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.

Allocation Mutual Fund Review

It’s been a while since last time we looked at some of representative asset allocation funds. MyPlanIQ has been tracking some of best allocation funds on SmartMoneyIQ Managers. In this newsletter, we want to look at their recent performance. 

US allocation funds

These funds are moderate allocation (Morningstar defines this category as 50% to 70% equity) funds that mainly invest in US stocks and bonds. 

Performance Comparison (as of 11/26/2018)
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15 Yr AR MaxDD
50 To 70 Percent Tactical Balanced Portfolio 3.0% 5.5% 9.7% 8.2% 12.4% 10.6% 12.9%
PRWCX (T. Rowe Price Capital Appreciation) 2.5% 3.9% 8.1% 9.0% 14.3% 9.3% 41.8%
VWELX (Vanguard Wellington Inv) -0.9% -2.1% 6.1% 6.2% 11.0% 7.8% 36.1%
DODBX (Dodge & Cox Balanced) -0.5% 2.7% 8.5% 7.1% 13.0% 7.4% 50.2%
BRUFX (Bruce) -0.7% 0.0% 4.5% 6.7% 13.0% 9.6% 42.2%
VBINX (Vanguard Balanced Index Inv) -0.3% 1.5% 6.7% 6.6% 10.8% 7% 36%

MaxDD: Maximum Drawdown (a peak to a following trough)

10 year chart

As 2008, the previous bear market is fading away from the last 10 year period, we include 15 year period that covers from 11/26/2003 to today. This period excludes the 2000-2002 bear market. 

Unfortunately, as US bonds (VBMFX, for example) have been losing money this year, funds except for PRWCX have slightly lost money this year. 

All of these funds have outperformed the benchmark index fund VBINX (Vanguard standard 60% stocks and 40% bonds allocation fund) for the past 10 and 15 years. Among them, the small (only $500 million asset under management) Bruce fund (BRUFX) has done a very respectable job: it actually outperformed PRWCX (9.6% vs. 9.3%) in the last 15 years. Dodge & Cox balanced fund (DODBX), a traditional power house in value stocks and fixed income, was hurt by its big loss in 2008. However, it has since recovered nicely. 

The best allocation fund 

T.Rowe Price Capital Appreciation (PRWCX), one of the best allocation funds that we have reviewed several times, again stands out: compared with all of funds in the table, it still delivered a positive year to date (YTD) 2.5% return. Furthermore, it’s the top performer in the last 5, 10 and 15 years. 

Though traditionally, PRWCX has been adept to using convertible bonds in its fixed income portion, recently, this fund has gradually shifted to more traditional bonds. In fact, as of September 2018, the fund held 6% government bonds and 8% cash. Based on Morningstar, the fund manager is also very flexible to overweight/underweight stocks and bonds in its stated range (stocks can range from 50% to as much as 80% at some time). 

The allocation on 9/30/2018 is as follows: 

Asset % Allocation
Cash 7.93
US Stock 60.56
Non US Stock 2.58
Bond 24.64
Other 4.30

Courtesy of Morningstar Inc.

It’s remarkable that this fund’s equity portion has outperformed S&P 500 by some big margin for the past 10 and 15 years. Furthermore, its fixed income also outperformed Barclay total bond index (VBMFX). 

Unfortunately, this fund has been closed to new investors since 2014. Some investors might still be able to access to this fund through their 401k and other retirement plans. 

For the sake of comparing with PRWCX, we again include our ‘best balanced portfolio’ in the table. The recent review of this portfolio (50 To 70 Percent Tactical Balanced Portfolio) is in the newsletter June 18, 2018: The ‘Best’ Balanced Portfolio Continues To Excel

We are happy to report that this portfolio is delivering better YTD return. Though it lost to PRWCX in the last 5 and 10 years, when 2008 bear market is included in the 15 year period, it has done much better, both in terms of annualized return (10.6% vs. 9.3%) and maximum drawdown (12.9% vs. 40.8%). As the stocks are in their late bull market stage of a full market cycle, we are again confident that this portfolio will continue to outperform even the best best allocation funds. 

Market overview

Investors have largely ignored the high earnings in last quarter (Q3): based on Factset, S&P 500 companies’ earnings growth rate is 25.9%, much higher than the expected 19.3% on September 30, 2018. Investors are now more focused on futures earnings: the average analyst expectation for 2019 earnings growth is only 9%. This slowdown, if materialized, will definitely affect stock prices. 

Unfortunately, as pointed out before, the three major factors, rising interest rate, higher labor cost and higher production cost (additionally caused by the trade war/friction), are all new to this extended market cycle since 2009. In addition, now that stocks are already (and still are even after the recent market drop) extended and expensive (in terms of valuation), we are seeing a difficult market condition ahead. 

As always, we believe in risk managing and staying the course in a sound plan. 

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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