Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Tuesday, September 5, 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.

Portfolio Performance: A Walk In The Past

Until recently, our tactical portfolios have been in a dog house for quite some time. However, in the past several months, as international and emerging market stocks have out performed US stocks, the performance of these portfolios have started to pick up. For example, here is the latest performance comparison for our representative tactical portfolio P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds (listed on Advanced Strategies page):

As of 8/18/2017

Name YTD*
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 13.2% 12.2% 4.9% 8.7% 9.8%
VFINX (Vanguard (S&P 500) Index) 9.7% 13.1% 9.3% 13.6% 7.5%
VBINX (Vanguard Balance (60% stocks/40% bonds) 6.5% 7.5% 6.3% 8.9% 6.7%

In fact, we started to see some noticeable activities from our users as some of them are ‘encouraged’ by the recent out performance. This reminds us of the newsletter we wrote two and half years ago. In that newsletter, we quoted a user’s comment on the above portfolio that was all upbeat (and puzzled). Here is some partial quote (see the newsletter for a more complete one):

Why isn’t this strategy, the GS GTAA one mentioned above, known and followed all over the place — by investment advisors, retail and institutional investors at large (outside of myplaniq), and so on? Or maybe it is. But I’m guilty of having read many (too many) investment newsletters, books, and articles over the years — and yet I never heard of this strategy anywhere else except through your site. 

Interestingly, we addressed his question right at the start of the underperformance of this portfolio: the portfolio actually went through the worst performance period in its 20+ years back testing history (and live history since 2010). 

In fact the best answer to this user’s question is the recent underperformance of this portfolio. The short answer is: no strategy/portfolio can be popular forever as once it has done well, it will go through a period of painful underperformance that will drive away many investors, making it unpopular for sure. However, the cycle will always repeat (of course, that’s based on the assumption that the strategy is a sound one in nature). 

As our background has been in computer simulation for so many years, we are a firm believer that walking back in the past can help one to understand the behavior tremendously. This is especially true in investing as a great number of investors either have short term memory or they are just in flux of finding out hot strategies or they are simply new to investing. 

So let’s take a walk in the history, assuming we are the ones investing in this portfolio. 

A walk in the past

To facilitate the walk, we ask you to imagine being at a particular point of time. Please go slow and dwell at any point of time for some moments. Remember, in real time, days and months are much longer than you see a dot in a chart or a table. Investors will have to endure the unpleasant feelings for days, months or even years when your investments are not doing well, either in an absolute sense (i.e. low returns or even loss) or in a relative sense when compared with a popular market index such as S&P 500. In our case, we are comparing with VFINX (Vanguard (S&P 500) Index)

At a given time, your feelings can vary markedly,  depending on whether you just start to invest in this portfolio, or you have followed it for some years. In this exercise, we use 6 months, 1, 3, 5 and 10 years returns for various types of investors. But remember even six-month is already a very long time for many people as their patience or expectation can be as short as a month. 

To simplify, we just use yearly data, i.e. we only walk through at the end of a year. Again, this actually compresses or ignores a great deal of interim results in a year (such as monthly data). But we hope just using the year end data would be enough to reveal the nature of the investing (strategy). 

The walk 

The following is the six month feeling for the past 20 years. Before 2010, virtually at every year end (other than 1998), the investors were very happy. However, there have been a lot of unhappy faces (i.e. the portfolio underperformed VFINX) since 2009. Note that we only use 6 month returns at the end of a year. We actually will get more happy faces from 2009 if we include other 6-month periods. For example, for the past several months, our users will have more happy faces than unhappy ones if they treat themselves as a new 6 month investor. 

We also want to point out the smiling face at the end of 2014 (actually at the beginning of 2015): the portfolio outperformed S&P 500 by a large margin: 12.7% vs. 4.3%. But that went quickly to down hill since February 2015. That was the time when the user mentioned at the beginning of this article brought up his positive comment. 

Again, we want to point out that if we examine data in more month ends instead of just once a yea, we will see the faces fluctuate more often than the above. 

Now, for 1 year walk, we can see that virtually the investors have not been pleased since 2009 every year (and before that, it has been uniformly happy)!

For the 3 year chart, we see that since the end of 2011, the portfolio underperformed at the end of every year (and before that, for 3 year investors, it did better every year since 1998). Similarly, the 5-year investor would have been unhappy since the end of 2013. 

However, the long term 10-year investors have had a happy face every year since 2008 (2008 means investing from 1998), albeit they have become less happier every year since 2010. Well, recently it looks like the 10 year return might be better than the end of last year, we will see how it goes at the end of this year. 

At this point, many readers might say oh, that’s wonderful, I’m a long term investor and that seems to be a good portfolio/strategy. However, before you jump to this conclusion, we want to remind you to look at the short term charts again in a slow and imaginative manner and truly understand that the past 9 years or so is a very long time. Being able to endure the unhappy faces through these periods is just not an easy feat. No wonder this strategy is unpopular, at least for the past several years. 

What’s next?

It amazes us that the portfolio has consistently exhibited a persistent performance outperformance/under-performance behavior, especially for 1, 3 and 5 year periods. We hope the above charts can help investors to better understand the nature of investment strategies. We also recommend readers the previous newsletter July 17, 2017: Long Term Stock Holding Periods For Retirement if you have not read it. 

On the other hand, an interesting question is that we are approaching to a 10 year period since the bear market low in 2008/2009. To be precise, a year from now, we will see the 10 year period to start from the lows in 2008. If S&P 500 continues to be at this level (or even slightly lower), we would expect the 10 year return of VFINX (S&P 500) would finally catch up with the portfolio’s. Whether this can materialize or not is anyone’s guess. However, as we have stated numerous times, as US stocks have been at such an elevated valuation level for so long, odds are increasing that they will have a sizable correction in the future. 

To summarize, some walk back in the past can be extremely helpful to put things in a bigger perspective. We just hope there are more tools to help to construct the walk easily and more intuitively. 

Market Overview

S&P 500 continued its drop last week. August traditionally has been a volatile month. We note that the portfolio based on summer seasonality is now doing better than S&P 500 (see this). Small cap stocks and high yield bonds are also weak. On the other hand, emerging market stocks recovered somewhat last week. Regardless whether the summer weakness is finally upon us or not, risk assets are vulnerable. Recognizing our incapability to better forecast near future movement, we call for staying the course to follow pre-selected strategies. 

For more detailed asset trend scores, please refer to 360° Market Overview

Now that the Trump administration has been in the office for more than half a year, it has stumbled and encountered many difficulties to implement its promised changes in terms of tax cuts, job stimulation and infrastructure spending. On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in. 

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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