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.
Warren Buffett’s Advices
Warren Buffett, considered to be one of the greatest investors in our time, is well liked. When he talks, millions of investors listen and follow. Over time, he has given consistent advices to average investors. For example, in his latest annual report published more than a week ago, Buffett again touted several well known principles. Among them, here are the two most widely quoted:
- About stocks: Buffett advises average investors to buy and hold low cost index funds such as Vanguard total stock market index or Vanguard S&P 500 index fund (VFINX) instead of actively managed funds.
- About bonds: “If you had to choose between buying long-term bonds or equities, I would choose equities in a minute.”
However, since financial media have always sensationally reported on Buffett’s (Berkshire Hathaway) annual reports or for that matter, anything coming out of Buffett, it’s often more entertaining than scientific to understand his teachings.
In this newsletter, we want to go into more details on the two points in the above. We also want to emphasize that it’s more important to understand our line of reasoning or the reasoning process to gain insights into his claims/teachings than just our conclusions.
Buy and hold an index stock fund
When it comes to invest stocks in a Strategic Asset Allocation (SAA) portfolio, we always advocate to invest in a low cost index fund. For example, in our September 19, 2016: Stock Investing: Actively Managed Funds vs. Index Funds, we presented the following two reasons:
- Active stock funds rarely outperform index funds consistently
- Risk (stock) funds are heavily influenced by sectors and styles
Obviously, the first reason is also the functional result of the high cost of actively managed funds, a reason cited by Buffett:
“Addressing this question is of enormous importance,” Buffett wrote. “American investors pay staggering sums annually to advisors, often incurring several layers of consequential costs. In the aggregate, do these investors get their money’s worth?”
Of course, the ultimate result of investing is the returns after all fees. In terms of fund selection, it’s the fund expense. In terms of portfolio management, it’s the advisors’ fees. Investors should look at their end result to see whether after all fees, you can simply beat a portfolio consisting of extremely low cost index funds.
Buffett always talks about his ideas in the context of long term investments, not in a short or even intermediate term. As we have repeatedly pointed out, ‘long term’ is a very imprecise phrase. For Buffett, because he mostly manages money that might not be needed in perpetuity, he didn’t bother to give a precise definition on this. Based on the historical return data on stocks and strategic and tactical portfolios, for example, see July 17, 2017: Long Term Stock Holding Periods For Retirement, we have the following rule of thumbs:
- For a strategic buy and hold portfolio (the ones Buffett advocates), capital invested in stocks should be held for at least 15 years or longer, preferably more than 20 years.
- For a Tactical Asset Allocation(TAA) portfolio, capital invested in stocks should be held for at least 10 years or longer, preferably more than 15 years.
We arrived at the above conclusion by looking at the historical data (since 1871, see May 8, 2017: Holding Period of Long Term Timing Portfolios) and their rolling multiple years’ returns. Unfortunately, for financial media or any so called popular experts, you might get various answers without much data backing. Of course, the media pieces are supposedly to be entertaining and to be understood without much thinking.
So next time when you hear someone mentions ‘long term’, a quest into a more precise or quantitative definition is called for.
Bonds vs. stocks
Buffett’s ‘stocks over bonds in any minute’ advice is widely quoted in a way that many readers might construe that he simply dismissed bonds all together. Well, in a financial article, that’s how things are simplified! But if you read his quote more carefully, he’s actually talking about holding long term stocks for a long term vs. holding a long term bond. In fact, he further elaborated:
“If I were going to own a 30-year government bond or own equities for 30 years, I think equities will considerably outperform that 30-year bond.”
In fact, we can do a simple exercise to estimate the annualized returns for both stocks and bonds. For stocks, we can use Dr. Hussman’s latest estimate:
It’s estimated that for the next 12 years, S&P 500 total return would be negative as stock valuation is historically high. Let’s be generous and just simply assume it returns 0% annually. At the end of 12th year, S&P 500 reaches its normal valuation level and for the remaining 18 years, it would return 10% annually, we can estimate the annualized return for the 30 years as:
Similarly, the annualized return for the next 20 years would be
On the other hand, currently the yield of 30 year US Treasury bond is 3.15%. So even if you can earn over 1% more by investing corporate bonds, you still end up worse than 5.9% from stocks. We can also see that US treasury bonds would probably return about the same as stocks for the next 20 years.
