Advanced Portfolios Review

Nov 21, 2023 | Investing, Investment Portfolios, Newsletter

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 Friday, December 1, 2023. 

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 Portfolios Review

We wish everyone a joyous Thanksgiving! It’s a well-deserved holiday.

For over a decade, we have maintained and tracked a list of advanced portfolios on Advanced Strategies page for more than a decade. In this newsletter, we take a closer look at some of these portfolios.

Global tactical allocation portfolios

During the 2000s, global tactical allocation portfolios gained popularity due to the strength of emerging market and international stocks. However, the past decade has posed challenges for all tactical allocation portfolios. Numerous funds have come and gone, exemplified by the closure of Cambria’s GTAA, subsequently replaced by GMOM (Cambria Global Momentum ETF). Other funds, including Alpha Architect Merlyn.AI tactical or momentum ETFs, have also been shuttered, with WIZ (Alpha Architect Merlyn.AI Bull-Rider Bear-Fighter ETF) closing on 11/10/2023.

The challenges are multifaceted. Firstly, international and emerging market equities have lacked clear trends over the past decade, significantly trailing behind US stocks. Additionally, most other major asset classes, including Real Estate (VNQ) and various US-style stocks outside of large growth or large blend categories, have shown limited performance. We will delve deeper into these dynamics in the upcoming section on US stock portfolios.

Nonetheless, over the long term, we maintain the belief that tactical portfolios will continue to have their place, particularly for individuals who have concerns about the intermediate-term fluctuations in their investments. This concern may arise due to factors such as nearing retirement or having specific plans for capital utilization, such as funding a child’s college education in the next 10 years.

Given that US stocks have not experienced significant bear market corrections in recent times (the 2020 bear market was swiftly addressed by strong fiscal and monetary stimuli, a response that might be more challenging in the next major crisis), we advocate the prudence of adhering to a sensible tactical portfolio to navigate potential future crises. However, as we have emphasized on numerous occasions, this approach is most relevant to capital with near and intermediate-term concerns. For capital with a very long-term horizon (15 years or preferably 20 years or longer), strategic asset allocation remains the preferred strategy.

If we extend our horizon to look at the representative advanced portfolio P GS Global Tactical Include Emerging Market Diversified Bonds since its start date in 1998, we can see it still outperformed even the US stocks which has had the highest returns among major asset classes: 

If we broaden our perspective to examine the performance of the representative advanced portfolio P GS Global Tactical Include Emerging Market Diversified Bonds since its inception in 1998, we observe that it has outperformed even US stocks, which have boasted the highest returns among major asset classes:

The following table compares the global tactical allocation portfolios with several funds: 

Portfolio Performance Comparison (as of 11/16/2023)
Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
P Composite Momentum Scoring Global Risk Assets 11.8% 13.1% 4.9% 7.3% 8.7% 11.6%
P GS Global Tactical Include Emerging Market Diversified Bonds -1.5% -2.8% 1.7% 2.2% 4.2% 7.2%
GMOM (Cambria Global Momentum ETF) -3.0% -4.1% 6.2% 4.1%    
VT (Vanguard Total World Stock ETF) 14.0% 12.3% 5.3% 8.8% 7.6% 10.4%
URTH (iShares MSCI World) 16.1% 14.0% 6.9% 9.9% 8.4%  

The P Composite Momentum Scoring Global Risk Assets continues to exhibit superior annualized returns over the last 10 and 15 years when compared to other global stock ETFs. Notably, this performance is achieved alongside a reduction in maximum drawdown.

The following chart compares the total returns since GMOM’s start date (GMOM has the shortest history): 

Both MyPlanIQ portfolios have outperformed GMOM. Moreover, P Composite Momentum Scoring Global Risk Assets has done way much better. 

In summary, despite facing challenges over the past decade, global tactical allocation portfolios have demonstrated resilience by maintaining reasonable returns and showing the potential to outperform during major bear markets.

