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, January 7, 2019. 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 Core Satellite Portfolio

The ‘best’ balanced portfolio has drawn quite interests from our users. The portfolio 50 To 70 Percent Tactical Balanced Portfolio at times can allocate as much as 70% to stocks (S&P 500 fund like VFINX) and as little as 0% when stock market is in a downtrend. It relies on our superior total return bond fund portfolio(s) to deliver above average returns in fixed income (for these portfolios, read many newsletters like March 26, 2018: Total Return Bond Update). 

However many users don’t feel comfortable with such a method that has all or nothing exposure to stocks. Not only this can suffer from whip-saw loss that is caused by selling stocks at a lower price only to buy back them at a higher price (as evidenced by last month’s behavior in the stock subportfolio), it also has a too high (70%) exposure in stocks when stocks are in an uptrend (thus short term volatility of the portfolio might be high). 

We have long maintained that a hybrid portfolio with both strategic (steady exposure in stocks and bonds) and tactical portions – so called core satellite portfolio – is a good trade off for investors who desire to have their portfolios to be somewhat in sync with broad markets (i.e. when stocks recover, there should be at least some stock exposure to enjoy this) while in the meantime to have a way to protect a large drawdown or interim loss that can last for as long as 10 years or so. In this newsletter, we show a simple way to develop such a core satellite portfolio. 

Strategic conservative portfolios

On our Brokerage Investors page (What We Do -> Brokerage Investors), we maintain a list of conservative portfolios for major brokerages. Let’s look at these portfolio’s performance:

Latest Conservative Allocation Fund Portfolios Performance Comparison (as of 11/30/2018)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 2001
Schwab Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.8% 5.7% 9.6% 8.5%
Fidelity Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.4% 5.8% 9.3% 8.2%
TDAmeritrade Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.2% 5.4% 9.3% 8.2%
Folioinvesting Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.8% 5.7% 9.6% 8.1%
Etrade Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.8% 5.7% 9.7% 8.2%
Merrill Edge Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.3% 5.6% 10.2% 7.7%
Vanguard Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.8% 5.7% 9.7% 7.8%
BERIX (Berwyn Income) 0.0% -2.5% 2.7% 2.0% 7.5% 6.9%
VWINX (Vanguard Wellesley Income Inv) -0.5% -0.6% 5.2% 5.3% 8.5% 6.6%

**YTD: Year to Date

The portfolio has the following static allocation: 

US Stocks VDIGX 20%
US Real Estate REITs VGSIX 10%
TotalReturnBond P_46880 70%

This portfolio keeps a constant exposure to stocks (20% dividend stocks and 10% REITs). 

The total return bond portfolio like P_46880 (Schwab Total Return Bond) is the fixed income portfolio that helps to deliver the above average returns – in this above, these portfolios have done much better than two best conservative allocation funds Berwyn Income (BERIX) and Vanguard Wellesley Income (VWINX) for the all the periods (YTD, 1, 3, 5, 10 and 15+ years). 

However, not only the portfolios are somewhat too conservative (thus lower returns than the balanced portfolio 50 To 70 Percent Tactical Balanced Portfolio mentioned above, it still has a bit high (20%) maximum drawdown in 2008. Currently, with US stocks’ valuation being at one of historically high points by many long term valuation metrics such as Shiller Cyclic Adjusted PE 10 (see Market Indicators for example), it’s not unlikely that a US stock index like S&P 500 will undergo over 60% loss which can rival that in 2008-2009. 

Conservative core satellite portfolio

What we can do is to combine the above conservative static portfolio with the ‘active’ balanced portfolio to derive both advantage and tradeoff from a static portfolio and an active tactical portfolio. Portfolio Conservative Core Satellite is one example: 

Conservative-Static P_68733 50%
Balanced-Active P_69402 50% 

Basically, the portfolio is just 50-50 split among the static conservative portfolio Schwab Conservative Total Return Dividend Portfolio and 50 To 70 Percent Tactical Balanced Portfolio.  What that means is that it can have the following two allocations: 

Scenario 1 (when stocks are in an up trend):

10% US dividend stock VDIGX


 35% US stocks (S&P  500 VFINX)

50% in total return bond fund portfolio

Scenario 2 (when stocks are in a downtrend):

10% US dividend stock VDIGX


85% in total return bond fund portfolio

Basically, this portfolio keeps at least 15% exposure to stocks (dividend paying ones) all the time, regardless how markets are doing. On the other hand, it has maximum 50% stock exposure. 

This portfolio has the following returns: 

Portfolio Performance Comparison (as of 11/30/2018):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 2001
Schwab Conservative Total Return Dividend Portfolio 1.1% 1.0% 5.8% 5.7% 9.6% 8.5%
50 To 70 Percent Tactical Balanced Portfolio 3.1% 4.0% 9.8% 8.1% 12.3% 11%
Conservative Core Satellite 2.1% 2.5% 7.8% 6.9% 11.0% 9.7%
PRWCX (T. Rowe Price Capital Appreciation) 5.4% 5.5% 9.1% 9.7% 13.5% 9.6%
VWINX (Vanguard Wellesley Income Inv) -0.5% -0.6% 5.2% 5.3% 8.5% 6.6%

10 year chart: 

Detailed link >>

So this portfolio delivers a 15+ year (since 2001) annualized return 9.7%, which is essentially the same as PRWCX’s. However, it has much less standard deviation (volatility) and maximum drawdown: 

Volatility and Maximum Drawdown: 
Ticker/Portfolio Name Max DD Std Since 2001
Schwab Conservative Total Return Dividend Portfolio 20% 6.1%
50 To 70 Percent Tactical Balanced Portfolio 13% 8.5%
Conservative Core Satellite 13% 6.6%
PRWCX (T. Rowe Price Capital Appreciation) 42% 10.6%
VWINX (Vanguard Wellesley Income Inv) 22% 6.7%

Max DD: Maximum Drawdown (Peak to a following trough). Std: Standard Deviation (annualized).

This portfolio’s standard deviation is very similar to the conservative static portfolio’s and VWINX’s. It’s maximum drawdown, however, has been reduced to be similar to the tactical balanced portfolio, only about 13%. This figure is very acceptable to a conservative investor. 

In conclusion, the above portfolio can be used by investors who are not comfortable with an all or nothing stock exposure tactical portfolio but also desire to have protection against large portfolio drawdown/loss. One can further tweak the exposure to suit personal situation. 

Market overview

As we pointed out previously, the three factors that can potentially derail a stock market are higher interest rates, higher labor cost and higher product cost. Last week, the impact of the two of these three factors were somewhat alleviated: the Federal Reserve chairman Powell stated that the interest rate is now near its targeted neutral level (meaning there will not be many more interest rate raises if conditions persist); the US-China meeting at G-20 resulted in a temporary cease fire in terms of tariff. It’s thus not surprising that stocks staged a comeback. Regardless, as stocks are now very expensive and the events last week were more temporary in nature, we maintain our cautious stance. 

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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