However, for the next 10 years, stocks are likely to underperform 10 year Treasury bond’s 2.8% annualized return.
The point to do the above exercise is to precisely understand the claims made by anyone, even from Warren Buffett, instead of merely catching sound bytes.
The above exercises also lead us to an important issue: how to actually implement/manage your investments in practice. Though Buffett just simply said that for a long term, buying and holding a stock index fund will probably be the best investment for average investors, in reality, when we are managing our investments, we need to decide
- For investments that are long term such as more than 30 years, should we just simply make a lump sum investment in a stock index fund (such as VFINX or SPY)?
- What about capital that’s needed before that? For those needed in 20 years? in 10 years? or in 5 years?
For question 1, as we can see through the above analysis, at the current very overvalued level, simply purchasing stocks out right is not the optimal way. In fact, Buffett did qualify this by saying:
“As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.”
Maybe one should wait till valuation drops to a more reasonable level before buying stocks (indexes)? Or maybe one should adopt a more active tactical style (such as MyPlanIQ’s TAA) in order to avoid big loss (thus improve returns, even for the 30 years)? At minimum, one can adopt a Dollar Cost Average (DCA) approach to gradually invest in stocks?
For question 2, Buffett apparently didn’t give any advice at all. Again, MyPlanIQ has outlined the rule of thumbs like:
- For capital needed within 2 years, invest in money market, T-bills, brokered CDs with fixed maturity.
- For capital needed from 2-10 years (or 2-7 years if you are aggressive), invest in MyPlanIQ’s total return bond portfolios (see those listed on What We Do -> Brokerage Investors page).
- For capital needed from 10-15 years (or 7 to 20 years), invest in a tactical stock portfolio (i.e. risk profile 0) such as P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds
- For capital needed for 20 years or longer, just simply buy and hold stock index funds such as VFINX, SPY, VTI, VEA, VWO etc.), i.e. a risk profile 0 SAA portfolio or in combination of both TAA and SAA portfolios.
To summarize, this missive tries to convey that investors should delve into details in a more rigorous manner for those sound bytes or widely reported advices, even given by gurus or sages like Warren Buffett. It’s just not as simple as it seems on surface.
Stocks continued their volatile behavior. Let’s take a look at the percent of stocks in S&P 500 that are above their 200 day moving averages:
Courtesy of stockcharts.com
The number of stocks that are in a downtrend (i.e. below their 200 day moving average) is now greater than its average. At any rate, we are in a state that can transition to the one that shows a more decisive trend change (if it continues to break its recent low) or trend continuation (if it breaks out above its recent all time high). We have no strong opinion on where it will head. However, we do call for caution, considering the extreme stock and bond valuation. As always, staying the course and managing risk to a reasonable level is the best way to deal with such uncertainties.
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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–Thanks to those who have already contributed — we appreciate it.
- February 26, 2018: Pros And Cons of Strategic And Tactical Portfolios In 2018
- February 5, 2018: Market Selloff And Long Term Investing
- January 29, 2018: The New Addition To Our Total Return Bond Fund Candidates
- January 22, 2018: Where Are Bonds Heading?
- January 15, 2018: Tactical Portfolios Review
- 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
- July 24, 2017: Total Return Bond Fund Portfolios And Cash
- July 17, 2017: Long Term Stock Holding Periods For Retirement
- July 10, 2017: Half Year Asset Trend Review
- June 26, 2017: How To Beat The Best Balanced Allocation Fund
- June 19, 2017: Newsletter Collection Update
- June 12, 2017: A Mixed Bag Performance of Momentum Investing
- June 5, 2017: How To Start A New Portfolio
- May 29, 2017: Alternative Assets And Their Role In Portfolios
- May 22, 2017: Summer Seasonality And Portfolio Management
- May 15, 2017: Cash: Banking Or Investing?
- May 8, 2017: Holding Period of Long Term Timing Portfolios
- 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
- March 20, 2017: Fund Fees: That’s (Still) Outrageous
- 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
- October 24, 2016: Current Commodity Trend And Managed Futures
- October 17, 2016: Investment Mistakes And Good Or Bad Investment Strategies
- October 10, 2016: Momentum Investing Review
- October 3, 2016: Survey & Feedback
- September 26, 2016: Fixed Income Investing: Actively Managed Funds vs. Index Funds
- 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
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- 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
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- 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
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- 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
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- 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
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- 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