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, April 2, 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.

Pros And Cons of Strategic And Tactical Portfolios In 2018

Recent market slump gives investors some taste on the severity of the next correction that might be caused by monetary tightening/inflation/rate hikes. 2018 might very well turn out to be a year when it really becomes the end of the last super bond bull market since 1982. Yes, it has been that long, almost 35 years!

What’s worse,  stock market valuation is at a historically high, close or even more expensive (depending on what valuation metrics you use) than any period in the last 35 year. That means stocks are now in a comparable or worse situation than those before the 2000 bear market or 2008 recession. 

In a word, we are in an unusual environment. In light of this, we think it’s a good time to recap/review what are the pros and cons for the two strategies MyPlanIQ advocates:  Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA)

Pros and Cons of SAA

We have outlined various pros and cons of SAA in some of our past newsletters (see our Newsletter Collection for a list of newsletters). Specifically, we recommend the following newsletters: 

Of course, the two most important factors for SAA that should be refreshed every time are: 

  1. Every asset class has its long term return average. Specifically stocks as a whole (i.e. stock market index funds such as VFINX (Vanguard S&P 500 Index) or VGTSX (Vanguard Total Intl Stock Index Inv)) should yield an inflation beating return in a long term — the good. 
  2. However, stocks, REITs and other risk assets such as commodities can fluctuate over time, sometimes, as much as more than -50% loss in a year — the bad. 

The above two factors for a buy and hold (Strategic) portfolio investor are not strange to investors who have experienced at least one bear market. However, for many young generation of investors, especially those who are only acquainted with the popular online robo advisors, they have not seen or felt the significance of a 30% or even 50% correction (Bloomberg reported that more than 25% WallStreet workers are too young because they began their career before the  2008-2009 bear market). For these investors, they should look at and review stock behaviors in the past bear markets to prepare for themselves. 

Unfortunately, practically most investors have no clear memory and data on the last bond bear market that’s been more than 35 years ago. In fact, most US mutual funds didn’t even existed in 1982. For example, Vanguard total bond market index fund VBMFX, one of the oldest mutual funds only started in 1986. No wonder even the old bond hand Bill Gross has repeatedly warned us that the good time in fixed income is ending or has ended. 

We do have much longer historical return data for 10 year Treasury bonds (see NYU website). The following shows the returns of 10 year Treasury bonds since 1928:

Two things noted:

  • The annual losses before 1982 for 10 year T(reasury) Bonds were not as big as those incurred recently. 
  • However, returns before 1982 were also much smaller than those since 1982. This is true even for those after the Great Depression. 

Given the recent advent of ETFs and high frequency trading, we suspect that the volatility of long term bonds or bonds in general will only be higher than before. Regardless, what we can see is that there might be prolonged multi-year periods for bonds to return negative or yield very little returns. 

To summarize, in 2018, for an SAA portfolio, be prepared for an even deeper/greater interim loss in the upcoming bear market as both stocks and bonds can correct in a big way. That means even for a balanced portfolio with stocks and bonds, losses can be bigger. Without an adequate psychological preparation, some SAA investors can eventually bail out from stocks or bonds in a market bottom and then fear to get back in when markets recover. This is precisely the worst time to take such actions.  On the other hand, as long as your capital in SAA portfolios are earmarked for a long time (preferably more than 15 years or even longer), your portfolios will alway bounce back. 

Pros and Cons of TAA

To some extent, a tactical portfolio is very much needed to tackle the current high prices in both stocks and bonds. However, we want to remind our readers that a tactical portfolio is not a bullet proof instrument. Furthermore, one should be familiar with their main pros and cons mentioned in this newsletter: 

The obvious pro or hope is that a tactical portfolio can help investors to sidestep a deep bear market either in stocks or in bonds or in both. However, the obvious fear or con for such portfolios is that it can incur many small losses (and eventually accumulate to a large one) because of the seesaws of volatile markets. The interesting part for such fake fluctuations/losses is that they often occur in a top formation process which can take an extended period such as several months to even a year. Unfortunately, they can also occur in some stock or bond bull market years – or that means these portfolios are not completely in sync with stock or bond markets. 

For example, P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds, our representative tactical portfolio, had difficulties in 2000, 2008, 2011 and 2015: 

Notice that both 2011 and 2015 are in a bull market while 2000 and 2008 are both at the beginning of a bear market. 

The key takeaway from the above observations is that, in 2018, one has to be prepared for a possible loss or several losses that often can frustrate many investors and in fact, causing them to abandon the strategy when it’s mostly called for. Investors just need to remind themselves that such losses are a price to pay to avoid larger losses. 

Market Overview

It looks like that stocks avoided a lower high that often signal a downtrend. At the moment, S&P 500 index surpasses 2732, a local high made on 2/16/2018. Furthermore, with most companies having reported last quarter’s earnings:  Factset, shows that the blended earnings growth is 14.8%, much better than the expected 11% after 90% of S&P 500 companies have reported their earnings for Q4 2017. However, 10 year Treasury bond’s yield has been stubbornly higher now, indicating it’s a fact of life that interest rates will be heading higher. We have no way to know whether this is a part of top formation process for stocks or even bonds or they will go back to their goldilocks one more time. However, if history is any guide, it’s not a time to be a hero right now. We believe a manageable risk exposure and consistently sticking to a sound investment strategy such as MyPlanIQ’s SAA or TAA are the best ways to cope with the current situation. 

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. 

Enjoy Newsletter

How can we improve this newsletter? Please take our survey 

–Thanks to those who have already contributed — we appreciate it.

Latest Articles

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.