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, February 26, 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.
Correction
In the previous newsletter, the 2017 return column of multi-asset tactical portfolios was erroneous. The corrected table should be as follows:
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% |
You can also read the corrected one here.
Several readers pointed out this. Thank you!
Where Are Bonds Heading?
The new year hasn’t been kind to bonds: while investors continue to chase stocks higher, bonds have been under a considerable pressure. In our opinion, bonds are now at a critical juncture that might signal a secular trend change.
First, let’s review recent interest rate actions.
Rates are rising
U.S. Treasurys
Symbol
|
Annual Yield (%)
|
---|---|
US 3-MO | 1.455 |
US 2-YR | 2.069 |
US 5-YR | 2.453 |
US 10-YR | 2.654 |
US 30-YR | 2.915 |
We should clarify first that the Federal Reserve only directly influences short term interest rates. Anything that’s longer than three months is decided by market (participants). The other concept is that bond price is inversely related to its yield: when its yield rises, the price falls and vice versus.
The following chart compares the interest rates of 2-yr Treasury with 10-yr and 30-yr Treasurys for the past one year (as of 1/22/2018):
The yield of the 2 year Treasury bill has risen most, compared with the two long term 10 and 30 year bonds. What’s more, the yield of 10 year Treasury, a standard long term bond mostly watched by fixed income investors, has broken out from its long term downtrend:
So the interest rate of 10 year Treasury is the highest since early 2015. Currently, it’s 2.65% annual interest has been above what famous bond investor Bill Gross called as the key level to watch.
However, the yield of 30 year Treasury has risen much less dramatically, indicating investors still dont have a strong conviction on the future inflation pressure. This is reflected in their trend scores — the trend score of 20+ year Treasurys is still slightly positive:
Fixed Income Assets Trend (as of 01/19/2018)
Description | Symbol | 1 Week | 4 Weeks | 13 Weeks | 26 Weeks | 52 Weeks | Trend Score |
---|---|---|---|---|---|---|---|
Intermediate Treasury | IEF | -0.75% | -1.19% | -1.52% | -2.09% | 0.98% | -0.91% |
10-20Year Treasury | TLH | -0.92% | -1.33% | -1.72% | -2.17% | 1.58% | -0.91% |
Short Term Treasury | SHY | -0.04% | -0.1% | -0.3% | -0.39% | 0.18% | -0.13% |
US Total Bond | BND | -0.44% | -0.65% | -0.62% | -0.29% | 2.57% | 0.11% |
Intermediate Term Credit | CIU | -0.47% | -0.46% | -0.5% | -0.16% | 2.78% | 0.24% |
Long Term Credit | LQD | -0.88% | -0.73% | -0.33% | 0.06% | 3.26% | 0.28% |
20+ Year Treasury | TLT | -1.17% | -1.37% | 0.08% | -0.66% | 5.41% | 0.46% |
National Muni | MUB | -0.01% | 0.03% | -0.57% | 0.13% | 3.73% | 0.66% |
High Yield | JNK | -0.11% | 0.52% | 0.01% | 1.31% | 3.81% | 1.11% |
Emerging Mkt Bonds | PCY | -0.64% | -0.31% | -0.35% | 1.26% | 6.09% | 1.21% |
Long Term Muni | VWLUX | -0.09% | 0.22% | 0.21% | 1.28% | 5.73% | 1.47% |
High Yield Muni | VWAHX | 0.0% | 0.24% | 0.49% | 2.05% | 7.0% | 1.96% |
International Treasury | BWX | 0.35% | 2.41% | 3.64% | 3.14% | 11.45% | 4.2% |
From the table above, one can see that bonds are indeed under pressure. However, the downtrend has not been uniform yet: trend scores of many segments are still positive.
