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.

A Mixed Bag Performance of Momentum Investing

At MyPlanIQ, our Tactical Asset Allocation(TAA) portfolios rely on multi-asset momentum to dynamically allocate asset exposures. The purpose is to avoid downside while capturing upside of assets that are in an up trend. Since momentum investing can happen in many levels that include individual stocks, industry, sector or asset levels, investors are often confused.  We thus periodically review representative momentum based portfolios at these levels. Our latest review is October 10, 2016: Momentum Investing Review. This newsletter looks at the latest performance and some issues for these portfolios/funds.

Again, here is the taxonomy of these portfolios: 

  • m1: A group of individual stocks such as Dow Jones 30 or Nasdaq 100 etc. — Can be Effective, but volatile. 
  • m2: A group of industrial stock funds such as Fidelity’s famous Fidelity Select funds. – Can be Effective, but volatile. 
  • m3: A group of stock sector funds such as SPDR’s S&P sector ETFs such as SPDR Select Energy (XLE) etc. – Can be Effective, but volatile. 
  • m4: A group of stock style funds such as Russell large, mid and small cap stock ETFs. – Effective and comparable risk. 
  • m5: single stock index (fund) buy/sell decision. – Fickle though might be on par with buy and hold. 
  • m6: A group of diversified and somewhat uncorrelated asset classes such as stocks, bonds, real estates (REITs) and their minor asset classes such as long term bonds, international bonds, gold etc. – Effective and lower risk.

Furthermore, at MyPlanIQ, we always advocate the momentum driven strategy at asset allocation level, or m6 in the above categories. This is what our  Tactical Asset Allocation(TAA) strategy is based on.

Individual stock momentum investing is performing

Year to date, the individual stock momentum based funds are doing well:

Individual stock momentum based fund performance (as of 6/12/2017)
Fund Name YTD
1Yr AR 3Yr AR 5Yr AR 5Yr Sharpe 10Yr AR
PIE (PowerShares DWA Emerging Markets Mom ETF) 17.2% 11.9% -1.7% 2.1% 0.12  
EEM (iShares MSCI Emerging Markets) 19.8% 24.3% 0.7% 4.2% 0.21 1.9%
AMOMX (AQR Momentum L) 10.4% 13.6% 7.9% 13.6% 0.97  
PDP (PowerShares DWA Momentum ETF) 11.9% 12.2% 6.9% 12.8% 0.92 6.5%
SPY (SPDR S&P 500 ETF) 9.5% 17.3% 9.8% 15.2% 1.21 7.1%
AIMOX (AQR International Momentum L) 13.2% 6.7% -0.4% 7.6% 0.53  
EFA (iShares MSCI EAFE) 14.4% 20.9% 1.2% 9.7% 0.63 1.1%
ASMOX (AQR Small Cap Momentum L) 5.8% 18.5% 7.0% 14.0% 0.79  
IWM (iShares Russell 2000) 4.8% 21.6% 8.0% 14.6% 0.9 7.0%

More detailed year by year comparison >> 

Domestic stock based momentum funds (AMOMX, PDP, ASMOX) have done better than their respective benchmarks while emerging market and international developed country stocks are performing in par with their benchmarks. We attribute the outperformance to the strong performance of a few stocks, especially large technology stocks. For example, the recently coined FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks have largely outperformed general indices by some large margins. Even accounting for today’s big loss of some of these stocks, they are doing so much better: 

FAANG stocks performance (as of 6/12/2017)
Stock YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
FB (Facebook Inc Class A) 30.0% 26.2% 33.5% 40.7%  
AAPL (Apple, Inc.) 29.2% 51.7% 18.8% 14.7% 24.9%
AMZN ( Inc) 30.5% 34.4% 44.0% 35.0% 29.6%
NFLX (Netflix Inc.) 27.6% 62.8% 37.8% 75.9% 47.0%
GOOG (Google, Inc. Class A) 23.1% 30.4% 19.1% 26.8% 13.9%
SPY (SPDR S&P 500 ETF) 9.5% 17.3% 9.8% 15.2% 7.1%
QQQ (PowerShares QQQ ETF) 18.4% 28.3% 15.9% 18.8% 12.6%

In fact, all FAANG stocks’ annualized returns are more than double than SPY for the past 3 years. 

