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.
Conclusions
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.
Latest Articles
- July 10, 2017: Half Year Asset Trend Review
- June 26, 2017: How To Beat The Best Balanced Allocation Fund
- June 19, 2017: Newsletter Collection Update
- June 12, 2017: A Mixed Bag Performance of Momentum Investing
- June 5, 2017: How To Start A New Portfolio
- May 29, 2017: Alternative Assets And Their Role In Portfolios
- 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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