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, January 22, 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.

Happy Holidays!

In this holiday season, we thank everyone for your continuous support and your trust in us. We wish you happy holidays and a prosperous 2018!

There will be no newsletters in the following two weeks and we will return in the week of January 8th, 2018.

Record Highs And Risk

It’s been an almost perfect year for stocks. Dow Jones industrial index has had 70 daily record highs this year. Stock volatility is also staying in record low: CBOE VIX index has been the lowest since 1990. Looking more closely:

US stocks:

In fact, the rise of these US stock indexes this year has been parabolic and exponential.

Furthermore, the major asset classes are in a classic goldilock situation: long term bonds, high yield bonds, domestic and foreign stocks are all doing very well. 10 year long term Treasury note yield is at 2.39% level, lower than levels many experts are worried about.

Among US stocks, growth stocks are still in favor, compared with value. Technologies, financials and consumer discretionary are the best performing sectors. This usually happens in a risk on environment.

Furthermore, the prices of majority (80%) of stocks in S&P 500 are above their 200 days moving average, indicating a very uniform risk appetite:

Enough said, all is well.

Risk, Risk, …

However, as we have indicated in our previous newsletters, there are several types of risk investors need to be aware of right now.

1. Valuation

Long term stock valuations are close to historically high:

Based on Dr. John Hussman, S&P 500 index will probably have negative annualized returns for the next 12 years.

2. Subsequent correction/bear market will be detrimental to new retirees

See November 13, 2017: Is This A Good Time For Retirees Or Would Be Retirees?

3. Investing stocks at an overvalued level will not do well even for long term investors:

In March 23, 2015: Investment Arithmetic for Long Term Investments, we showed that even after 20 years, stocks probably will only make less than half (6.5%) annualized returns, assuming stocks will make a historical average 10% annualized returns after 50% correction. Currently, based on Hussman, stocks will need to drop 65% to be back to their historical norm.

4. Investment arithmetic: a 50% loss requires 100% gain to just break even

When price is at a very high level, it’s more susceptible to a sharp fall that requires much larger gain to offset. See some discussions in June 9, 2014: The Arithmetic of Investment Mistakes.

Seemly contradicting statements?

Some readers have questioned on where we really stand, given that both of our main strategies Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA)  are ‘bullish’ right now (meaning stocks are fully vested in their allocated target levels), while we have sounded cautious alarm like the above for the past several years now. They believe we are somewhat contradicting to ourselves. Below, we would like to clarify:

  • Overall risk level is high means that there is a high possibility to endure big loss in the future. However, since we don’t have believe and claim to have a predictive power in the near future, we don’t know when such a loss will occur.
  • However, in a short or near term, markets often exhibit momentum. For example, even in an overvalued market, markets can continue to go high. This is in fact what our TAA relies on.
  • Higher risk level means investors should manage their overall risk exposure level more carefully and more rigorously. This means your overall stock exposure should be controlled to a level that you are comfortable with even in the face of a loss as big as 50%. Currently, for example, we believe this is the time to do so.
  • However, at individual portfolio level, you should stick to what the strategies call for. So, for example, a TAA based portfolio should allocate to the target level of stocks today even stocks are in a very high valuation level or we are in a high risk level as we claim.
  • At a high risk level, investors should also be more disciplined and rigorous to follow a strategy since a careless or missed rebalance could easily damage a portfolio.

In a word, our philosophy is that a risk environment does not mean investors should just abandon stocks or risk assets all together. Instead, they should be more cautious in their overall risk exposure (tolerance) planning, more disciplined and rigorous to manage a portfolio by following a preselected strategy.

Market Overview

A near certain tax bill and the holiday season are propping up stocks almost daily. For now, we are happy to take what the markets are giving to us while keeping an eye on risk. As always, stay the course.

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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