Industry, sector and style level momentum portfolios are lagging

However, in the US stocks, when we look at the higher level portfolios, they are all doing worse:

Higher Level Momentum Portfolio Performance Comparison (as of 6/12/2017):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
(m2)P Sector Rotation Fidelity Select Funds Top 2 Monthly Adjust with Cash 1.8% 9.5% 14.3% 18.0% 11.2% 0.47
(m3)P Momentum Scoring Sector ETFs 2.0% 1.6% 3.7% 9.0% 5.5% 0.3
(m4)P Momentum Scoring Style ETFs and Treasuries 1.2% 15.6% 2.0% 10.2% 7.9% 0.5
(m5)P SMA 200d VFINX Total Return Bond As Cash Monthly 9.4% 18.2% 8.6% 14.3% 12.2% 0.93
(m6)P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 9.8% 12.9% 4.7% 8.4% 10.0% 0.81
(m1)AMOMX (AQR Momentum L) 10.4% 13.6% 7.9% 13.6%    
SPY (SPDR S&P 500 ETF) 9.5% 17.3% 9.8% 15.2% 7.1% 0.33

More detailed year by year comparison >>

Year to date, all portfolios at industry (m2), sector (m3), style (m4) levels have underperformed badly. We believe that the main reason is that the US stock momentum is pretty much driven by the few stocks concentrated in internet/technology industry. Since these portfolios pick at least 2 funds to invest each time, their performance is whipsawed by the overall segment of stocks picked in the two funds. 

Multi-asset momentum is catching up

However, portfolios at m5 (single index) and m6 (multi-asset) levels are doing well. In fact, the multi-asset portfolio is doing better than S&P 500. The reason: 

Major Asset Performance Comparison (as of 6/12/2017):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
VTI (Vanguard Total Stock Market ETF) 9.1% 18.9% 9.5% 15.4% 7.4%
VEA (Vanguard FTSE Developed Markets ETF) 15.0% 16.4% 1.9% 10.3%  
VWO (Vanguard FTSE Emerging Markets ETF) 14.7% 22.9% 0.6% 4.0% 1.9%
VNQ (Vanguard REIT ETF) 3.0% 4.1% 8.9% 9.8% 5.6%
DBC (PowerShares DB Commodity Tracking ETF) -9.5% -6.7% -18.0% -10.6% -5.2%
BND (Vanguard Total Bond Market ETF) 1.9% 0.0% 2.5% 1.8% 4.3%

Year to date, international developed markets (VEA) and emerging market (VWO) stocks have all outperformed US stocks (VTI). We also note that US REITs (VNQ) has languished recently. 

The outperformance again shows that diversification is important. Just back to a year ago, US stocks were performing far better than international stocks and no one seemed to like international stocks back then. Again, in the coming years, we suspect international stocks will again outperform US stocks every now and then, given that US stocks are very overvalued. 

Even though multi-asset momentum based portfolios have caught up a little bit so far, they have done worse for the past 3 and 5 years. However, long term investors should take a note that for the past 10 years and longer, the portfolio has delivered much better returns with much lower volatility. 

Market Overview

FAANG stocks finally started to correct violently.  At the moment, we note that this mini-correction is very confined to the high flying large technology stocks. So far, this does not seem to be a uniform risk-off event. High yield bonds, international stocks and bonds are still holding up well. Though we have been very cautious all along because of stocks’ overvaluation and the apparent enthusiasm on the technology sector,  whether this is the beginning of the long awaited correction or this is just a blip is everyone’s guess. As stated, one should ignore noises in financial media or even financial markets. Follow a sound investing plan and stick to it. 

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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