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.

Tactical Portfolios Review

We continue to review the performance of portfolios using our another core asset allocation strategy – Tactical Asset Allocation(TAA). The strategy is momentum based: it ranks momentum (trend score) of the total returns (i.e. dividend reinvested) of major core asset classes and chooses top assets to invest for a pre-selected risk level. We will comment the strategy in some more details at the end of this newsletter.

First, as quoted in the previous newsletter (January 8, 2018: Strategic Portfolios Review), emerging market stocks, developed country stocks and US stocks are the three best performing assets last year.

Major Index ETF Performance Comparison (as of 1/5/2018):

ETF 2017 3Yr AR 5Yr AR 10Yr AR
VTI (Vanguard Total Stock Market ETF) 21.7% 12.8% 15.5% 9.5%
VEA (Vanguard FTSE Developed Markets ETF) 26.4% 11.0% 8.5% 2.9%
VWO (Vanguard FTSE Emerging Markets ETF) 31.5% 10.0% 3.9% 2.1%
VNQ (Vanguard REIT ETF) 7.0% 4.4% 8.4% 8.2%
DBC (PowerShares DB Commodity Tracking ETF) 4.9% -2.4% -9.5% -6.3%
BND (Vanguard Total Bond Market ETF) 3.7% 1.9% 2.0% 3.7%
GLD (SPDR Gold Shares) 12.8% 2.7% -4.8% 3.9%
TLT (iShares 20+ Year Treasury Bond) 9.2% 1.5% 3.9% 6.2%
JNK (SPDR Barclays High Yield Bond ETF) 3.9% 4.0% 3.4% 5.4%
TIP (iShares TIPS Bond) 1.8% 1.2% -7.6% -0.9%

However, among the risk assets, commodities (DBC) commanded some strong momentum in November, 2017 that proved to be fleeting:

This fluctuation from commodities has negatively affected some of our portfolios reviewed below. 

Multi-asset tactical portfolios are catching up

In 2017 global diversification based portfolios finally caught up US stocks/bonds only portfolios:

Portfolio Performance Comparison (as of 1/12/2018, all returns are dividend reinvested)

Ticker/Portfolio Name 2017 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 1/2/2001 Max Drawdown
P SMA 200d VFINX Total Return Bond As Cash Monthly 21.7% 11.9% 14.9% 13.7% 14% 12.7% 17.5%
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 22.2% 6.7% 9.8% 9.3% 13.4% 13.1% 17.2%
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds Top 2 22.3% 4.0% 9.4% 8.8% 13.5% 13.3% 21.5%
VFINX (Vanguard 500 Index Investor) 21.7% 13.4% 15.8% 9.3% 9.7% 6.6% 55.5%

See year by year detailed comparison >>

The representative P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds can be found in our Advanced Strategies (its ETF equivalent is listed on that page but one can find the link through the ETF portfolio page there.  The portfolio used here is based on index mutual funds that has much longer history). 

What we can see is that:

  • As the US stocks have advanced dramatically in the current bull market since 2009, S&P 500 total return (VFINX) now has a very comparable total returns compared with the Goldman Sachs Global Tactical Portfolios for the past 10 years. However, even for the past 10 years, the long term 200 day moving average based portfolio (P SMA 200d VFINX Total Return Bond As Cash Monthly) is still much better than the index (10 year AR (annualized return) 13.7% vs. 9.3%). The long term timing/tactical strategy not only has better returns but it has done so with much less maximum drawdown: 17% vs. 55%!
  • In the longer history since 1/2/2001 or last 15 years, returns of all global tactical portfolios are better than the S&P 500 by a big margin: 13.3% vs. 6.6%.
  • From time to time, we compare our representative tactical portfolio with another one (P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds Top 2) that chooses top 2 assets monthly to invest. P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds chooses top three assets (index funds). In general, the portfolio that chooses top two assets has the best long term performance but it achieves this with bigger risk. It can be more volatile too. For example, the GS top 2 fund portfolio did poorly in 2016 and 2015, compared with the top 3 portfolio (see year by year detailed comparison). If there are enough assets to choose from, we prove choosing top 3 assets instead.

We note that even though US stock index based portfolio (P SMA 200d VFINX Total Return Bond As Cash Monthly) has been on fire recently, we still believe that diversifying among global assets is appealing in the long term. As world economy has become more diversified and balanced, global oriented portfolios should prove to be beneficial longer time, even though it’s possible to suffer from some short term underperformance.

