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, July 16, 2018. 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.

Is 10 Year Long Enough For Portfolio Comparison?

Current bull market in US stocks has been so consistently stronger than others that it’s becoming increasingly difficult to argue for the benefits of asset allocation or diversification. In this newsletter, however, we try to walk through historical performance and look at current live data (and likely some of your portfolios). We hope this could help us to better understand how to evaluate a portfolio in an often used ‘long term’ period. 

Recent stock asset returns

First, let’s compare the major stock asset performance: 

As of 6/8/2018:
Stock Asset YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR 20 Yr AR
VFINX (Vanguard 500 Index Investor) 4.8% 16.3% 12.3% 13.2% 9.6% 9.3% 6.6%
NAESX (Vanguard Small Cap Index Inv) 8.2% 19.1% 10.9% 12.5% 10.5% 11.5% 8.8%
VGTSX (Vanguard Total Intl Stock Index Inv) 0.2% 11.0% 6.3% 6.4% 2.5% 7.9% 5%
VEIEX (Vanguard Emerging Mkts Stock Idx) -1.1% 12.8% 5.6% 4.5% 1.6% 10.7% 8.3%

*: NOT annualized

 10 Year total return charts: 

A couple of observations: 

  • Clearly for the past 1, 3, 5 and 10 years, US stocks (both large cap and small cap) have done so much better than others. 
  • However, moving to 15 and 20 years, things become less consistent: emerging market stocks did outperform US large stocks for those periods is mostly because of some earlier years strong returns from emerging market stocks. 

While reviewing various portfolios listed on our  Advanced Strategies page, especially those that can invest 100% in risk assets (stocks, for example) at some time, we found their recent returns are all over the map. Here are the ones we have regularly featured in our newsletters: 

Portfolio Performance Comparison (as of 6/8/2018):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001 AR
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 0.8% 12.9% 8.4% 8.4% 8.8% 12.3% 12.8%
P Invest and Speculate 4.8% 16.3% 10.8% 12.3% 14.4% 13.3% 12.8%
P Momentum Scoring Style ETFs and Treasuries 9.0% 19.1% 7.1% 9.3% 10.0% 11.3% 9.4%
P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy Total Return Bond Funds As Cash -2.0% 0.4% 4.0% 7.9% 12.9% 11% 11.1%
VFINX (Vanguard 500 Index Investor) 4.8% 16.3% 12.3% 13.2% 9.6% 9.3% 6.5%

*: NOT annualized

The reason we chose return data since 1/1/2001 is because most of these portfolios’ start dates began on this date. 

The above table includes a global tactical portfolio (P Goldman Sachs Global Tactical), a long term stock valuation metric based timing portfolio (P Warren Buffett) on US stocks, an improved version of the Buffett ratio portfolio (P Invest and Speculate) and a 9 US style (large cap, small cap, growth, value etc.) stock rotation (P Momentum Scoring Style) portfolio. 

Several observations:

  • S&P 500 total return (represented by VFINX) has excelled for the past 1, 3, 5 years. The reason it lost out for the 10 years is mostly the poor performance from June 2008 to March 2009,  a major period of the 2008-2009 bear market. We suspect that if the current trend continues to this time next year, it will outperform most of these portfolios for the 10 year period as by then, the 2008 bear market will not be included anymore. 
  • Since 2003 (15 year period), however, S&P 500 has returned the least. This is again because of the 2008-2009 bear market as well as some of the outperformance by emerging market stocks and international stocks. 
  • For more than 17 years, the global diversified portfolio P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds did the best, along with P Invest and Speculate, a portfolio that combines 200 day moving average timing as well as long term stock valuation metric (using Buffett ratio) on S&P 500, so a US stock centric portfolio. 

Global tactical starts to lose steam compared with US stocks for the recent 10 years

Based on the above data, one can see that for 15 and beyond, global diversification based and/or long term timing based portfolios have easily outperformed US stocks. This fact has increasingly been forgotten by investors because of the recent strong 1, 3, 5, and even 10 years’ US stock outperformance. 

As stated above, we are seeing right now US stocks (represented by VFINX) has begun to outperform global TAA portfolio P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds for the 10 year period. We suspect this trend will continue till the next major correction, which is likely to happen next year or maybe as late as 2020 (this is a pure subjective speculation, as always, we don’t very much trust our own prediction/speculation). 

However, if we look at our total return flash based chart that compares the total returns of VFINX against that of the global TAA portfolio (please click on 10y (10 year) tab and check Normalized box (meaning relative comparison)), you can move the 10 year period backward (by dragging the slider at the bottom of the chart), and ‘simulate’ or ‘walk’ through rolling 10 year periods since 1998. Here are some snapshot: 

The latest 10 year: (Indigo line represents VFINX)


From 2005 to 2016 (the worst year of the P GS portfolio):

From 2003 (out of the 2000-2002 tech induced recession) to 2013:

If you do walk through from right to left, you will see that for virtually all other 10 year periods, the portfolio has outperformed VFINX. 

But again, we are seeing now VFINX starts to do better than the portfolio for the last 10 years and probably will continue to do so for a while. 

Is 10 year return long enough?

The short answer to this question is no, a 10 year period is probably not long enough. This is not surprising. We addressed so called minimum holding periods for both buy and hold (SAA) and tactical (TAA) portfolios previously: 

  • For buy and hold stocks, the minimum holding period should be 15 years, preferably 20 years or more. 
  • For tactical portfolios, the minimum holding period should be 10 years, preferably 15 years or more. 

The above statement is about minimum holding period for stock portfolios (i.e. SAA or TAA). By minimum holding periods we mean a period in which your portfolio can give you some reasonable returns over inflation. 

On the other hand, for comparison purpose among different strategy based portfolios, from the above data, we would claim that one should give at least 10 years, preferably 15 years or more time if you want to see a tactical strategy based portfolio to show its advantage. The reason is that though in most cases, a 10 year period is sufficiently long enough to cover a complete market cylce (bear and bull or bull and bear market), some bull market alone (like the current one which is 9 plus and running) can be as long as 10 years or so. 

To summarize, the above discussion is just to give us some quantitative sense on the often used ‘long term’ phrase. For the absolute inflation beating returns, portfolios should be held for 15 or 20 years more, depending on the types of strategies. On the other hand, for comparison purpose, one should look at relative return data beyond 10 years. 

Finally, the above conclusion is at best still a rough estimate. For example, if indeed for the coming 10 years, buy and hold US stocks (like S&P 500 index funds) will give us zeor or even negative annualized return (as predicted by many such as GMO and John Hussman), and only then the valuation is back to a historical normal level (thus achieving 10% annual return for the next 10 years), one should expect buy and hold US stocks for the next 20 years will only give us 4% to 5% annual return ((1.1)^10)^(1/20)-1 = 4.8%). 

Market Overview

It’s somewhat surprising that stock markets are still going strong even now we are in the summer session that’s usually weak for stocks. Furthermore, rate sensitive assets such as REITs have recovered somewhat, though not completely. For example, year to date, consumer staples (XLP) sector has returned -8.9% while utilities sector (XLU) returned -6.3% till last Friday. At the moment, there is no visible or imminent recession or downturn risk in economy. However, as we stated many times, things can change quickly in today’s over valued and over extended markets. As always, stay the course and while we still can, enjoy a good market in this summer. 

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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