 years.
- Similarly, long term bonds have defied naysayers and have done their jobs: in terms of returns and hedging.
- However, broadbase commodity index ETF DBC has a very dismal performance for the past 10 years. This has become a drag to those portfolios that have taken exposure to this asset.
Though major stock indexes like S&P 500 and Nasdaq continue to levitate around record close levels, we should be aware that there has been some considerable divergence among individual stocks. Small cap stocks are lagging and only some large technology stocks such as Apple, Facebook etc. are at record levels. Long term bonds have recovered from their year end slump, mostly because of worry on economic growth strength. As we stated, we believe risk is lurking and one should be cautious.
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 22, 2017: Summer Seasonality And Portfolio Management
- May 15, 2017: Cash: Banking Or Investing?
- May 8, 2017: Holding Period of Long Term Timing Portfolios
- 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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