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.

How To Start A New Portfolio

One of the most challenging issues for investors is how to initiate a new portfolio. We have received numerous emails from users on this problem. Many complained that once they started to follow a portfolio, they immediately experienced a loss. Though there is a psychological Murphy’s law here (similar to the feeling that you move to an even slower line right after switching to this line from a crowded one while waiting in line), this problem is indeed important: in fact, many new users will immediately dismiss the strategy or portfolio as not working and abandon it. This happens to many of our strategies including  Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA) portfolios.

Reasonable expectation on risk

Many users often start to follow a portfolio or a strategy when that portfolio has been doing well recently. In fact, this often is the most dangerous time to initiate such a portfolio. The key to understand here is that regardless of what strategies and portfolios, other than cash and short term bonds, they are all long term strategies that require patience and long term following. A long term strategy implies that there is a short term risk at any given point of time. For example, look at the following chart:

The portfolio in this chart is our representative tactical asset allocation portfolio P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds. This chart represents the portfolio value growth since 1998. The portfolio has done way better than S&P 500: annualized 14.2% vs. VFINX’s 6.8% in this almost 20 year period. 

However, if one were to initiate a new portfolio to follow this model portfolio in early 2015, he/she would immediately be in a downhill: the maximum drawdown (or loss) is 15.8% until early 2016. This drawdown is almost close to its historically high 16.6% that occurred in 2006. This is just a very recent extreme. There are many other smaller instances. 

Does this mean the strategy stopped working? No, we don’t believe so. There is nothing wrong with the fundamental of this strategy. Its short term loss should be fully expected. 

As we also discussed in the recent newsletter May 8, 2017: Holding Period of Long Term Timing Portfolios, a tactical or timing strategy is still very risky in a short term. It does reduce volatility compared with a buy and hold stock index, but it’s not enough to make it a short term strategy. In fact, its required holding period is at least 10 to 15 years. 

Furthermore, even if one were to follow an all bond portfolio such as those total return bond fund portfolios or even tax free municipal bond portfolios listed on Brokerage Investors page, it’s still possible to get hit by short term loss. An example is Fidelity Muni Bond Funds that lost near the end of 2016. This indicates even for a bond portfolio, it can’t be treated as completely risk free and it’s not necessarily a short term portfolio. 

However, it’s a real issue for many users to initiate a new portfolio. Reasonable expectation aside, one can alleviate this by following some rules explained below. 

Scaling risk up to match target risk allocation

By risk allocation, we mean the allocation to risk assets including stocks, REITs and commodities. It’s the percentage of 100-MyPlanIQ’s risk profile. 

Often users switch from an existing allocation to the holdings of the new portfolio. The existing allocation can be either all cash (meaning new money), all bonds or a mixed of stocks and bonds. If you have all new cash and invests in the portfolio which currently holds 60% stocks, that would mean you immediately increase your risk exposure (allocation) to a level that could materially affect its value. On the other hand, if you start from an all stock account and follow a 60% stock allocation portfolio, you would have reduced risk allocation by 40%. 

A few rules of thumbs: 

  • If your existing risk allocation is the same as the new one’s, you can switch the whole account without experiencing different account value gyration. For example, if you are currently in cash and the portfolio to be followed is a tactical portfolio that happens to be in cash or bonds, you can immediately switch. 
  • If your existing risk allocation is bigger than the new one’s, you can either switch in one step or gradually reduce risk asset exposure to match the new one. Whether you want to do it in one shot or do it in a pre-determined multi-steps (such as in 3 steps, each step in a month) depends on your own read on the current market condition. But it’s very important to stick to the pre-determined multi-step schedule if you choose to do so. Your schedule should not be affected/changed just because markets have behaved differently from your expectation. The schedule is made out precisely to counter such guess and trial tendency, a human nature that is very bad for investing. 
  • If your existing risk allocation is smaller than the new one’s,  you should try to scale your risk allocation to the current one gradually. This step is often called Dollar Cost Average (DCA) for any new money to invest in stocks. Depending on the current market outlook, you can design a fixed period multi-step process. For example, it can be in three chunks, each invested in a month. In general, always remember that when the portfolio is doing well, it’s riskier. Furthermore, it also depends on the risk allocation of the followed portfolio. Sometimes, the risk allocation of the followed portfolio can be under invested. For example, even though the target allocation is 60% in stocks, right now, the followed portfolio only allocates 30% in stocks because of a market downtrend. In this case, you might want to reduce the number of steps so that your account can completely follow the portfolio faster. 

Finally, we want to remind our readers again that even after you adopt the above steps, it’s still possible that you experience underperformance in a short term. The above steps are no cure to this problem. They only alleviate the pain to switch to a new portfolio. Furthermore, by forcing yourself to go through this process planning, we hope you will be equipped with a better expectation on the portfolio performance psychologically. This will cushion the pain of possible underperformance/loss in a short period of time. 

Market Overview

Stock markets are still elevated. In fact, it’s interesting to see that right now, for US stocks, growth is leading blend while value stocks have languished. Emerging market bonds and high yield bonds, two of the riskiest bond sub-assets are still ranked the highest among all bonds. We are still not seeing a risk off mode at this moment. Again, we don’t think that we should try to predict markets one way or the other, we will respond as time goes. As always, manage risk properly and staying the 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. 

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