Commodities and multi-assets

Another related topic is that commodities, similar to emerging market stocks (and European stocks) prior to last year, has been a big distractor to the recent returns of our portfolios:

Portfolio Performance Comparison (as of 1/12/2018):

Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 12/31/2000 Max Drawdown
Six Core Asset Index Funds Tactical Asset Allocation Moderate 10.6% 2.4% 4.7% 6.1% 9.5% 9% 12.9%
Five Core Asset Index Funds Tactical Asset Allocation Moderate 16.6% 5.0% 6.2% 6.8% 9.8% 9.4% 13.8%
Three Core Asset Index Funds Tactical Asset Allocation Moderate 16.5% 5.4% 6.0% 4.9% 7% 6.9% 9.9%
VBINX (Vanguard Balanced Index Inv) 15.0% 8.4% 10.0% 7.5% 8% 6.4% 36%

In the above, the candidate funds of  Five Core Asset Index Funds Tactical Asset Allocation Moderate are the five major index funds without commodities, which is included in Six Core Asset Index Funds Tactical Asset Allocation Moderate:

Foreign Large Blend VGTSX VGTSX (Vanguard Total Intl Stock Index)
Intermediate-Term Bond VBMFX VBMFX (Vanguard Total Bond Market Index)
LARGE BLEND VTSMX VTSMX (Vanguard Total Stock Mkt Idx)

The three core asset portfolios only uses US stocks (VTSMX), international stocks (VGTSX) and bonds (VBMFX) as candidate funds. This configuration is prevalent among company 401k plans.

We can see that

  • Five core assets one has done much better than Six core asset portfolio for the past 1, 3 and years. Commodities has been an distractor for sure.
  • Without commodities, five core and three core portfolios did better than VBINX last year.
  • Even comparing for the past 10, 15 and 17+ years, commodities has not added much value.
  • However, the same can not be said for emerging market stocks and REITs: for the past 15 and 17+ years, the six and five core portfolios have done much better than the three core one.

Regarding commodities, in addition to the recent performance distraction, the other concern we have is that most of these funds are future contract based (other than physical asset based such as gold fund GLD), this has added another uncertain factor (so called backwardation and contango related to future contract expiration and rollover to new contracts) that can possibly affect returns. On the other hand, we do recognize the added diversification benefit of commodities. For example, it’s possible that the recent strength in commodities can sustain further for multiple years if global economy continues to expand in the current late stage bull market.

So we would suggest some caution on commodities, especially for those who are more conservative. This means that if you have been following a plan that has commodities as an asset such as Six Core Asset ETFs,  you might also want to consider to look at Five Core Asset ETFs. You can either switch to the five core plan or reduce weights when commodities are suggested in a six core portfolio.

This article only discusses momentum based investing among multiple assets. We will review momentum based investing at different levels (such as individual stocks, sectors etc.) in a future newsletter.

Dual momentum vs. relative and absolute momentum

Recently, a user asked us a question regarding MyPlanIQ’s TAA vs. so called dual momentum outlined by Gary Antonacci. The user asked:

Dual Momentum incorporates both Relative and Absolute Momentum.   Does your TAA methodology include some of these principles?  All ?   thoughts?
Is there anything to learn here to improve your methods?

In fact, we published an interview several years ago in 2013 Interview with Gary Antonacci on Momentum Based Investing on this subject. In the interview, we noted that our TAA uses a similar dual momentum method. Unfortunately, Gary interpreted this as our way to ask him to promote our TAA (see his comment). We have not responded his comment since and would like to clarify here.

MyPlanIQ independently developed our Tactical Asset Allocation(TAA) way earlier than 2013: internally it was developed during 2008-2009 and was publicly published in 2010. It incorporates the relative and absolute momentum (i.e. the dual momentum called by Gary) by including cash asset among all candidate funds/assets in a portfolio. Since cash always exhibits positive momentum, including it in our trend score ranking implicitly ensures the so called absolute momentum — any negative momentum would be ranked below cash’s (as negative momentum would have a negative trend/momentum score). What we want to point out is that MyPlanIQ has utilized and fine tuned such a strategy for almost 10 years and it’s completely independent. When we heard about Gary’s dual momentum concept, we were delighted and hoped to promote such a methodology (not just MyPlanIQ’s) to a wider user/community base. Hence the interview and the subsequent controversy.

So the short answer to the user’s question is that, yes, MyPlanIQ’s TAA does incorporate the dual momentum concept. As we have pointed out numerous times, the real challenge of momentum based investing is not some sort of secret source people haven’t uncovered. Instead, it’s the very nature of its behavior that can make it challenging to many investors short term (see, for example, July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly). We don’t proclaim possessing super secret investing strategies, instead, we have been very open and believe our value lies in constant education, interaction and analysis on these strategies and human behavior.

Market Overview

The ‘melt-up’ of stocks continued since the New Year. It does seem that investors are now fully hopeful that a repeat of a similar late bull market in 1998 or so is in store. Based on many experts, recession is not on the near horizon and 2018 might prove to be another year of favoring risk assets (stocks). Regardless, bonds have sent some negative signals and this has affected rate sensitive assets including REITs and utilities (and even many consumer staple stocks). We have no strong opinion on where the markets will head and would prefer to stay the course and let markets guide us. As always, in the current over valued and over bought environment, manage 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 a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation and the promised infrastructure spending remains to be seen.  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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