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, May 7, 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.
Municipal Bonds As A Fixed Income Asset Class
We have long argued that municipal bonds, the debts issued by state and local governments, are more than just tax-free substitutes. Because of their special nature, they should be considered as a standalone fixed income asset class that can be used even in a tax-deferred account such as 401k or IRA. In this newsletter, we will review the current municipal bond market and discuss their investment strategies.
Current municipal bond yields
Let’s first look at the current municipal bond yields, compared with Treasury bond yields.
Muni Taxable Equivalent (24%)
Muni Taxable Equivalent (37%)
So for a reasonably high federal tax bracket (24%) investor, the AAA rated municipal bonds are yielding higher than their Treasury bonds equivalent after tax. This is even before state tax consideration.
In fact, considering the absolute total return, an intermediate term Municipal bond fund has done better than an intermediate term taxable bond fund:
|Intermediate bond fund||YTD
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||10Yr Sharpe|
|VBMFX (Vanguard Total Bond Market Index Inv)||-2.0%||-0.5%||0.7%||1.3%||3.4%||0.81|
|VWIUX (Vanguard Interm-Term Tx-Ex Adm)||-1.1%||1.3%||1.9%||2.3%||3.8%||1.32|
This is somewhat surprising! Municipal bond investors have gotten better total returns even in a tax-free or tax-deferred account for the past 1,3,5 and 10 years. Talk about market efficiency.
There are several possible reasons to explain this:
First, if one looks at the above chart more carefully, municipal bonds started to outperform taxable bonds in 2014, just around the time when the Federal Reserve began to raise interest rates in some meaningful way. In general, municipal bonds respond to rate change more slowly than Treasury bonds. A likely reason is that more municipal bonds are mostly (more than 75% by some estimate) held by wealthy individuals who are more likely to hold the debts till their maturity, thus making their prices less volatile.
Second, recent tax laws, especially the latest tax law have made it harder for local governments to issue debts. This creates a (less) supply and (more) demand situation, thus again pushing muni bonds’ prices higher.
Third, also because of the recent tax law that now limits state and local government tax deduction to $10,000, more investors are conscious of tax benefits and they flocked into muni bonds.
Municipal bond portfolios
Because of the properties stated above, one can see that muni bonds can have more stable trends. That’s reflected in our brokerage specific municipal bond portfolios listed on What We Do -> Brokerage Investors page:
Latest Tax Free Municipal Bond Fund Portfolios Performance Comparison
|1Yr AR||3Yr AR||5Yr AR||10Yr AR|
|Fidelity Muni Bond Funds||-0.8%||6.9%||4.1%||3.9%||6.4%|
|Schwab Muni Bond Funds||-0.8%||6.9%||4.1%||3.9%||6.4%|
|Merrill Edge Muni Bond Funds||-1.1%||3.4%||2.7%||2.8%||5.6%|
|Etrade Muni Bond Funds||-1.1%||3.4%||2.7%||2.8%||5.6%|
|Vanguard Muni Bond Funds||-1.0%||2.7%||2.1%||2.2%||4.5%|
|VWIUX (Vanguard Interm-Term Tx-Ex Adm)||-1.1%||1.3%||1.9%||2.3%||3.8%|
Every quarter, these portfolios pick a municipal bond fund from a list of candidate funds that represent short, intermediate and long term municipal bonds as well as high yield municipal bond funds. They have done way better than intermediate bond funds such as VWIUX (Vanguard Interm-Term Tx-Ex Adm).
In fact, they are not that far behind the active taxable total return bond fund portfolios listed on the same page:
Latest Total Return Bond Fund Portfolios Performance Comparison
|1Yr AR||3Yr AR||5Yr AR||10Yr AR|
|Schwab Total Return Bond||-1.2%||2.9%||3.4%||3.5%||7.4%|
|Fidelity Total Return Bond||-1.2%||4.3%||2.6%||3.0%||6.9%|
|TDAmeritrade Total Return Bond||-1.2%||3.9%||2.7%||3.3%||7.4%|
|FolioInvesting Total Return Bond||-1.2%||2.9%||3.4%||3.5%||7.4%|
|Etrade Total Return Bond||-1.2%||2.9%||3.4%||3.5%||7.4%|
|Merrill Edge Total Return Bond||-1.2%||2.9%||2.5%||3.3%||8.3%|
|Vanguard Brokerage Total Return Bond||-1.2%||2.9%||3.4%||3.5%||7.5%|
|PTTRX (PIMCO Total Return Instl)||-1.3%||1.1%||1.5%||1.7%||4.7%|
|VBMFX (Vanguard Total Bond Market Index Inv)||-2.0%||-0.5%||0.7%||1.3%||3.4%|
The municipal bond portfolios have done better for the past 1, 3 and 5 years. However, they still lagged behind in the 10 year time frame.
In general, a taxable total return bond fund has more opportunities to invest: in addition to the usual domestic taxable and even municipal bonds, a total return bond fund can venture into riskier (and higher-yielding) bonds such as international and emerging market bonds. They can also at times take advantage of high yield taxable bonds that can be more volatile (and thus more rewarding).
Regardless, municipal bonds, especially the active municipal bond portfolios discussed above, can be a viable alternative to taxable bonds. This is especially true at the early phase of a rising rate environment.
However, municipal bonds still carry similar risk as taxable bonds, as evident in the YTD (Year To Date) returns of these bonds and portfolios. Furthermore, in the late stage of a rising rate period, we expect these bonds will get less demand as their taxable equivalent ones will offer more compelling yields, thus diminishing their allure.
Now that the fear of geopolitical uncertainty (Syrian situation) and trade war with China lessened a bit, stocks finally started to respond to the positive earnings report. Up to last Friday, based on Factset, among 6% of companies in S&P 500 group had reported earnings. The blended (i.e. the mixed actual earnings and estimated earnings for those still to report) earnings growth is 17.3%, higher than the expected 17.1% on December 31, 2017. Investors have a high expectation for this earnings season. This is actually a negative as anything that’s less expected can derail the current over-extended stock market. To make the matter worse, this is in a highly overvalued stock valuation environment. As always, we urge investors to manage their risk exposure to a comfortable level while sticking to planned and sound investment strategies.
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 about 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.
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- March 26, 2018: Total Return Bond Update
- March 19, 2018: Treasury Bills vs. Brokered CDs
- March 12, 2018: Defensive Conservative Portfolio Review
- March 5, 2018: Warren Buffett’s Advices
- February 26, 2018: Pros And Cons of Strategic And Tactical Portfolios In 2018
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- 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
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- 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
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- October 23, 2017: A Primer For Portfolios
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- October 9, 2017: Conservative Portfolios Revisited
- October 2, 2017: The Role of Short Term Bond Funds
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- 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
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- June 19, 2017: Newsletter Collection Update
- June 12, 2017: A Mixed Bag Performance of Momentum Investing
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- 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
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- 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
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- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
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- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
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- 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
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- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
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- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
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- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
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