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.

What Can We Learn From GE’s Removal From Dow Jones Index?

GE was booted out of Dow Jones Industrial Index last week. This caused some media sensation. For example, The Wall Street Journal stated in the article titled as GE Drops Out of the Dow After More Than a Century as:

a milestone in the decline of a firm that once ranked among the mightiest of blue-chips and was a pillar of the U.S. economy.

We at MyPlanIQ have long maintained that one should never just simply buy and forget a business, being a stock or a fund, regardless of how wonderful the business is. In this newsletter, we want to delve into this subject in some details. 

The Once Mightiest GE

Investors who have been in markets for a long time should remember that even 10 year ago, GE had been always regarded as a bellwether for US companies. In fact, it was regarded by many investment professionals as the barometer of US economy. For a century, the company has been one of the largest companies in terms of its market capitalization. The following are some interesting data:

  • In 2000, it was valued at $594 billion, the largest among all the US companies. Today, the company was valued $110 billion, compared with the most valued stock Apple’s $895 billion. 
  • 10 years ago, at the end of 2008, GE’s revenue was $182 billion, compared with today’s $120 billion, a 1/3 reduction!
  • Its EBITDA (Earnings Before Interests, Tax, Depreciation & Amortization) was $56 billion in 2008, compared with $1.2 billion at the end of 2017. 

GE’s stock total return (including dividend reinvested) since 2000:

Its returns, compared with S&P 500 (VFINX): 

Stock/Fund YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR AR 20 Yr AR
GE (General Electric Co) -26.3% -52.3% -19.4% -8.1% -4.1% 4.7%
VFINX (Vanguard 500 Index Investor) 3.9% 15.2% 11.2% 13.8% 9.9% 6.6%

So for those who have bought GE in the last 20 years, odds are high that they are not getting a good return or even lost money. 

Long term stock holding and actively managed funds

For the capital one can afford to allocate for at least 20 years, we actually advocate buy and hold low cost stock index funds, as long as stock valuation is reasonable at the time of purchasing. We have detailed some of our allocation philosophy in previous newsletters like June 11, 2018: Is 10 Year Long Enough For Portfolio Comparison?

However, when it comes to long term individual stock holdings, we do not advocate buy and forget approach. In fact, even Warren Buffett, a strong advocate of long term buy and hold of ‘wonderful’ businesses, once held GE stock in his Berkshire’s portfolio and subsequently liquidated it. 

What happened to GE is just one of too many examples. For example, long term bellwether IBM has recently also had some long term business challenge that it might not be able to tackle successfully. Buffett held IBM for a couple of years and finally liquidated the stock last year and openly admitted the investment was a mistake. 

The reason is that, a company or a business, however wonderful it is and how strong a moat it has (to protect against other competitors and to monopolize its market shares), is subject to disruption that might be just too  hard to resist in nature: management/ownership change, fundamental business shift: GE was the mightiest as it was once the symbol of the US manufacturing, which was the manufacturing center since World War II,  or IBM’s mainframe was considered to be one of the stickiest and essential business for large corporations’ information systems, but not anymore. A business can also be simply destroyed by some stupid mistakes made by management. We can go on and on the list of possible factors. 

That’s why at least, these businesses should be reviewed regularly. However, for many average investors (in fact, many professional investors too), it’s just not easy to distinguish a fundamental business deterioration from some short term challenges. 

The same principle applies to actively managed funds too. We have seen so many blow up from good and famed stock funds including Sequoia (SEQUX), Fairholme (FAIRX) and Legg Mason Value Trust (LMVTX). Along the years, we wrote about them every now and then, It’s actually not surprising if one views a fund management as a business: it’s subject to many similar challenges an individual business/stock faces. 

Index funds and quantitative strategies

For stock/equity investments, buying low cost reputable index funds is a good way to mitigate individual stock risk. Index funds are proxies of stock markets. So investing in an index fund such as S&P 500 is just like investing in a representative of stock markets: in the S&P 500 index case, it’s a good representation of large US companies. 

Furthermore, index construction is a well established and mostly mechanical (or quantitative) strategy. S&P 500 index is constructed and periodically reviewed by a committee from S&P, hopefully using a pre-calibrated or pre-set methodology (since their methodology is not disclosed publicly, we can only speculate there). It’s no wonder majority of actively managed stock funds can not outperform such an index. 

