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, July 31, 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 Beat The Best Balanced Allocation Fund

When it comes to finding the best balanced allocation fund, several well known names come to mind:

“Best” Balanced Funds Comparison (as of 6/23/2016)
Fund YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
PRWCX (T. Rowe Price Capital Appreciation) 9.5% 11.7% 9.5% 13.2% 8.2% 0.54
BRUFX (Bruce) 7.3% 5.5% 3.9% 10.5% 6.9% 0.68
DODBX (Dodge & Cox Balanced) 5.0% 17.6% 6.9% 13.0% 5.9% 0.35
VBINX (Vanguard Balanced Index Inv) 6.4% 10.5% 6.5% 9.7% 6.5% 0.51
MALOX (BlackRock Global Allocation Instl) 7.9% 10.9% 3.2% 7.2% 5.0% 0.41
PASDX (PIMCO All Asset D) 6.0% 10.0% 0.8% 4.0% 4.7% 0.51
GBMFX (GMO Benchmark-Free Allocation III) 7.5% 9.2% 0.9% 5.0% 4.9% 0.59

You can find these funds in our SmartMoneyIQ Managers. We regularly review or mention these funds. 

The highlighted ones are domestic balanced funds and the rest are global allocation funds. 

But for the best of the “best” balanced funds, according to many investors and rating agencies like Morningstar, it would be really PRWCX (T. Rowe Price Capital Appreciation). Morningstar rates the fund ‘Gold’, the best in the category. This fund has consistently delivered higher returns than others. From the above table, one can see that it has outperformed others for the past 10 years by some big margins. In fact, it has done so well such that it now manages more than $28 billions and its manager closed the fund to new investors in June 2014, three years ago. So investors who aren’t in the fund are already out of luck to invest in it. 

We have featured this fund several times. In fact, we have monitored this fund for over a decade. One of its strength is that the fund is very adept in using convertible and high yield bonds in its fixed income investing. Furthermore, its stock investment strategy is growth at a reasonable price (GARP), a strong area in T.Rowe Price fund family. 

The ‘best’ balanced portfolio

Morningstar classified PRWCX into the 50%-70% equity allocation category. It’s really tough to construct a balanced portfolio to deliver similar or better return than PRWCX. As we stated many times, we believe that our total return bond fund portfolios (see those listed on Brokerage Investors page or a recent article on these portfolios January 23, 2017: Fixed Income Portfolio Review) are some of the best fixed income solutions. Naturally, we can construct a static portfolio that has about 70% in stocks (using S&P 500 index fund VFINX) and 30% in a total return bond fund portfolio such as P_46880 (Schwab Total Return Bond)): 

Bonds P_46880 30.0%
Stocks VFINX 70.0%

Unfortunately, as one can see in the following table, this portfolio 50 To 70 Percent Static Balanced Portfolio still lags behind PRWCX. Thus, just simply using the best fixed income investing strategy for the fixed income part and adopting index funds for stock portion is not enough to beat this fund. 

However, as good as it is, the fund has a glaring weakness in 2008: it had a 48% maximum drawdown and lost 27% in that year. What we can do is to try to reduce the drawdown while improving portfolio return by using a long term stock timing portfolio such as P_61056 (P SMA 200d VFINX Total Return Bond As Cash Monthly). This portfolio invests in S&P 500 (VFINX) when S&P 500 total return value is above its 200 day moving average and otherwise invests in P_46880 (Schwab Total Return Bond) (instead of simply going to cash). The portfolio is rebalanced monthly to avoid frequent trading. The portfolio is listed on Advanced Strategies page.

Its allocation is as follows:

Asset Fund in this portfolio Percentage
Bonds P_46880 (Schwab Total Return Bond) 30.00%
Tactical P_61056 (P SMA 200d VFINX Total Return Bond As Cash Monthly) 70.00%

This portfolio 50 To 70 Percent Tactical Balanced Portfolio has done way much better than PRWCX for the past 10 years and 16 plus years since its start date on 1/2/2001. 

Portfolio Performance Comparison (as of 6/26/2017):
  Max Drawdown YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 1/2/2001
50 To 70 Percent Tactical Balanced Portfolio 12.9% 7.9% 14.2% 6.6% 11.9% 11.0% 11.2%
50 To 70 Percent Static Balanced Portfolio 41.5% 7.9% 14.2% 7.6% 12.5% 7.7% 7.1%
PRWCX (T. Rowe Price Capital Appreciation) 41.8% 9.5% 16.3% 9.5% 13.2% 8.2% 9.7%

See detailed year by year comparison here >>

To summarize:

  • The portfolio cuts down maximum drawdown by more than 2/3: 12.9% vs. 41.8%! Though PRWCX is positioned as a balanced portfolio, its large drawdown makes it hard for a conservative investor (like retiree) to simply rely on this portfolio as the overall investment. However, the tactical portfolio, with only 13% maximum peak to trough drawdown, is now much more suitable to these investors.
  • The reduced risk does not need to be penalized with lower returns. Instead, this portfolio has done much better than PRWCX. So risk avoidance does not necessarily come with the price of lower returns, even though such a claim can only go that far (i.e. ultimately, once improvements have been made, to get higher returns does come with higher risk. However, there are definitely first level risk reduction that can improve returns also).  
  • However how reasonable returns the portfolio has achieved for the past 1, 3, 5 years periods (6% to 12% annual returns are nothing to sneeze at), it has lagged behind PRWCX for these periods. This reminds investors that an investment strategy is a long term play. If you just chase short term performance, you will be disappointed. 

Market Overview

Frankly, writing market overview has recently become very boring as stock markets have been extremely calm with very little volatility. In fact, the following chart shows that the CBOE VIX index (S&P 500 stocks implied volatilities) has been the lowest since 1990!

Though investors like us who are actively keeping an eye on market risk have not been rewarded for the past 8 years and going, we believe that markets can only become even more risky when they are calm and their valuations are high by historical standard. Our attitude is not to be complacent (though it’s hard to be as markets have been so calm for so long), to ignore noises and opinions (including any subjective comments we might have made) and stick to a sound investing strategy.

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. 

Latest Articles

Enjoy Newsletter

How can we improve this newsletter? Please take our survey 

–Thanks to those who have already contributed — we appreciate it.

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.