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.

Aggressive Fixed Income Portfolios?

In our October 29, 2018: Taxable Total Return Bond Plus Muni Bond Fund Based Portfolios, we introduced a total return bond fund plus portfolio that includes municipal bond funds as extra candidate funds. In this newsletter, we review this portfolio and discuss whether it’s worth to try to increase returns by introducing higher risk bond funds as candidate funds. 

Total return bond plus muni bond funds portfolio

To recall, the portfolio Schwab TRB Plus includes the following two sets of bond funds: 

1. Taxable total return bond funds

These are the original candidate bond funds in Schwab Total Return Bond:

PBDAX PIMCO Investment Grade Corp Bd A
PDBZX Prudential Total Return Bond Z
DLTNX DoubleLine Total Return Bond N
WABRX Western Asset Core Bond R
TGMNX TCW Total Return Bond N
PTTAX PIMCO Total Return A
MWTRX Metropolitan West Total Return Bond M
LSBRX Loomis Sayles Bond Retail

2. Municipal bond funds

These are the original candidate municipal bond funds in Schwab Muni Bond Funds:

FLAAX (Nuveen All-American Municipal Bond A)
NHMAX (Nuveen High Yield Municipal Bond A)
NMBAX (Nuveen Interm Duration Muni Bond A)
FSHAX (Nuveen Short Term Municipal Bond A)
FLTDX (Nuveen Limited-Term Municipal Bond A)

The resulting portfolio Schwab TRB Plus that selects the fund with the highest momentum score among the above funds once a month has continued to outperform:

Portfolio Performance Comparison (as of 8/9/2019):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
Schwab TRB Plus 7.9% 7.9% 5.4% 6.2% 8.7% 8.3%
Schwab Total Return Bond 7.4% 7.6% 4.8% 4.0% 7.4% 7.9%
VBMFX (Vanguard Total Bond Market Index Inv) 7.7% 9.2% 2.4% 2.9% 3.8% 4.1%

Ten year chart:

More aggressive portfolios?

The TRB plus portfolio has done well mostly because of the inclusion of high yield muni bond fund (NHMAX) and possibly long term muni bond fund (FLAAX). We pointed out previously that muni bond funds have even better momentum properties than taxable bond funds as most muni bond holders are wealthy individuals who have less inclination to trade these bonds frequently, unlike institutional investors. The return improvement can be attributed to selecting these muni bond funds when markets are in fluctuation that often affects taxable bond funds. 

Several users have asked us whether there is a way to further improve this TRB plus portfolio by including a taxable high yield bond fund such as Vanguard high yield VWEHX (we will have to change to a suitable NTF (No Transaction Fee) no load fund in a specific brokerage if this is indeed followed). After all, the reason goes that if the inclusion of high yield muni bond funds can improve the total return bond portfolio, a taxable high yield bond fund that often possesses excellent momentum should help too. 

It turns out that there isn’t much we can improve. In fact, adding VWEHX to the candidate fund list distorts/degrades performance: 

Portfolio Performance Comparison (as of 8/9/2019):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
Schwab TRB Muni And Taxable High Yield Plus 6.9% 2.4% 4.0% 5.4% 8.0% 7.8%
Schwab TRB Plus 7.9% 7.9% 5.4% 6.2% 8.7% 8.3%
Schwab Total Return Bond 7.4% 7.6% 4.8% 4.0% 7.4% 7.9%
VWEHX (Vanguard High-Yield Corporate Inv) 11.0% 7.2% 5.5% 4.9% 7.5% 6.2%

Schwab TRB Muni And Taxable High Yield Plus actually couldn’t even outperform the regular Schwab Total Return Bond. This has been known by us for quite sometime: taxable high yield bonds can sometimes disrupt a more steady bond trend because of their volatile nature. The sometimes gains from exposure to a high yield taxable bond fund is not enough to compensate the loss resulted from the disruption. However, the high yield muni bonds are more steady and the disruption is not big enough to offset the gains. 

In conclusions, sometimes, adding more risky funds to a pool of candidate funds does not help, in fact, it can actually do the opposite. 

In the meantime, both Schwab TRB Plus and Schwab Total Return Bond have outperformed even the riskiest high yield bond fund VWEHX for the past 5, 10 and 15 year periods. The 15 year around 8% annualized returns are very respectable for a portfolio with only 7% to 11% maximum drawdown. 

Market overview

Stocks were volatile last week mainly because of the trade war concern. As stated in our previous newsletter, we suspect that if the current trade war affair continues, it will eventually have some serious impact on economy as businesses’ confidence and outlook will be dampened. Often such negative sentiment in an already slowing economy can undershoot and accelerate economy and financial markets decline. 

In terms of companies earnings report, now that 90% of the companies in the S&P 500 have reported results, the blended earnings growth for last quarter is -0.7%, again better than previous expected figures. However, next quarter earnings expectation continues to trend down, now -3.1%, compared with -2.2% two weeks ago. While analysts still expect a positive growth for Q4, it’s likely will be changed downward dramatically if the current trade war situation worsens. 

Considering the extremely high valuation, extended market rise and recent negative economic news, we call for caution and staying the course. 

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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