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, August 20, 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.
Tax Efficient Portfolios
We continue to answer an often asked question (which was also asked by the same user whose another part of question was discussed in our previous newsletter July 9, 2018: Conservative Allocation Mutual Funds Based Portfolios): how to construct a tax efficient portfolio.
Tax efficient stock investments
An investor’s overall investments mainly consist of two parts: stock (equity) and bond investments. For stock investments, there are strategic (buy and hold) and tactical (active) portfolios. To avoid tax incurred in an investment lifetime, one should minimize capital gain tax, especially short term capital gain tax (investments sold in less than a year). A natural way is to buy and hold securities for a long time.
Holding a security for a long time works also for the nature of compounding (see for example, April 9, 2018: Exponential Or Compounding Nature In Investing). In general, as what we have discussed numerously times, for capitals that are deemed not to be needed for a long time (by MyPlanIQ’s standard, at least more than 15 years, preferably more than 20 years), one should really considering to invest such capitals in a long term buy and hold SAA portfolio, as long as when you start to invest, stock valuation is at a reasonable level.
To invest in stocks, MyPlanIQ maintains that one should invest in low cost index funds, either in index mutual funds or index ETFs. Note that the funds should be
- low cost: as we discussed before, many brokerages don’t have low cost index mutual funds available (example, Merrill Edge’s US stock index funds often charged more than 0.4% compared with Vanguard’s 0.1% or so expense). In this case, the best way is to invest index ETFs (such as Vanguard ETFs) whose expense ratios are often lower than index mutual funds’.
- Furthermore, index ETFs have a slight advantage over index mutual funds because of their structures: when you invest in a mutual fund, you might end up being penalized with some of the capital gain that was already embedded in the fund. Though in a long period of time, such difference tends to diminish.
- However, index mutual funds are especially good for those who are trade averse: because mutual funds’ pricing is determined by market closing prices of each underlying securities, it’s much easier to trade these than ETFs in a rebalance. Since the price of an ETF can fluctuate during a day, it’s possible that you might not be able to get a fair price.
However, for capitals that are needed within 15 years or a shorter period or for those who are really concerned with portfolio value fluctuation (think about whether you can stomach through a 40% or 50% cut in your investments’ value), you might find some tactical portfolios appealing. In MyPlanIQ, you can either use Tactical Asset Allocation (TAA) or a long term timing based portfolios such as 200 days moving average. Since MyPlanIQ’s TAA uses asset class momentum score to pick top assets to invest, it’s actually not very tax efficient. Here, our preference is on using a long term timing portfolio. The following are the portfolios that we favor. They are listed on Advanced Strategies page:
|Ticker/Portfolio Name||15 Yr Max Drawdown||YTD
|1Yr AR||3Yr AR||5Yr AR||10Yr AR||Since 2001 AR|
|P SMA 200d VFINX Total Return Bond As Cash Monthly||17.5%||6.5%||15.9%||11.6%||12.0%||14.1%||12.4%|
|P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy Total Return Bond Funds As Cash||18.6%||-1.3%||1.7%||4.5%||7.6%||13.5%||11.4%|
|P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly Total Return Bond Funds As Cash||18.6%||-1.3%||1.7%||4.5%||5.2%||11.9%||11.2%|
|VFINX (Vanguard 500 Index Investor)||55.3%||6.5%||15.9%||13.0%||12.9%||10.6%||6.6%|
The SMA 200d portfolio uses 200 days (roughly 10 month) moving average to decide whether to buy VFINX (Vanguard S&P 500 index fund) or just invest in a total return bond fund portfolio. It only does rebalance at the end of a month. Since 2001, this portfolio buys and sells VFINX 15 times, thus only averaging less than one time per year (in 17.5 years):
It’s interesting to see that this portfolio can capture a secular trend that lasts for several years without doing any trades. For example, the last trade it did was on 3/31/2016 (more than 2 years ago). The one before this is from 12/30/2011 to 8/31/2015, almost 4 years. The other long one is from 9/30/2004 to 12/31/2007, another 3 plus years.
Basically, the shorter term trades in this portfolio are only for some minor gains or even loss while big gains are those from a longer period. Thus these big gains are usually long term capital gains that have much lower tax than a short term one.
