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, August 5, 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.

Core Satellite Portfolios Balance Fluctuation

We have long advocated using a combination of  Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA) portfolios to help to mitigate fluctuations caused by either portfolio. In this newsletter, let’s look at a live example. 

Conservative core satellite portfolio

In December 3, 2018: Conservative Core Satellite Portfolio newsletter, we discussed a composite portfolio that was designed to be a trade off between SAA and TAA portfolios. To recap, the portfolio Conservative Core Satellite consists of the two sub-portfolios:

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

where P_68733 is a strategic buy and hold conservative portfolio Schwab Conservative Total Return Dividend Portfolio that’s listed on (What We Do -> Brokerage Investors) page that has the following components: 

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

P_46880 is a fixed total return bond fund based portfolio Schwab Total Return Bond, again listed on our Brokerage Investors page. The above portfolio is really a basic 30% dividend stocks and 70% bond (fixed income) allocation portfolio. 

The other portfolio in Conservative Core Satellite, P_69402, is a called 50 To 70 Percent Tactical Balanced Portfolio that’s essentially allocates 70% to a 200 day moving average based portfolio and 30% to fixed income portfolio P_46880 Schwab Total Return Bond. The 200 day moving average based portfolio P_61056 (P SMA 200d VFINX Total Return Bond As Cash Monthly) holds S&P index fund (VFINX) when its total return price is above its 200 day simple moving average, otherwise, it again holds Schwab Total Return Bond.

In a word, the core satellite portfolio can have two different allocations depending on market condition: 

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

So the portfolio always holds at least 15% in dividend stocks. 

Core static stock holdings as a stabilizer

The tactical moving average portfolio P SMA 200d VFINX Total Return Bond As Cash Monthly) had done pretty well until late last year, when it was severely impacted by some violent market fluctuations: 


Basically the portfolio has experienced two of its worst scenarios:  missing a powerful rally and buy high, sell low. 

It first started at the end of last November when it went into VFINX (S&P 500) because of the almost vertical monthly rally of S&P 500. Unfortunately the market immediately experienced a precipitous decline, causing it to liquidate stocks by the tend of December, which proved to be a really bad move as stocks started to rally at the beginning of this year again. The misfortune of this portfolio continued: by the end of May, the portfolio again sold VFINX that was bought at a higher price at the end of February, another buy high and sell low!

There is no doubt that the portfolio’s returns have been affected by the above experience: 

data as of 7/22/19:

Name YTD*
2018 Return 1Yr
P SMA 200d VFINX Total Return Bond As Cash Monthly 2.8% -6.3% -9.0% 6.8% 5.9% 12.0% 11.2%
VFINX (Vanguard (S&P 500) Index) 20.0% -4.5% 8.2% 13.3% 10.6% 14.4% 9.0%

So the portfolio Year To Date (YTD) 2.8% is way lower than VFINX’s 20%. It also incurred bigger loss in 2018. Furthermore, it caused its 3, 5 year annualized returns to drop significantly at this moment. 

This also impacted the returns of  50 To 70 Percent Tactical Balanced Portfolio:

Portfolio Performance Comparison (as of 7/22/19):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001
Schwab Conservative Total Return Dividend Portfolio 10.6% 8.9% 6.0% 5.5% 9.7% 8.5% 8.6%
Conservative Core Satellite 7.1% 2.7% 6.4% 5.5% 10.4% 9.4% 9.5%
50 To 70 Percent Tactical Balanced Portfolio 3.5% -3.3% 6.6% 5.5% 11.0% 10.1% 10.4%
PRWCX (T. Rowe Price Capital Appreciation) 18.0% 12.9% 11.5% 10.3% 12.8% 9.7% 9.9%
VWINX (Vanguard Wellesley Income Inv) 11.0% 9.2% 5.4% 5.6% 8.6% 7.1% 6.9%

detailed link

One can see that compared with the SAA portfolio Schwab Conservative Total Return Dividend Portfolio (fund VWINX), this portfolio’s 3.5% YTD is way lower than 10.6% (11%). 

Fortunately, Conservative Core Satellite has a more stable returns (YTD is 7.1%). This is because of its 50% holding of the SAA portfolio Schwab Conservative Total Return Dividend Portfolio that has always held 15% stocks (10% dividend stock VDIGX, 5% REIT VGSIX). 

We further note the following: 

  • Core satellite portfolio, though has lower 1, 3 and 5 year returns than Vanguard Wellesley Income (VWINX), it did much better than VWINX for the 10 and 15 year periods. It also came closer to PRWCX, probably the best balanced mutual fund right now. 
  • However, PRWCX suffered from a large drawdown in 2008: 48%, compared with the core satellite’s 14.8%! You can find this detailed info from the above detailed link
  • The tactical one 50 To 70 Percent Tactical Balanced Portfolio still delivers the best long term returns: even better than PRWCX with only about 1/3 of PRWCX’s maximum drawdown.
What we learn from the above is that adding strategic (or static) portfolio to a tactical one can alleviate the tactical portfolio’s fluctuation that usually happens in a bull market. Of course, the tactical one will help to mitigate or reduce loss in a bear market downturn.  Finally, we want to comment that for a conservative strategic (SAA) portfolio that only allocates 30% or so to stocks, adding it to another conservative/balanced tactical portfolio does not substantially increase maximum drawdown. In our case, Conservative Core Satellite has 12.7% maximum drawdown, which is actually LOWER than the tactical’s 14.8% (again see the detailed link for more details). So the core satellite’s maximum drawdown was actually reduced from the tactical one, a somewhat surprising finding. 

Market overview

Companies have started to report their last quarter (Q2) earnings. So far, with about 16% of S&P 500 companies reporting, the blended earnings growth (-1.9%) is actually better than previously expected (-2.7% on 3/31/2019). However, the earnings growth is still negative. Investors are also waiting for the Federal Reserve’s interest rate decision at the end of this month. Again, the current stock market strength seems to more hinge on subjective hope than the actual earnings results. Given the elevated valuation and extended market price action, we call for staying the course and carefully managing risk. 

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. 

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