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, February 11, 2019. You can also find the re-balance calendar for 2019 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.

Strategic Asset Allocation Portfolio Review

Now that the volatile 2018 is behind us, let’s review how our portfolios fared last year. 

First, let’s look at how major assets did in 2018. 

Virtually all major assets were down last year 

All asset values were shrunk in 2018: 

Major asset returns (as of 1/4/2019):
Ticker/Portfolio Name 2018 3Yr AR 5Yr AR 10Yr AR
VTI (Vanguard Total Stock Market ETF) -5.2% 9.9% 8.3% 13.1%
VEA (Vanguard FTSE Developed Markets ETF) -14.8% 4.7% 1.5% 6.3%
VWO (Vanguard FTSE Emerging Markets ETF) -14.8% 9.7% 2.3% 7.1%
VNQ (Vanguard REIT ETF) -6% 3.3% 7.6% 12.4%
DBC (PowerShares DB Commodity Tracking ETF) -12.8% 3.8% -10.0% -3.8%
BND (Vanguard Total Bond Market ETF) 0.1% 2.3% 2.4% 3.0%
GLD (SPDR Gold Shares) -1.9% 5.7% 0.4% 3.5%
TLT (iShares 20+ Year Treasury Bond) -1.6% 2.8% 6.4% 3.6%
JNK (SPDR Barclays High Yield Bond ETF) -3.3% 5.6% 2.0% 8.2%
TIP (iShares TIPS Bond) -2.2% 1.4% -6.5% -0.7%

See detailed comparison >>

What we see:

  • Among risk assets, US stocks and US REITs were down least. This might seem to be surprising to US investors as US stocks went through a big roller coaster in the last quarter. However, one should see that foreign stocks were down almost 3 times as much as the US in 2018. 
  • US bonds managed to crawl back to virtually unchanged last year, mostly in the fourth quarter. 
  • Gold and long term Treasury bonds (TLT), though being very strong when stocks were tanking in the end of last year, actually still lost money. 

Global strategic portfolios performance

It’s thus not surprising that MyPlanIQ’s Strategic Asset Allocation (SAA) did worse than the US centric balanced index fund VBINX: 

Portfolio Performance Comparison (as of 1/4/2019):
Ticker/Portfolio Name 2018 3Yr AR 5Yr AR 10Yr AR 15 Yr AR
Schwab Core Mutual Funds Strategic Asset Allocation – Optimal Moderate -6.3% 4.3% 3.7% 9.4% 7.2%
Fidelity Core Mutual Funds Strategic Asset Allocation – Optimal Moderate -7.3% 4.3% 4.6% 9.6% 7.1%
Vanguard Select Mutual Funds Strategic Asset Allocation – Optimal Moderate -5.6% 4.6% 2.9% 7.4% 5.9%
Etrade Core Mutual Funds Strategic Asset Allocation – Optimal Moderate -6.7% 4.7% 4.4% 9.8% 7.5%
Merrill Edge Core Mutual Funds Strategic Asset Allocation – Optimal Moderate -6.8% 5.6% 4.5% 10.1% 7.5%
VBINX (Vanguard Balanced Index Inv) -2.5% 7.0% 6.1% 9.4% 6.6%
PASAX (PIMCO All Asset A) -8.2% 6.1% 1.6% 5.8% 4.8%
MALOX (BlackRock Global Allocation Instl) -11.7% 2.1% 1.5% 5.7% 6.5%

Detailed comparison >>

What we see: 

  • Again, it’s not surprising that in 2018, our global oriented strategic portfolios did worse than the US balanced index fund VBINX (60% US stocks and 40% US bonds) because of the underperformance of all other foreign and commodity assets. 
  • However, our portfolios did better than other good global allocation funds like PIMCO All Asset or BlackRock Global Allocation in 2018. 
  • If we extend our horizon to 10 and 15 years, our portfolios are solidly better than VBINX (other than Vanguard portfolio). Similarly, they outperformed the global allocation mutual funds too. 

Valuation and stock markets

Though currently US stocks have retreated a bit, its valuation is still extremely high. To get a rough sense on what’s the ‘reasonable’ level for S&P 500 index, one can use Shiller’s CAPE metric (see Market Indicators) that states it was 1.6 of its long term average on last Friday. Put it another way, this means S&P 500 index would need to go down to 1500 to 1600 to make the metric go back to its historical norm. This means S&P 500 would need to shrink another 40% from its current level. Granted, the above estimate is never precise and might be too harsh. But one can probably safely estimate that anything above 2000 level for S&P 500 index is not fairly valued. 

Strategic allocation portfolios are based on the assumption that stocks, if held for a long time, would deliver above inflation returns. As we have discussed before, the ‘long time’  for holding stocks should be at least 15 years and preferably  more than 20 years. If your holding horizon is more than 20 years, committing to holding stock index funds for such a long period should carry some small risk. However, if your holding period is shorter than this or if you are not comfortable with interim loss, you need to further pare down your stock exposure, even at the currently already lowered levels. This is especially true for US stocks. 

Market overview

Recent stock market behavior is actually similar to what happened in previous bear markets. The recent 8.4% rally from its low right before Christmas is a very typical fast and violent recovery in a serious correction: 

Though investors are pinning their hope to the trade deal with China and the Federal Reserve’s less aggressive or even accommodative interest rate policy, we believe one should pay more attention to the possible earnings slowdown. Apple’s pronouncement on its earnings shortfall can be an ominous sign: maybe more ‘Apple’s will come out in the following months. This should not surprise anyone as US companies have enjoyed phenomenally high profit margins for so long. Amid global economic rebalance like Asia supply chain relocation and rising emerging market labor and other cost (thus trimming down profit margins of global companies), it’s interesting to see how long the elevated profit levels can sustain. 

Marketwise, right now, risk assets are decisively in a down trend even after the current short burst rally. 

We again iterate that following a sound plan and managing risk is the best defense. 

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

In terms of investments, even after the recent retreat, U.S. stock valuation is still at a historically high level and a bigger correction is still waiting to happen. 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. 

Enjoy Newsletter

How can we improve this newsletter? Please take our survey 

–Thanks to those who have already contributed — we appreciate it.

Latest Articles

Any investment in securities including mutual funds, ETFs, closed end funds, stocks and any other securities could lose money over any period of time. All investments involve risk. Losses may exceed the principal invested. Past performance is not an indicator of future performance. There is no guarantee for future results in your investment and any other actions based on the information provided on the website including, but not limited to, strategies, portfolios, articles, performance data and results of any tools. All rights are reserved and enforced. By accessing the website, you agree not to copy and redistribute the information provided herein without the explicit consent from MyPlanIQ.