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.

PIMCO’s Recent Fund Class Conversion

PIMCO recently announced that they will start to convert many of their class D share funds to class A. Class A funds are usually those that charge some percentage fees when one buys them – so called front load funds. Class D funds, on the other hand, do not charge anything extra for buying and selling — i.e. they are no load funds. PIMCO promises that the funds’ regular expenses will be the same. Furthermore, if investors already own a class D fund, after its conversion to class A fund, investors can purchase more without front load fee. For more information, see this link. There are also discussions in a Morningstar forum.

Some of popular PIMCO funds used in MyPlanIQ portfolios include PONDX (PIMCO Income D), PTTDX (PIMCO Total Return Bond D) and PSPDX (PIMCO StockPlus D).

The question now is that whether major brokerages like Fidelity, Schwab and Etrade can negotiate with PIMCO to allow their clients to purchase these A share funds without the front load fee (as funds’ new investors). Many times, brokerages negotiate with a fund company to carry so called load waived funds – i.e. even a fund is classified as class A share, it’s load will be waived. We are monitoring this situation as time goes.

At worst, for those who have held PIMCO’s D funds, one way to be able to still enjoy no load charges is to keep some nominal amount of these funds even when they are deemed to be sold by our strategies. In this way, you will not be charged with the front load fee when you later on purchase more.

We welcome users to inform us any new development in this situation. We thank Dan and Paul for letting us know about this matter.

Market Selloff And Long Term Investing

That escalated quickly: global stocks have been falling fast and furious (as the time we are writing) for the past week or so. As this might have caused some concerns for investors, we want to devote this missive to it.

Recent Selloff

To some extent, the recent stock correction shouldn’t be surprising: after a parabolic rise, it’s actually normal to also encounter a sharp fall (what Dr. Hussman called ‘air pocket’):

Not only VTI (Vanguard total stock market index ETF) is now negative year to date, it actually fell all the way back to the end of November 2017:

One can see that stocks had a parabolic rise in December and January. As of 2/5/2018, VTI has had about 8.3% correction from its peak made on 1/26/2018.

The main culprit for the loss, from whoever wants to find a reason for it, is really the strong economy induced inflation/interest rate scare. Long term bonds have been under pressure since the New Year and it finally reverted its daily drop today:

So to summarize, all stocks have been in sync to drop sharply. However, long term bonds did possibly signal that yield rise might take a breath right now.

Regardless, we don’t have strong conviction on when such a correction will end. In fact, as stocks have been over extended for so long, odds are it can go further down. This leads to us to review what happened in the Black Monday in 1987, which some has claimed to be similar to current stock market.

Black Monday 1987

The following chart shows what happened right before the fateful Monday, October 19, 1987. On that day, Dow Jones Industrial index dropped 22 percent. 

However how abrupt and sharp the drop was, S&P 500 index actually started to fall from its peak on 8/25/2017 to Friday 10/16/1987 for about 40 days. Along the way, there were several drops and rises. By 10/16/1987, it has fell for more than 13%. Furthermore, S&P crossed its 200 day moving average on 10/15/1987.

It’s no surprising that before August, stocks rose parabolic-ally:

However, after the Black Monday, stocks bounced back. For 1987, S&P 500 actually had positive return. It took nine months  (July 1988) for stocks to fully recover back to the Peak in August 1987.

What we can learn from the above:

  • A sharp drop usually follows a parabolic rise.
  • However, the sharp drops usually took several phases. it can take many days or even months before leading to the big drop. Along the way, it can have fake rises (to give investors false hope).
  • After the sharp drop, strong bounces usually follow. Stocks will always recoup back the loss, it’s more a question on how long it will take to recover.

What to do in a selloff

For a long term portfolio, market selloff is a fact in life: it always comes and goes. What’s important is that one has to maintain a systematic, pre-designed strategy or plan to respond to it (or not to react to it).

In a Strategic Asset Allocation (SAA) portfolio, the worst is to abandon stocks at the bottom of a selloff.  In general, in such a portfolio, you should just hold stocks without panic.  In fact, when an asset such as US stocks drops too much, you might even consider rebalancing the portfolio by buying more stocks by selling overweighted assets such as cash or bonds.

In a Tactical Asset Allocation(TAA) portfolio, that means you should follow the strategy closely and liquidate stocks or reduce stock exposure when it’s called for, BUT later on when stocks show a positive trend, repurchase them back when it’s deemed to be suitable by the strategy. In such a strategy, the worst is to abandon stocks without a follow through as you might just become too emotional and second guess the strategy. Granted, such a strategy can suffer from whip saw loss. Examples include selling at the bottom and only to see stocks quickly recover big time and having to buy back them at a higher price. The other one is that buying back stocks at a higher price and later on suffering from another even bigger drop.

Regardless, in a long term, both SAA and TAA will exhibit positive returns. Again, it’s essential to stick to a strategy for a long time once you have committed to it in order to fully derive its long term benefit.

Market Overview

30 year Treasury bond yield breached 3% last week (even though now it fell slightly back below). The rising inflation induced fear by a strong economy (strong payroll & employment, rising income and strong ISM numbers) just can’t be alleviated by good earnings reported so far for last quarter: based on Factset, with 50% of S&P 500 companies reporting earnings for Q4 2017, the blended earnings growth is 13.4%, better than the expected 11%. Furthermore, we remind our readers that even after the recent pullback, stocks are still at a way too high valuation level by many well known valuation metrics (see for example, Market Indicators). We again call for exercising prudently and paring down unnecessary risk exposure. On the other hand, as always, stay the course and stick to the strategies you are following.

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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