In our opinion, tax consideration should not override your risk consideration, especially if you are very much in need of this capital earlier.
Finally, for the long term buy and hold capital, you might question our qualifier in the above: ‘as long as when you start to invest, stock valuation is at a reasonable level.” For example, at the moment, stock valuation are at historically high. So for new money, unless you are doing dollar cost average (i.e. invest in several chunks) and it’s only a small chunk of the overall capital invested in this buy and hold portfolio (for example, regular monthly savings earmarked for long term retirement need), we wouldn’t recommend to invest in a buy and hold portfolio right now. You can either invest in a fixed income portfolio or if you really want, invest in a tactical portfolio (even here, we would like to suggest using dollar cost average method) to wait it out until the stock valuation reaches a reasonable level, then you can buy and hold for a long time. This is similar to our Invest and Speculate portfolio that invests in a tactical portfolio when stock valuation is high and invest in a buy and hold portfolio when stock valuation is at a reasonable or undervalued level.
Tax efficient fixed income investments
Naturally, for the bond (fixed income) investments, a tax efficient way is to invest in a tax exempt municipal bond fund portfolio. We just discussed these portfolios in the previous newsletter July 23, 2018: Municipal Bond Funds And Portfolios.
Note the gains of these portfolios consist of two parts: capital gains resulted from buy and sell municipal bond funds and interests paid from these funds. The capital gains do incur tax (often can be short term gain tax) while the interests paid are mostly tax exempt. However, because of the much higher extra returns and much lower drawdown in these portfolios, we believe such active or tactical portfolios are better than buy and hold municipal bond fund portfolios, even after taking tax into consideration.
We often touted that for cash like investments (for capital needed within 2 years), one should considers directly buying Treasury bills (TBills). See, for example, March 19, 2018: Treasury Bills vs. Brokered CDs. A less well known tax benefit for buying Treasury bills instead of investing in a bank savings account is that the interest paid from a T Bill is only subject to federal tax. It’s tax exempt at state or local level. This, coupled with no extra fee/markup charged by a bank or a money market fund (some of money market funds like TDAmeritrade are paying extremely low interest at the moment), can further increase returns.
A little more than half (53%) of S&P 500 companies had reported Q2 earnings by last Friday. Based on Factset, the blended earnings growth is 21.3%, which is better than the 20% expected on 6/30. However, the expected earnings growth for the next quarter is actually lower than the expected: 21.2% vs. 21.5% expected on 6/30/2018. Though one shouldn’t read too much into this minor difference, recent market behavior does warrant some attention: the prices of high flying FAANG stocks have declined substantially: Facebook is now in a bear market while Netflix is also very close to lose more than 20% from its high. Furthermore, trade tariff concern is now frequently mentioned in the recent earnings reports. Whether these will manifest into a real correction or decline is anyone’s guess. However, we are reminded that market weakness is often started from the very euphoric period. Furthermore, at the current historically high stock price level, the future correction can be a very steep one that can lose as much as 50% of its value.
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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–Thanks to those who have already contributed — we appreciate it.
- July 23, 2018: Municipal Bond Funds And Portfolios
- July 16, 2018: A Guide To Conservative Portfolios
- July 9, 2018: Conservative Allocation Mutual Funds Based Portfolios
- July 2, 2018: Small Cap Stocks For The Long Term
- June 25, 2018: What Can We Learn From GE’s Removal From Dow Jones Index?
- June 18, 2018: The ‘Best’ Balanced Portfolio Continues To Excel
- June 11, 2018: Is 10 Year Long Enough For Portfolio Comparison?
- June 4, 2018: Action Plan: Risk Review For Investments
- May 21, 2018: Rising Rates, Consumer Staples And Stock Index
- May 14, 2018: Newsletter Collection Update
- May 7, 2018: Money Market Fund Taxonomy
- April 30, 2018: Momentum Investing Review
- April 23, 2018: Commodities In Current Environment
- April 16, 2018: Municipal Bonds As A Fixed Income Asset Class
- April 9, 2018: Exponential Or Compounding Nature In Investing
- April 2, 2018: Inside Of The Stock Chaos
- 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
- February 12, 2018: Trend Review
- 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