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, September 9, 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.

Long Term Investment Strategies And Short Term Market Noises

Well that happened quickly: President Trump started a major US-China trade war escalation when proposing to put 10% tariffs on the remaining $300 billion worth of Chinese goods last Thursday, the Chinese retaliated with halting of US agriculture product purchase and letting its currency devalued, then US Treasury designated China as a currency manipulator, … The financial markets have been in a huge shock. Stocks have been in a free fall since then. 

Market carnage

Let’s survey major asset trends:

As of 8/5/2019

Description Symbol 1 Week Trend Score
Gold GLD 2.42% 10.62%
Intermediate Treasuries IEF 2.52% 6.93%
Total US Bonds BND 1.58% 5.32%
Emerging Mkt Bonds PCY -1.26% 5.12%
US Credit Bonds IGIB 0.81% 5.0%
Municipal Bonds MUB 0.79% 3.75%
Mortgage Back Bonds MBB 0.59% 3.31%
International Treasury Bonds BWX 1.09% 3.08%
US Equity REITs VNQ -1.1% 2.83%
US High Yield Bonds JNK -1.43% 1.22%
Treasury Bills SHV 0.09% 1.09%
US Stocks VTI -5.78% -1.5%
International Developed Stks VEA -5.32% -4.38%
Commodities DBC -3.53% -5.78%
Emerging Market Stks VWO -8.05% -7.08%

Other than REITs and high yield bonds, all other major assets have negative trend scores (see 360° Market Overview for more details). 

The free fall of risk assets other than gold since Thursday:

We also include utility sector fund XLU to the above chart. We can see that US stocks has lost 4.7% while REIT (VNQ) have lost the least. The good news is that utilities actually eked out a small gain since last Thursday (though it started to lose value today). This indicates the markets are still not in a distressed state. 

In the meantime, gold and virtually all bonds other than emerging market and high yield bonds have made gains: 

Interestingly, high yield municipal bond ETF, HYMB, didn’t lose money in this period. Again, markets are still not in a distressed state, though stock selling is pretty much indiscriminate across the board. 

What we can say from the above is that at the moment, markets are in a very short term transitory state. 

Long term investment strategies

The market behavior in the last few days might turn out to be just some short term noises. As we (and virtually all other sensible financial publications) have stated, investors should ignore short term noises. What does this exactly mean?

It’s very straightforward to understand this when you are a Strategic Asset Allocation (SAA) investor, you just sit tight and maintain your investments. You are doing (or not doing) this right now. You will also do that even if stocks drop another 10% or 20% in the next 20 days. The key here is that, as this newsletter has repeated pointed out, regardless how steep it will be, you are well prepared to ride out the short term loss.

Furthermore, an SAA investor should also be prepared to accept whatever the returns markets will deliver to you, especially that it’s very likely even in the coming 10 years or so, a portfolio with stocks and bonds will probably return close 0% annually. Hussman’s latest commentary, for example, states that a portfolio with 60% stocks, 30% Treasury bonds and 10% cash will probably have close to 0% annual return for the coming 12 year period. Forecast/estimates from other famed investment services such as GMO also arrive at similar conclusions. This is not surprising as US stocks are at a record valuation level based on various valuation metrics. 

Of course, for assets invested in an SAA portfolio, one would expect to reap positive returns after a long period of time, in this case, probably after 20 years or longer. Though nothing is 100% certain, it is virtually guaranteed that a broad base stock index such as S&P 500 in a fair capital market will deliver some reasonable returns in a long long period of time. 

For an active investment strategy like Tactical Asset Allocation(TAA), though it can actively respond to market movements (or even noises), an investor should just simply ignore how markets behave at present and just sits tight to follow the strategy. Ignoring short term noises means you should control your impulse, panic, greed or sense of pride to act on your own. You should just let the strategy dictates your actions. 

This is actually easier said than done. First, a TAA strategy has significantly underperformed a buy and hold SAA portfolio for the most part of this bull market that has lasted for more than 10 years. By now, we suspect many of TAA followers have either given up following it and switched to buy and hold or some other short term, subjective trading strategies that have done well recently (after all, in a bull market, chasing hottest stocks or sectors in some semi random fashion can pretty much do very well anyway). Second, it’s actually really hard to be active and suffer from some periods of ‘buy high, sell low’ mishaps by the TAA and not suspect its effectiveness. 

Regardless, recent market weakness and global economic development might signify the beginning of a more serious bear market. If this indeed materializes, it might be well likely that TAA will start to outperform SAA portfolios. 

In a word, ignoring short term noises, avoiding making impulse decision and sticking to the strategies you have committed is the key for success. 

Market overview

Switching back to the ongoing Q2 earnings report, it turns out that the blended earning growth after 77% of S&P 500 companies reporting actual results was -1.0%, much better than the expected -2.7% on 3/31/2019. Unfortunately, Q3 earnings outlook is now worse than 2 weeks ago: analysts expect -2.2% earnings drop (vs. -1.9% two weeks ago). Considering the latest US-China trade war escalation, we suspect corporate earnings will only become even worse. Current trade war situation is actually very discouraging as both sides are now engaging tic for tat retaliation that not only will be hard to untangle, it will also continue to hurt businesses’ confidence and worsen both economies. 

As stated above, investors’ best response is to stay the course and control risk exposure to a comfortable degree. 

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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