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, December 3, 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.

Taxable Total Return Bond Plus Muni Bond Fund Based Portfolios

Several users have asked whether one can further improve our total return bond fund portfolios listed on What We Do -> Brokerage Investors page by incorporating muni bond funds. In our previous newsletters (see, for example, October 1, 2018: Taxable vs. Tax Exempt High Yield Bonds), we discussed the difference between high yield taxable bond funds and high yield municipal bond funds. We showed that muni bonds themselves possess better momentum property than their taxable bond fund counterparts. We further attributed the muni bond fund portfolios’ outperformance to its recent strength across the board and high yield muni bond funds’ excellent momentum property. 

The portfolio

The idea to improve the total return bond fund portfolios is to add muni bond funds to their candidate fund lists. Specifically, to improve Schwab Total Return Bond, we add the candidate funds in Schwab Muni Bond Funds that include the following funds:

FLAAX (Nuveen All-American Municipal Bond A)
NHMAX (Nuveen High Yield Municipal Bond A)
NMBAX (Nuveen Interm Duration Muni Bond A)
FSHAX (Nuveen Short Term Municipal Bond A)
FLTDX (Nuveen Limited-Term Municipal Bond A)

These muni bond funds cover major muni bond subasset classes. 

The rationale behind adding these muni bond funds to its candidate fund list is that because of stronger muni bond momentum, when muni bonds outperform total return bond funds, they tend to continue to outperform for some time and adding them to the portfolio will not distract its overall performance. 

The portfolio Schwab TRB Plus selects a fund from its candidate fund list to invest every quarter using the same momentum strategy employed by Schwab Muni Bond Funds. Its candidate fund list includes the candidate funds (total return bond funds) in Schwab Total Return Bond plus the muni bond funds in the above table. Since it uses a quarterly rebalance frequency, it guarantees to hold a fund for at least 3 months, thus it should not incur any early redemption fee imposed by Schwab. 

The outperformance

The following table and chart show the outperformance of the newly created hybrid portfolio. 

Portfolio Performance Comparison (as of 10/26/2018)
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 12/31/2000
Schwab TRB Plus 0.2% 1.3% 5.5% 6.1% 8.3% 9.0%
Schwab Total Return Bond -1.1% 0.0% 4.5% 3.7% 8.1% 8.5%

10 year Chart

See detailed year over year comparison >>

Notice that the 0.5% improvement since 12/31/2000 is the nominal improvement without taking account of tax factor. If one were to use this portfolio in a taxable account, one would have gotten better than 0.5% improvement after tax is taken into account. 


As one can see, the 0.5% overall improve comes with a big jump in terms of maximum drawdown (11.2% vs. 7.6%) (to see this, click on the detailed comparison link below the chart in the above). Conservative investors  or those who want a simple portfolio might not want the trouble to manage yet another portfolio. On the other hand, for a large account, one can again consider building a composite portfolio that consists of some (such as half) total return bond portfolio and another (half) total return bond plus portfolio. In this way, you might be able to spread your investment in two funds in some periods that at least can increase diversification. 

The elegance and the intuition behind our total return bond funds based portfolios lie in their simplicity. We caution that our human habit to further tweak and improve investment strategies often can result in seemingly good results might falter in a long term period.  In this case, we believe this is a border line case: the modified portfolio can be useful for certain investors but not necessarily for all. 

Market Overview

It does look like that US stocks finally succumb to the intensive selling pressure in the past several weeks and now they are in a downtrend. At this juncture, we want to remind our readers to stick to your pre-selected strategies and rigorously follow them. For strategic asset allocation based portfolios, that means you should hold tight and wait out the storm. You should prepare psychologically that your portfolio value might suffer in the short term – stocks might still fall another 20% to 40% from here. In the long term, a buy and hold of broad base stock index funds portfolio will eventually deliver positive returns. For tactical asset allocation portfolios, you will need to stick to the strategy and do not second guess it. On the other hand, you should still prepare for possible fall out for the strategy – stocks might immediately recover from here and go back to a positive up trend. Such whipsaw can cost the portfolio. However, in the long term, a tactical portfolio like ours should deliver inflation beating returns with less drawdown. The key lies in the ‘long term’ — as long as 15 years or longer. Knowing that investing is a statistical game, we have no idea and have no claim that our tactical strategy will correctly predict stock market direction in the upcoming short term. But we are confident that in the long term, such a strategy will converge to its long term average that will deliver reasonable returns even though it might suffer from a ‘wrong’ decision in a short term. 

Again, we urge our readers to read some of our previous newsletters that have discussed our investment philosophy and the rationale behind both the strategic and tactical asset allocations strategies. You can find these newsletters from our newsletter collection page

Finally, as we are also near the month end, we want to make some specific comments on the popular portfolio P SMA 200d VFINX Total Return Bond As Cash Monthly that is listed on Advanced Strategies: barring from some radical change in the bond market and a sharp rebound of US stocks, it looks like the portfolio will switch to a total return bond fund portfolio at the end of this month. We want to point out that it’s not a good idea to just follow an existing total return bond portfolio like Schwab Total Return Bond. This is because such a portfolio holds a fund that might be still subject to minimum holding period requirement (in Schwab Total Return Bond case, it’s 3 months). Since you just start this portfolio, the best way is to visit such a portfolio page and do a ‘Customize a New Portfolio’ to create a new portfolio using the latest market and fund condition. For example, if we ‘Customize a New Portfolio’ for Schwab Total Return Bond right now, it would suggest to hold CASH instead of a bond fund. That would mean you should just purchase a money market fund (as a proxy to CASH) instead. 

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

In terms of investments, U.S. stock valuation is still at a historically high level and it might still have a bigger correction. 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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