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.

Long Term Stock Holding Periods For Retirement Investing

In previous newsletter May 8, 2017: Holding Period of Long Term Timing Portfolios, we looked at the holding periods required to achieve average equity like returns. Specifically, we look at the long term holding periods required for both S&P 500 index (i.e. buy and hold S&P 500 index) and a portfolio that utilizes 10-month (200-day) moving average on S&P 500 index total returns (long term timing portfolio similar to P SMA 200d VFINX Total Return Bond As Cash Monthly on Advanced Strategies page or our Tactical Asset Allocation(TAA) portfolios). Let’s look at the table in the newsletter again: 

  S&P Rolling 10 Yr S&P Rolling 15 Yr S&P Rolling 20 Yr  MA Rolling 10 Yr  MA Rolling 15 Yr  MA Rolling 20 Yr 
AVERAGE 9.2% 9.2% 9.3% 9.4% 9.4% 9.4%
STDEV 5.0% 4.1% 3.3% 3.9% 3.1% 2.3%
MIN -4.0% -0.3% 2.1% 0.9% 2.6% 3.2%
MAX 21.1% 19.3% 17.9% 19.4% 16.7% 15.3%

From this table, we can say that to achieve the average 9.3% or 9.4% returns in a rolling period and avoid at least negative returns in the period, one should hold S&P 500 for 20 years while for a long term timing portfolio, at least 10-15 years (preferably 15 years). So, in general, a tactical/timing portfolio probably shortens holding period by 5 to 10 years. 

But just how significant that the shortened holding period a tactical or timing portfolio has over a buy and hold portfolio in a real practice? Let’s look at this for a retiree’s investments.  

Retirement Spending and holding periods

In our case, we just look at an investor who is already in retirement (retiree) and his sole income is derived from his investment gains (if any). It’s widely held that to properly maintain purchasing power after in inflation, a retiree should only spend 4% of his capital every year (and adjusted with inflation). Put it another way, he can have a living standard of 4% of his capital plus any other income such as social security income or pensions. 

A simple way to calculate how much this investor should allocate into stocks now becomes: since buy and hold S&P 500 requires 20 years at minimum, that would mean he at least should allocate 4%*20 = 80% to fixed income, leaving out the remaining 20% to stocks (S&P 500 index fund like VFINX or SPY). 

Let’s look at how much the 20% of S&P 500 would have grown for the 20 years: nominal value is 0.2*(1+9.4%)^20 = 1.2. Or in the nominal (actual number) term, the 20% turns into 1.2 times of the overall initial investment after 20 years. Not bad. On the other hand, if one assumes 3% average annual inflation, the inflation adjusted value for the 20% would have been 0.2*(1+9.4%-3%)^20 = 0.69. Or the 20% would only be equivalent to today’s 0.69 of the initial capital after 20 years. So we have some short fall here.

That would mean either we have to take a more conservative spending plan such as only spending 3% a year instead of 4%. In this case, the investor needs to allocate at least 3%*20 = 60% to fixed income, increasing the stock allocation from 20% to 100%-60% = 40%. Now, the inflation adjusted value of the 40% stocks after 20 years would have doubled that of the 20% case. Thus now the stock portion has grown to 2*0.69 = 1.38 of the original capital. 

However, this comes with the 25% spending reduction (3% vs. 4%). That’s quite a hit. 

Now, let’s look at situation where instead of buy and hold, the investor adopts a tactical portfolio. As from the above table, it’s reasonable to assume holding in a tactical or timing portfolio for 15 years, it would return 9.4% with at least no risk losing original capital at all. Similar math would say he should allocate 4%*15=60% in fixed income, thus 40% in the tactical portfolio. Again, the 40% of the tactical portfolio will have grown to 0.4*(1 + 9.4%)^15 = 1.54 times of the original value. In inflation adjusted term, it will become 1.01 times of the original (or today’s) value. Just enough to maintain the purchasing power. 

Again, just a mere 5 years holding reduction would not only yield a much safer retirement spending (or 25% higher spending in the above scenario), it would have helped to grow the values better. This is intuitive as in a continuous withdrawal account, a more stable portfolio would give a much higher chance to recover from a deep loss in the stock investment during a bear market. 

The above is for a retiree, but one can extrapolate for someone who will retire in a couple of years or at least within 20 years. That would mean for an investor who plans to retire at the average 65 year old retirement age, it’s very relevant for anyone who is 45 years or older. 

Of course, the above reasoning is based on the assumption of a typical situation. When markets are in some extreme conditions, things will become very different. This is especially true when markets are extremely overvalued or extremely undervalued. 

Current market conditions

Unfortunately, we are now in a condition that stocks are extremely overvalued by various long term metrics. For example, the metrics on Market Indicators indicate that:

  • Buffet’s stock market capitalization over GNP ratio is 142%, 42% more than a comfortable level Buffett would consider to buy stocks. 
  • obert Shiller’s Shiller Cyclically Adjusted PE 10 Years (or CAPE10) is now around 1.8 times of its long term CAPE10 average. 

One can argue about which metric is more suitable or which way is more accurate to calculate a metric, but whatever it is, it’s becoming very clear that stocks are very overvalued. 

The implication: the S&P 500 will have dismal returns in the coming years. In fact, based on Hussman’s calculation, it will probably return 0% annually for the future 12 year period or -2.5% annually in the coming 10 years. Or assuming that after 12 years, S&P 500 will grow at a 9.4% annual, we are still talking about 3.7% annual return for the coming 20 years. This is far from the 9.4% we assume in the above. In fact, the 20% stock portion will be only equivalent to 23% of today’s purchase power. After spending all the 80% in the fixed income for the 20 years, you are left with only one fifth of capital to survive. 


The holding period based (in a more technical term, duration based) analysis offers a simple way to decide stock and bond allocations. Understanding the minimum periods for a buy and hold or any other strategy enables one to even calculate retirement spending. 

Furthermore, it fits very well to accommodate long term stock return projection. Our belief is that it’s a fool’s game to predict stock returns in a short or intermediate term (or at least it’s very volatile such that one can not rely this to make a planning decision). However it’s much more reliable to predict stocks for a long term (at least 10 years and beyond).

The above simple analysis should should really alert an investor who is near or in retirement in the current investment environment. 

Market Overview

We are now back to ‘normal’: stocks are lolling up, again in a record territory. We have been in such a state for so long such that we are afraid many investors will become sleepy and complacent. Again, we have no strong conviction on when the markets will have a correction, even though we know for sure there will be one some time in the future. In bonds, there was a fear that interest rates eventually will break away some key level causing an avalanching style of up shoot of the yields. However, with some weak economic data recently, 10 year Treasury bond yield has again come down (which means its price has gone up): 

So it does look like that some immediate bearish sentiment is again deterred for now. Again, we stress that we are in a not so optimistic situation by many long term metrics and the best way to navigate is to stay 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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