September 17, 2018: Where Are We Since The Financial Crisis 10 Years Ago?

Sep 18, 2018 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

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, September 24, 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.

Where Are We Since The Financial Crisis 10 Years Ago?

Last week, in financial media it was full of articles that ‘celebrated’  the 10 year anniversary of Lehman Brothers’ bankruptcy. The bankruptcy was symbolically viewed as the beginning of the 2008-2009 financial crisis. We think it’s a good exercise to review some of the main themes in the investment world since then. 

Risk is no longer a hot topic

Perhaps the most obvious phenomenon in investing is that risk is no longer a hot topic among investors. Even though the current bull market is close to be 10 years old, economy has picked up steam and US stocks have risen dramatically (more on this later). As MyPlanIQ started its service right after the crisis, we have the first hand experience on this. 

Around 2010 or so, freshly out of the financial crisis, investors were extremely risk averse. For many, it was a one-two punch: the technology stock crash in 2000-2003 was only 5 years ago. At that time, tactical portfolios, alternative portfolios that invest in multiple assets that can hedge each other (remember the famous permanent portfolios?) and hedge funds that employ hedging techniques such as long-short were very much sought after. After 10 years, this has become a distant memory:

  • Tactical portfolios and alternative are seldom talked about. Their returns have been lagging behind a simple buy and hold US stocks and bonds portfolio or fund (such as Vanguard Balanced Fund VBINX). 
  • Hedge funds are no longer in fashion as many have had dismal returns. In fact, many of them have shut down. 
  • In stock investing, people poured money into index funds. Actively managed funds have been largely discarded by many. 
  • In the early years after the crisis, investors were still very much in favor of dividend stocks — most of them are considered to be safer than growth stocks (remember yield chasing?). Now it’s all about growth. See our previous newsletter, for example. 
  • Bonds have started to lose money this year. On the other hand,  stocks (mainly US stocks) have risen steadily in a very smooth fashion — in fact, there were only 4 times that S&P 500 index corrected more than 10% in the past 10 years. 

This period also saw many so called robo advisors coming to markets. What’s striking is that most such services (perhaps MyPlanIQ is the only exception) only promote buy and hold strategic asset allocation. They basically dismiss the need to actively manage risk. Investors have been very receptive to their offerings.

In addition, multiple risk asset (foreign stocks, emerging market stocks, commodities) diversification is no longer ‘working’ for many. 

Global and major asset diversification don’t pay

Let’s first look at how the major assets have fared for the past 10 years: 

Major risk asset returns (as of 9/14/2018):
Asset YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR
VTI (Vanguard Total Stock Market ETF) 10.4% 19.2% 16.2% 13.5% 11.2%
VEA (Vanguard FTSE Developed Markets ETF) -3.3% 1.7% 8.2% 4.8% 4.5%
VWO (Vanguard FTSE Emerging Markets ETF) -10.5% -6.7% 8.9% 2.5% 3.6%
VNQ (Vanguard REIT ETF) 2.1% 3.1% 9.4% 9.3% 7.5%
DBC (PowerShares DB Commodity Tracking ETF) 3.6% 12.6% 4.6% -8.2% -6.5%

Again, it’s evident that US stocks and US REITs have done wonder while the rest have languished. Foreign stocks and emerging market stocks barely beat US bonds while Commodities have lost 49% of its value for the past 10 years!

It’s thus no wonder that anything global or alternative is not working well, compared with a pure US stocks/US bonds allocation: 

Portfolio Performance Comparison (as of 9/14/2018):
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR Maximum Drawdown
Six Core Asset ETFs Tactical Asset Allocation Moderate 1.0% 1.8% 4.3% 3.4% 6.1% 11%
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate 0.2% 3.7% 7.3% 5.4% 5.6% 39%
Harry Browne Permanent Portfolio -0.7% 1.0% 5.4% 4.6% 6.0% 15%
My Simple Alternative Hedge Fund 0.8% 2.2% 5.9% 4.8% 8.0% 13%
PASAX (PIMCO All Asset A) -4.2% -2.0% 6.4% 2.8% 4.5% 28%
GBMFX (GMO Benchmark-Free Allocation III) -2.2% -0.1% 4.4% 2.7% 5.1% 20%
MALOX (BlackRock Global Allocation Instl) -0.4% 1.9% 6.0% 4.8% 5.7% 33%
VBINX (Vanguard Balanced Index Inv) 6.1% 11.0% 10.3% 9.0% 8.4% 36%

 Of course, since the current 10 year period still includes some part of the 2008-2009 crisis, the tactical and alternative portfolios still show some big advantage in maximum drawdown (the loss from a peak to a subsequent trough). 

The three mutual funds (PIMCO, GMO, Blackrock) are considered to be some of the best moderate global allocation funds. They all performed poorly, compared with VBINX. Notice that our My Simple Alternative Hedge Fund portfolio (listed on What We Do -> Brokerage Investors page) is most close to match VBINX for the 10 year returns as it employs our total return bond fund portfolios as its fixed income portion, which boosted its returns.  

Investment cost has come down in general

In the past 10 years, one of the bright spots is that mutual fund and ETF cost has come down. This is especially true for index funds. In fact, for US stock index funds, the expense ratio can be as low as zero (Fidelity zero-fee index funds) or for most, can be 0.03% or so. For other stock index funds, the expense ratios are also at 0.1% or so range. 

This period also saw many so called commission free ETFs. Fidelity was the very first one to venture into this. However, as time went, many have degenerated into more or less a way for ETF providers to sell low AUM (Asset Under Management) new funds. The major exception is Vanguard brokerage that offers all of its ETFs commission free. Many of these ETFs are the core ETFs that have large liquidity (volume) for mainstream portfolio building. 

However, investors are still paying high fees for actively managed funds including total return bond funds. Furthermore, another peculiar area is that money market funds, which are considered to be cash equivalent, are still charging high fees (as much as 0.8% or so). As we pointed out several times before, this is an ‘open secret’ for brokerages to make money. 

Where are we going from here?

To some extent, what we observed above is not surprising: at the end of a bull market, something always goes to some extreme. At the moment. the risk of the next recession is nowhere in sight. The current bull market is becoming more and more similar to the one in 1990s:

S&P 500 index only lost a bit more than 20% in the brief bear market in 1990. The bull market, counted from 1990, lasted for 10 years. If we ignore the 1990’s brief one and extend the period to the 1987 crash, the bull market lasted for about 13 years. Whether the current one will have a couple more years to go is anyone’s guess. However, one thing is clear: though risk management and diversification have been made not that important by the buoyant markets, investors should remember that history often repeats itself, especially in a time most unexpected. Risk is not going away and we are more closer to the next bear market than anytime in the current bull market cycle. 

Market Overview

10 year Treasury rate went back up and approached 3% again last week. Bonds are again under pressure. The most noticeable concerns at the moment are the US-China trade conflict and the upcoming election. US stocks are again near their record territory while emerging market stocks have lost more than 10% this year.  As always, stay the course. 

For more detailed asset trend scores, please refer to 360° Market Overview. 

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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