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.

Conservative Allocation Mutual Funds Based Portfolios

Recently, we received a user’s question/request on conservative allocation portfolios:

 I have an interest in managing some money in a conservative portfolio.  I have accounts at Fidelity, so I had some interest in the portfolio below.  However, looking at the performance of this portfolio vs other conservative funds shown below, has me thinking, why would anyone follow this portfolio​?  It greatly underperforms the other options.  I’d like to see a newsletter address your group’s current thinking on conservative portfolios.  There has to be something better than Fidelity Conservative Allocation for Fidelity investors.  Or this portfolio needs to be restructured.

The portfolio and comparison the user refers to is as follows: 

Fidelity Conservative Allocation Performance Comparison

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
Fidelity Conservative Fund Upgrade -1.0% -3.6% -0.5% 1.1% 3.8%
VWINX (Vanguard Wellesley Income Inv) -1.4% 3.2% 5.6% 6.1% 7.4%
BERIX (Berwyn Income)       2.4% 0.9% 3.1% 4.1% 6.6%

This conservative fund upgrade portfolio is a Fidelity brokerage specific portfolio that’s similar to a model portfolio P No Load Conservative Mutual Funds Upgrading Quarterly listed on Advanced Strategies. The performance has been extremely disappointing, to say the least. 

In this newsletter, we will look at this problem in more details. We also want to answer a more general question: should one utilize ready made existing conservative allocation mutual funds or should we just construct a conservative allocation portfolio using stock and bond funds on his/her own?

Availability of no load and no transaction fee conservative mutual funds in a brokerage

The idea to construct conservative allocation mutual fund upgrade portfolios is to first pick a selective subset of ‘good’ conservative mutual funds and then use our fund momentum ranking technique to pick funds with the highest momentum score to invest. The frequency is to do this monthly while in the meantime to obey the minimum holding period requirement for each fund. The ‘good’ fund candidates are based on our own research and Morningstar’s ratings. For P No Load Conservative Mutual Funds Upgrading Quarterly listed on Advanced Strategies, we choose a set of such ‘good’ funds without considering their actual availability in a brokerage. 

The following are the candidate funds used in the above portfolio (you can find this info on the portfolio page too):

  • Berwyn Income BERIX
  • Vanguard Wellesley Incom VWINX
  • Permanent Portfolio PRPFX
  • American Century One Choice Very Conservative AONIX
  • Manning & Napier Pro-Blend Conservative Terms EXDAX
  • Janus Conservtive Allocation JSPCX
  • T.Rowe Price Personal Strat Income PRSIX
  • Fidelity Strategic Real Return FSRRX
  • James Balanced Golden Rainbow GLRBX
  • Hussman Strategic Total Return HSTRX

Unfortunately, these funds are not always available as NTF (No Transaction Fee) no load fund in a specific brokerage. To make matters worse, many brokerages have very limited subset of NTF conservative funds available. 

For example, we did a screen on Fidelity website to see the availability of its NTF funds, surprisingly, we only find 22 such funds available. Furthermore, there are only very few good funds: 

There are only 3 funds that have Morningstar’s 10yr 5 star ratings. Many excellent funds like Vanguard’s VWINX or Berwyn Income BERIX are not available as NTF in Fidelity. 

This is the challenge to construct a good list of candidate funds. In fact, in Fidelity Conservative Fund Plan, the one used for the user’s portfolio in question, it has only 6 such candidate funds. 

The limited availability of ‘good’ conservative funds is not just in Fidelity. This occurs in virtually all of the brokerages. 

High fees and lousy performance

It’s also very disappointing that for these allocation funds charge very high fees. From the above table, one can see the net expense ratios range from 0.5% to 1.7%. 

This is very high, compared with many equity index funds’s 0.3% or lower. 

Furthermore, these funds all underperformed BERIX and VWINX in the last 10 years. 

Conservative portfolios

Now let’s compare the Fidelity portfolio in the user’s question with the ‘generic’ one:

Portfolio Performance Comparison (as of 7/9/2018):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
P No Load Conservative Mutual Funds Upgrading Quarterly -0.4% 4.5% 5.0% 5.5% 6.8% 1.41
Fidelity Conservative Fund Upgrade -0.8% -3.5% -0.3% 1.0% 3.7% 0.7
Fidelity Conservative Total Return Dividend Portfolio -0.1% 3.3% 5.4% 6.1% 7.9% 1.17
BERIX (Berwyn Income) 2.4% 0.9% 3.1% 4.1% 6.6% 1.09
VWINX (Vanguard Wellesley Income Inv) -1.4% 3.2% 5.6% 6.1% 7.4% 1.1

See detailed comparison >>

The ‘generic’ one outperforms the Fidelity one by a big margin. It also did better than BERIX while slightly underperformed VWINX in the last 10 years. Notice however, it has the highest 10 year Sharpe ratio, indicating better risk adjusted return. In fact, its maximum drawdown in the last 10 year is only 9.4%, less than half of VWINX’s 19%. 

Of course, none of these are no better than our Fidelity Conservative Total Return Dividend Portfolio that’s listed on What We Do -> Brokerage Investors page. We covered this type of portfolio in  January 30, 2017: Brokerage Specific Conservative Portfolios and other newsletters. 


From the above exercise, we can see that the limited availability of conservative mutual funds in a brokerage and high fees in these funds severely affects our ability of building a good conservative portfolio using these actively managed existing funds. On the other hand, even assuming all of the ‘good’ conservative allocation funds are available in a brokerage (i.e. the ‘generic’ portfolio P No Load Conservative Mutual Funds Upgrading Quarterly), it’s still not as competitive as the ones constructed using low cost stock index funds and a total return bond fund portfolio (i.e. Fidelity Conservative Total Return Dividend Portfolio)

Of course, Fidelity Conservative Total Return Dividend Portfolio is US centric: its stock funds are US stocks and US REITs which have outperformed other international funds for the past 10 years. However, one can follow the similar methodology to construct a global stock based conservative allocation portfolio that’s still better than many excellent conservative allocation funds. 

In conclusion, we do not advocate using existing conservative allocation mutual funds to construct a conservative portfolio. We prefer using either index funds or our own stock and bond portfolios to build such a conservative portfolio. In the next newsletter, we will discuss this in more details. 

Market Overview

US stocks shook off the trade war concern and staged another attempt to ascend. However, one should be very concerned that stocks in the rest of the world were all weakened considerably last week. US stocks are now the only bright star among all risk assets, as in past many years. Bonds have recovered somewhat, signaling rising interest rate fear might be waning. As always, we believe it’s futile to attempt to predict market direction in a short term. The best is to follow a well designed plan and stay 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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–Thanks to those who have already contributed — we appreciate it.

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