The simple, intuitive and well established method (or strategy) is the key to avoid typical human related errors. Not only this is true to a buy and hold approach (or strategic such as our strategic asset allocation strategy), this is also applicable to a tactical, mechanical investment strategy. Of course, such a strategy has to have a strong fundamental backing. In most of MyPlanIQ’s tactical investment strategies, we rely on the well known momentum behavior, a factor that has been well recognized (and has a strong intuition) with strong research backings. 

Long time MyPlanIQ customers also know that for fixed income (bond) investments, we advocate a strategy called total return bond fund rotation. Such a strategy picks a total return bond fund out of a set of few highly selective funds monthly, based on the prevailing total returns (including interests/distributions) of these funds. The set of these candidate funds have to meet a condition that entails its manager(s) should have won at least once the fixed income manager of the year award by Morningstar. 

We have explained previously that capitalization weight based index bond funds are not the best representation of bond markets. However, with a strictly followed, constantly reviewed (monthly) strategy that selects the best fund among this pool of ‘best’ funds, we believe we can avoid the pitfall of individual fund risk. 

Some readers might think why not just select one or a few of these ‘best’ funds and buy and hold them forever. For example, up until recently, PIMCO income fund PONAX has been the best performer, even better than our total return bond fund for the past 10 years: 

Portfolio Performance Comparison (as of 6/22/2018):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
Schwab Total Return Bond -1.1% 1.2% 4.4% 4.0% 7.7%
Fidelity Total Return Bond -1.1% 0.8% 3.9% 4.3% 7.1%
TDAmeritrade Total Return Bond -1.1% 2.3% 3.6% 3.7% 7.2%
FolioInvesting Total Return Bond -1.1% 2.1% 4.8% 4.2% 7.7%
Etrade Total Return Bond -1.1% 2.1% 4.8% 4.2% 7.7%
Merrill Edge Total Return Bond -1.1% 2.1% 3.7% 4.0% 8.5%
PONAX (PIMCO Income A) -1.8% 1.5% 4.2% 5.2% 8.5%
PTTAX (PIMCO Total Return A) -2.4% -1.3% 1.7% 2.2% 4.4%
LSBDX (Loomis Sayles Bond Instl) -0.4% -0.7% 2.3% 3.2% 5.5%
DLTNX (DoubleLine Total Return Bond N) -0.2% 0.4% 2.1% 2.7%  
VBMFX (Vanguard Total Bond Market Index Inv) -2.4% -1.7% 1.3% 2.0% 3.5%

The reason why we prefer using our total return bond fund portfolios instead of just investing a single fund (PONAX, for example) for a long time is exactly the one we explained in the above: we want to avoid individual fund risk. In fact, just several years ago, investors were so much sure about PIMCO total return bond fund (PTTAX) or Loomis Sayles Bond (LSBDX) but recently their returns have been somewhat disappointing, much less than our portfolios’. Though currently, PIMCO income fund has been the favorite, but at some point, this will change. A good investment strategy should have a way to prepare for this and deal with it when it happens. 

Finally, we want to emphasize that the above discussions by no means imply we don’t admire those excellent fund managers or investors such as Warren Buffett, Bill Gross, Jeffrey Gundlach of Doubleline or Dan Ivascyn of PIMCO Income. They represent some of the best investors. However, as explained above, regardless how great an investor is, humans are fundamentally subject to fallacy, sooner or later. This is just the human nature. What we strive to do is to use a pre-calibrated and well studies quantitative method to avoid this so that we can manage our investment risk better. 

Market Overview

Stock markets started to become more volatile last week. Trade war related concern has exacerbated stock weakness. If the current trade policy is indeed fully implemented, global economy might be seriously affected. This, together with the current high stock valuation and the rising rate environment, will be hostile to stock markets. As of today, international and emerging market stocks all have negative trend scores. Furthermore, last week, defensive sectors including utilities and consumer staples were in favor. As we have no idea on where this is headed, we will rely on our selected strategies to guide us through. As always, we call for staying the course. 

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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