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, November 13, 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.

Conservative Portfolios Revisited

First, a few words on our recent newsletters: you might notice that our recent articles are mostly on conservative topics such as cash, short term investments, total return bond funds based portfolios and conservative portfolios. This actually reflects our belief that even though financial markets (stocks and bonds) have been doing well lately, we are now more and more approaching to a correction point, considering extremely high stock valuation. Of course, we have no idea when that actually will happen. So while our portfolios (other than the long term market valuation based portfolios) are taking advantage of the recent market strength by mostly investing in stocks in their full capacity/allocations, we want our users to understand that we are cautious on the markets and for new money or new investors, a properly managed risk is called for.

On to the conservative portfolios, our recent newsletters like September 18, 2017: Conservative Portfolios Review has drew several users’ requests. They are interested in how to construct a conservative portfolio that’s even less volatile. For example, one of users’ email stated that he’s interested in a conservative portfolio that not only outperforms VWINX (Vanguard Wellesley Income Inv), but it should be less volatile.

Though from the recent newsletter September 18, 2017: Conservative Portfolios Review, one can see that the portfolios listed on Brokerage Investors page have outperformed VWINX in returns and also have closely matched VWINX in terms of volatility and maximum drawdown. For example, Schwab Conservative Total Return Dividend Portfolio has maximum drawdown (i.e. maximum loss from a peak to a following trough) 20.1% compared with VWINX’s 21.7%, while it’s standard deviation 6.8% is slightly bigger than VWINX’s 6.1%. 

However, we can do even better in terms of returns and volatility, solidly outperforming VWINX.  

Outperform the best conservative allocation fund

It turns out that the improvement can be made by simply turning the stock portion to a long term timing based (sub)portfolio. In fact, in June 26, 2017: How To Beat The Best Balanced Allocation Fund, we described such a method to outperform PRWCX (T. Rowe Price Capital Appreciation), a balance allocation fund that probably has the best long term record. 

Morningstar classifies VWINX as a 30% to 50% equity allocation fund.  For example, it indicates that as of 6/30/2017, VWINX had the following stock/bond allocations:

So in total, it had about 38% in stocks. 

What we can do is to use the following allocations:

stocks: P_61056 (P SMA 200d VFINX Total Return Bond As Cash Monthly)

bonds: P_46880 (Schwab Total Return Bond)

In our stock investment, it invests in S&P 500 index fund VFINX (or any S&P 500 index ETF or fund such as SPY) when its total return (dividends reinvested) is above its 200 day moving average. It rebalances/trades once a month (at the end of a month). When it’s below the 200 day moving average, it invests in the total return bond fund portfolio P_46880 (Schwab Total Return Bond) (depending on brokerages you are using, you can choose a brokerage specific portfolio). The stock and bond allocations are rebalanced once a year. 

The following shows the performance comparison:

Portfolio Performance Comparison (as of 10/6/2017)
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 1/1/2001 10Yr Sharpe
Tactical Conservative Portfolio 30 Percent Stocks 9.1% 9.9% 5.6% 7.4% 9.3% 9.9% 1.63
Tactical Conservative Portfolio 40 Percent Stocks 9.9% 11.3% 6.2% 8.2% 9.7% 10.3% 1.49
Tactical Conservative Portfolio 50 Percent Stocks 10.8% 12.7% 6.7% 9.1% 10.2% 10.6% 1.37
VWINX (Vanguard Wellesley Income Inv) 7.2% 7.2% 6.3% 6.8% 6.8% 7% 0.99

Detailed year by year comparison >>

Standard deviation (volatility) and maximum drawdown since 2001 (almost 17 years span):

Ticker/Portfolio Name Standard Deviation (since 2001) Maximum Drawdown (since 2001)
Tactical Conservative Portfolio 30 Percent Stocks 5.2% 7.3%
Tactical Conservative Portfolio 40 Percent Stocks 5.9% 8.4%
Tactical Conservative Portfolio 50 Percent Stocks 6.7% 9.8%
VWINX (Vanguard Wellesley Income Inv) 6.2% 21.7%

From the above tables, we make the following observations:

  • All of our 3 tactical conservative portfolios have had much better returns than VWINX: the excessive return ranges from 2.9% to 3.6% annually! 
  • Equally impressive, our conservative portfolios have had much lower maximum drawdown than VWINX: a single digit vs. VWINX’s 21%! For example, the portfolio with most stock allocation (50 percent stocks) has about 9.8% maximum loss at any period of time, that’s fairly reasonable for a conservative/retiree’s income portfolio. 
  • Our conservative portfolios have had better or equal standard deviation than VWINX.  

Market Overview

Investors continue to be comfortable/complacent with current market valuations. Little has changed for now. Emerging market stocks, high yield bonds, emerging market bonds are all doing well, indicating an appetite for risk. As we are now in the quarter end earnings report period, we expect markets might soon show more volatility. Again, we call for staying the course and managing risk accordingly. 

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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