June 15, 2020: Advanced Minimum Equity Portfolios | Better Financial Future -- MyPlanIQ

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Wednesday July 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month.

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.

Advanced Minimum Equity Portfolios

In June 1, 2020: Minimum Equity Portfolios, we stated that our basic subscribers’ AAC portfolios now always have some minimum equity (stock) exposure (up to 20%). We have always believed in core satellite portfolio concepts and advocated an investor’s overall investments should have both a strategic allocation portfolio (core) and a tactical allocation portfolio (satellite). We also pointed out that if the strategic/buy and hold stock exposure is controlled to be of conservative portion, i.e. up to 20%-30% at most, it would not increase much of the overall investment risk.

We have received several requests since on what would such a minimum euqity portfolio look like in terms of returns and risk for some of the adanced portfolios listed on Advanced Strategies page. This newsletter will try to look at some of these portfolios.

Minimum equity tactical portfolios

Our minimum equity portfolios are static portfolios that consist of the following:

20% Core equity (stocks):

10% US stocks (mutual fund VTSMX for longer history, ETF VTI)
5% US REITs (mutual fund VGSIX for longer history, ETF VNQ)
4% international developed market stocks (mutual fund VGTSX for longer history, ETF VEA)
1% emerging market stocks (mutual fund VEIEX for longer history, ETF VWO)

80% tactical portfolio

The following table compares the three advanced tactical porfolios that have minimum 20% stocks:

Portfolio Performance Comparison (as of 6/12/2020):

Ticker/Portfolio Name	Max Drawdown	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	15Yr AR	Since 12/31/1997 AR
P Composite Momentum Global Risk Assets and Minimum Stocks	22%	-7.5%	1.4%	8.2%	7.3%	10.1%	11.9%	12.7%
P Composite Momentum Scoring Global Risk Assets	21%	-7.2%	1.5%	8.9%	7.5%	10.2%	12.9%	13.9%
P Composite Momentum Market VFINX and Minimum Equity	19%	-6.1%	5.9%	8.8%	8.7%	12.1%	10.9%	11.1%
P GS Global Tactical Include Emerging Market Diversified Bonds and Minimum Stocks	21%	-3.8%	3.4%	3.6%	4.6%	7.5%	9.3%	10.7%
VFINX (Vanguard 500 Index Investor)	55%	-5.0%	7.6%	9.8%	9.8%	13.0%	8.5%	7.1%

drawdown: percentage from a peak to its subsequent trough. AR: compounded Annualized Return

Note that compared with the minimum stock portfolio P Composite Momentum Global Risk Assets and Minimum Stocks, the pure tactical one P Composite Momentum Scoring Global Risk Assets has better historical returns. However, we view that it’s worth to sacrifice the returns to reduce another implicit risk, namely, psychological risk when stocks are rising while the tactical portion is out of sync. For example, at this moment, stocks have rallied hard since the lows in March. In the meantime, our tactical portfolios are out of stocks. This definitely creates a big anxiety for people to Fear Of Missing Out (Wall Street even has a name for this FOMO). That in turn can make some investors give up their current strategies and start some kind of impulsive buying and selling. With some stocks always being invested, investors will at least feel not completely left out and thus can stay the course for the strategy.

In addition, there are other tax and estate benefits to hold stocks for a long time. Core satellite portfolios can certainly better address these kinds of issues.

Long term timing portfolios with minimum stocks

The following table compares the returns among two long term timing portfolios with minimum stock exposure:

Portfolio Performance Comparison (as of 6/12/2020):

Ticker/Portfolio Name	Max drawdown	YTD Return**	1Yr AR	3Yr AR	5Yr AR	10Yr AR	15Yr AR	Since 7/1/2001 AR
P Buffett Total Stock Market Valuation to GNP Ratio and Minimum Stocks	23%	2.2%	9.2%	5.9%	6.2%	10.4%	10.8%	10.6%
P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy Total Return Bond Funds As Cash	19%	5.0%	11.1%	5.9%	6.0%	10.5%	11.4%	11.1%
P Shiller Cyclically Adjusted PE 10 and Minimum Stocks	24%	2.2%	9.2%	6.0%	6.1%	9.6%	10.2%	10.5%
P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly Total Return Bond Funds As Cash	19%	5.0%	11.3%	6.1%	6.0%	9.5%	10.6%	10.9%
VFINX (Vanguard 500 Index Investor)	55%	-4.2%	8.2%	10.0%	10.0%	13.1%	8.5%	6.9%

It’s remarkable that the two long term timing portfolios have done so well in the past, considering that they haven’t been in stocks for a long period of time. The last time P Warren Buffett Total Stock Market Valuation to GNP Ratio SO SU Weekly Strategy Total Return Bond Funds As Cash was in stocks (VFINX, S&P 500 index fund) was 12/26/2014, more than five and half years ago. Similarly, P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly Total Return Bond Funds As Cash exited stocks on 11/15/2013, six and half years ago! Both of these two portfolios have relied on our excellent fixed income total return bond fund portfolio after they switched out of stocks for the past 5 or 6 years.

For these two portfolios, adding some minimum stock exposure is especially useful as that can reduce the anxiety created by being out of stocks for so long (while seeing stocks rose year after year). Again, even though for the very long term, these minimum stock portfolios’ returns might be slightly lower, we believe it’s worth the reduction.

Market overview

Well, what the difference a week can make. Right after we pointed out some positive developments in our last newsletter, stocks promptly went into some mini correction. Investors finally started to worry about the pace of economic recovery/reopenning, the possible second wave of the pandemic (it’s reported that several states have seen rising Covid-19 hospitalization) and the ending of some stimulus (such as the PPP stimulus money). Furthermore, it’s really worrisome to see stock markets are actually very frothy. Case in point: companies that have announced seeking bankruptcy protection have seen their stock prices shot up for no reason. Hertz, a company that has annouced seeking Chapter 11 bankruptcy protection, even announced to offer up to $1 billion stocks for sale with an explicit warning that they expect stockholders to lose all of their money. Hertz was hoping that as its stock was wildly traded and propped up by retail traders (it once shot up to $3.2 from $2), they can raise funds from these traders. These traders, called Robinhood traders, are typically represented by those who have accounts in Robin Hood, a brokerage pioneering commission free stock trading. They are mostly young and have no real experience of a real bear market.

In reality, more and more companies will announce some sort of debt reset such as bankruptcy protection or bond/loan/capitalization restructuring in the coming months. As we stated in our early March newsletter, we are seeing a drawnout process that are affecting many businesses, starting from many small businesses and up to mid and even large size companies. Though Robinhood traders might have prevailed since March, we want to remind our readers that the caution and wisdom represented by Warren Buffett and other sensible investors are not invalidated yet. Still plenty of time will tell.

Refardless, we again emphasize the following:

For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

For more detailed current market trends, please refer to 360° Market Overview.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far.

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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