Advanced US stock portfolios

Moving on to US stock portfolios, we show the following table that compares with S&P 500 (VFINX or SPY):

Advanced US stock portfolio returns (as of 11/16/2023):

Ticker/Portfolio Name YTD
Return**		 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
P Composite Momentum Market VFINX 19.0% 15.6% 9.1% 10.6% 10.7% 13.0%
P Composite Momentum Scoring Factor ETFs 11.9% 12.1% 12.6% 11.8% 13.5% 14.4%
P Composite Momentum Scoring Style ETFs 10.6% 8.2% 5.5% 9.1% 8.8% 12.5%
P Composite Momentum Scoring Fidelity Select Funds 10.6% 5.4% 16.4% 15.3% 14.9% 15.4%
SPY (SPDR S&P 500 ETF) 19.0% 15.6% 9.1% 12.3% 11.6% 13.8%

The encouraging news is that even when compared to the top-performing major asset class, U.S. stocks, our tactical advanced portfolios have either surpassed or maintained comparable returns. Specifically:

The P Composite Momentum Market VFINX serves as a benchmark for evaluating the efficacy of our composite momentum market indicator. This indicator is based on both economic and market price data to generate a timing signal that directs the portfolio to allocate 100% to VFINX (Vanguard S&P 500 fund, akin to SPY) or 100% to CASH. It is evident that this portfolio has underperformed SPY over the recent years (5, 10, 15 years). However, upon extending the time frame to 1997 when both the portfolio and VFINX have available data, it becomes apparent that the portfolio has consistently outperformed by a significant margin:

P Composite Momentum Scoring Factor ETFs stands out as possibly the most robust ETF-based tactical portfolio for U.S. stocks. Its performance has displayed consistency, surpassing that of VFINX over the last 10 and 15 years. This portfolio utilizes our composite momentum indicator and implements momentum-based rotation among a select group of smart factor ETFs. The smart factor ETFs encompass the quality factor, value factor, momentum factor, and volatility factor (as a side note, we are contemplating the addition of a GARP (growth at a reasonable price) ETF to the candidate list). For further details, please refer to the following articles:

Additionally, it’s worth noting that these portfolios have not factored in smart bond funds when transitioning to cash. Utilizing a total return bond fund rotation portfolio (refer to portfolios on the Income Investors page) as a substitute for cash could likely contribute an additional 1% or so annually to the portfolios.

For the seasoned investor comfortable with significant market fluctuations, P Composite Momentum Scoring Fidelity Select Funds employs a comparable momentum-based strategy across Fidelity Select mutual funds, which essentially focus on specific U.S. sectors and industries. Since 1996, it has generated an impressive compound annualized return of 16.2%, translating to a cumulative return that is 54 times greater than that of the S&P 500 during the same period.

In summary, our tactical portfolios have consistently delivered reasonable, comparable, or superior returns when contrasted with the S&P 500 index fund, all while exhibiting significantly lower interim losses (maximum drawdowns). We encourage readers to explore these portfolios on the Advanced Strategies page, utilizing various tools and tables to delve into their returns and behavioral patterns, including risk assessment.

Market Overview

The third quarter earnings report is drawing to a close, based on Factset, as of last Friday, with 94% of S&P 500 companies reporting actual results, the blended earnings growth year over year is 4.3%, much better than the -0.3% expected on September 30. Stocks staged a powerful rally. 

As of last Friday, the third-quarter earnings reporting season is concluding, according to Factset. With 94% of S&P 500 companies having reported actual results, the blended year-over-year earnings growth stands at 4.3%. This performance significantly exceeds the -0.3% expected on September 30. Stocks have experienced a robust rally in response to the positive earnings outcome.

Nevertheless, the US economy is displaying notable vulnerabilities, evident in both year-over-year declines in retail sales and industrial output for October. Additionally, there’s a discernible weakness in payroll figures, consistent with the impact of the prevailing high-interest-rate environment. On the positive side, Inflation has been gradually decreasing. As mentioned earlier, we find ourselves in a subtle precarious situation, navigating the uncertainty of whether a recession is imminent, and if so, whether it will be a brief and transient downturn or a more severe and prolonged one. The economy, and consequently financial markets, have defied numerous expert opinions, making accurate forecasting extremely challenging. Fortunately, we don’t need to be able to forecast this precisely but just need to react properly. 

As always, we claim no crystal ball and we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as 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, preferably much longer, given the current high valuation. 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 and preferably many more 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 during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

Stock valuation has dropped, and now valuation is becoming less hostile. However, it is still not cheap by historical standards. For the moment, we believe it’s prudent to be extra cautious. However, how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.

We again would like to emphasize that for any new investor and new money, the best way to step into this kind of market 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.

Struggling to Select Investments for Your 401(k), IRA, or Brokerage Accounts?

 

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