High yield and international bonds
From the above table, one can also see that the trend scores of most ‘risky’ bonds are still positive. These include high yield bonds, high yield municipal bonds and foreign bonds. Looking at the spread between high yield bond yields and Treasury bonds, the following chart shows it’s still very tight:
In fact, it’s still trending down. What this means is that high yield bond yields haven’t risen much recently while the yields of Treasury bonds have risen, driving down the spread (difference) between the yields.
The tight high yield bond yield spread indicates investors are very much complacent (comfortable) with current high yield bond yields. This usually occurs when they are chasing risk assets and they are still not very concerned about the impact of rising rates on business.
Similarly, international and emerging market bonds are still showing reasonable strength, again conforming with the risk appetite.
To summarize, we see bonds are at a critical juncture that might soon affirmatively signal the end of the current long term bond market. However, at the moment, we are still in the process to see a broad base confirmation.
What to do
First, stay the course. In the current environment, active strategies such as the fund selection strategy embedded in MyPlanIQ’s Tactical Asset Allocation(TAA) or in total return bond fund portfolios will be more effective to prevent from a large loss if indeed a bear market is finally in place. A bear market is a process and we should closely follow our strategies instead of making subjective and impulsive guess on the direction of bond markets.
Even in a ‘big bad’ bear market, as we stated in many of our newsletters, it’s still possible to derive reasonable positive returns in such a period. See for example, the following articles:
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- April 27, 2015: Long Term Treasury Bond Behavior
Furthermore, in such a bear market, there will be some bond segments that can still show positive trends (just as right now, corporate bonds and foreign bonds are still positive). The active strategy that rotates among high quality total return bond funds can hopefully still take advantage of funds that happen to have positioned better than the others in a period. As a last resort, if everything is solidly in a downtrend, cash or ultra short term bonds can be used to temporarily avoid a big loss.
Market Overview
Investors are chasing stocks like the sky is the limit: stock indexes have consistently making historical highs day after day. However, besides elevated valuation levels and political dysfunction in the congress and the administration, there are several negative undercurrents: 1. negative bond trend as discussed above. Eventually, higher rates raises borrowing cost and they will have negative impact on stocks. 2. rate sensitive assets such as utilities and REITs are actually under pressure. 3. Factset S&P 500 companies earnings tracking for Q4 2017 so far hasn’t been encouraging: blended earnings was -0.2% compared with the expected 10.8% on December 31, 2017, though it’s still too early as only 11% of these 500 companies reported results by last Friday. At any rate, we will take what markets give to us and stay the course and 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.
Latest Articles
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- January 8, 2018: Strategic Portfolios Review
- December 18, 2017: Record Highs And Risk
- December 11, 2017: Cash Return And Interest Rate Update
- December 4, 2017: Mutual Fund Star Ratings: Are They Useful?
- November 20, 2017: Thankful And Mindful
- November 13, 2017: Is This A Good Time For Retirees Or Would Be Retirees?
- November 6, 2017: Newsletter Collection Update
- October 30, 2017: Rising Interest Rates
- October 23, 2017: A Primer For Portfolios
- October 16, 2017: REITs As An Asset Class
- October 9, 2017: Conservative Portfolios Revisited
- October 2, 2017: The Role of Short Term Bond Funds
- September 25, 2017: Fees In Cash Investments
- September 18, 2017: Conservative Portfolios Review
- September 11, 2017: International Diversification Effect
- September 4, 2017: Invest And Speculate Revisited
- August 28, 2017: Total Return Bond Fund Portfolios: Where Do They Fit?
- August 21, 2017: Portfolio Performance: A Walk In The Past
- August 14, 2017: Fidelity Commission Free ETFs Update
- August 7, 2017: I Didn’t Learn Anything — Mistake vs. Temporary Underperformance
- July 31, 2017: Asset Classes And Fund Choices: A Primer
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- 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
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- 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
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- October 3, 2016: Survey & Feedback
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- 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
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- 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
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- 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
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- 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
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- 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
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- July 13, 2015: Pain in Tactical Portfolios
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- 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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