So 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 Thursday June 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.

‘Best’ Tactical Stock or Dividend Income Balanced Portfolios vs. Best Balanced Allocation Fund

In our previous newsletter, we outlined the ‘best’ strategic stock or dividend income balanced portfolios. The portfolios basically buy and hold stock funds (either S&P 500 index fund or a dividend income index fund) for their stock portion and in the fixed income bond portion, they invest in our total return bond portfolios. Though we are confident that our fixed income portion can perform better than that in the ‘best’ balanced allocation fund PRWCX (T. Rowe Price Capital Appreciation), the strategic portfolios still underperform PRWCX. We attribute the underperformance to our inactive stock parts. In this newsletter, we look at the two tactical balanced portfolios in which their stock portions are replaced with tactical stock or dividend income portfolios. We show that the two portfolio outperform PRWCX. 

We plan to feature these portfolios more permanently in order to accommodate those who are more comfortable with some easy to follow portfolios in the near future. 

The tactical stock portfolios that aren’t that active

We will utilize recently improved MyPlanIQ composite indicator for the stock portion investments. The composite indicator bases on some key economic indicators and various asset price momentum to decide whether to retreat to a ‘safer’ bond portfolio in a downturn. This indicator is designed under the assumption that holding some quality broad base stock market indexes such as S&P 500 index should be preferred as these index funds represent quality business conglomerates (see Low-Cost Stock Index Funds: Quality ‘Business Conglomerates’ for Solid, Low-Risk Long-Term Returns). The portfolios should only be in ‘safe’ bonds when both economic recessionary and negative price momentum conditions are met. This will make portfolios less active and should invest in stocks most of time. The following table shows the two stock portfolios that are used in our tactical balanced portfolios (that will be discussed in the next section):

Portfolio Performance Comparison (as of 5/19/2023):
Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001
P Composite Momentum Market Vanguard Dividend Growth 0.8% 7.1% 12.9% 10.0% 9.9% 11.6% 11.4%
P Composite Momentum Market S&P 500 9.8% 9.2% 13.2% 9.2% 10.8% 12.5% 11%
VFINX (Vanguard 500 Index Investor) 10.3% 11.0% 15.0% 11.2% 11.8% 9.6% 7.4%

In P Composite Momentum Market S&P 500, it invests in VFINX (Vanguard 500 Index Investor) when MyPlanIQ composite indicator is positive, otherwise it will invest in P_46880 (Schwab Total Return Bond) which is one of our total return bond fund portfolios listed on Income Investors page. Similarly, VFINX (Vanguard 500 Index Investor) normally invests in VFINX (Vanguard 500 Index Investor) when MyPlanIQ composite indicator is positive, otherwise it will invest in P_46880 (Schwab Total Return Bond)

Let’s take a closer look at how many times the portfolio shifted to bonds since 2001: 

So basically, the portfolio had 7 times going to bonds since 2001 for the past 22 years. It stayed in stocks for most of time. 

On the other hand, the portfolios have outperformed S&P 500 (VFINX) by big margins since 2001, as much as 4% each year since 2001. Though the portfolios underperformed VFINX in recent years (for the past 10 years), their returns didn’t deviate too much from S&P 500. This makes them suitable to many investors as most investors are sensitive to benchmarking against popular stock indexes such as S&P 500. 

Outperforming the best balanced fund, both in terms of returns and risk

Now if we replace the stock portion in both strategic portfolios mentioned in the previous newsletter, we would get the following two portfolios:

Tactical Stock Balanced Portfolio:

Buy and Hold (Annually Rebalance)
30% Bonds P_46880 (Schwab Total Return Bond) 
70% Stocks P Composite Momentum Market S&P 500

Tactical Dividend Stock Income Balanced Portfolio:

Buy and Hold (Annually Rebalance)
30% Bonds P_46880 (Schwab Total Return Bond)
70% Stocks P_76606 (P Composite Momentum Market Vanguard Dividend Growth)

The Stocks portion in each portfolio is now replaced with its corresponding tactical stock portfolio mentioned in the above while the total return bond portfolio is still used in the bond portion. Notice again, this portfolio can be replaced with the ETF fixed income portfolio MPIQ ETF Fixed Income on Income Investors page.

The following table shows the returns and maximum drawdowns of the two portfolios and PRWCX:

Portfolio Performance Comparison (as of 5/19/2023):
Ticker/Portfolio Name Maximum Drawdown YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001
Tactical Stock Balanced Portfolio 25.1% 7.2% 7.2% 10.4% 8.2% 8.9% 10.8% 10.3%
Tactical Dividend Stock Income Balanced Portfolio 24.5% 0.9% 5.6% 10.0% 8.5% 8.2% 10.1% 10.4%
PRWCX (T. Rowe Price Capital Appreciation) 41.8% 7.9% 8.7% 11.0% 10.4% 10.4% 9.5% 9.8%

The portfolios not only have only about half of the maximum drawdown of PRWCX, they also outperformed PRWCX. Notice that since these portfolios are implemented in your accounts, you have more flexibility such as tax loss harvesting and selling bonds when withdrawing. Tax loss harvesting is a tax offsetting strategy of selling loss at year end and replace with a similar ETF. For example, one can replace VFINX or VOO with VTI. Doing so, supposed your newly invested capital to VFINX or VOO, you can claim loss in VFINX to offset other income. Selling bonds when withdrawing from the portfolio is a strategy that in a situation when you need to withdraw some capital from the portfolio and you are not willing to sell some stock fund portion as it has experienced large loss recently, you can sell some bond fund instead. If investors are investing in a commonly held mutual fund such as PRWCX, it’s impossible for the fund to accommodate everyone’s need. 

Income and ETF portfolios

We also want to point out that Tactical Dividend Stock Income Balanced Portfolio again has reasonable high yields, similar to Strategic Dividend Stock Income Balanced Portfolio. Furthermore, one can opt to use higher yield funds such as VHYAX (Vanguard High Dividend Yld Idx Adm)  or VYM (Vanguard High Dividend Yield ETF)  or Vanguard REIT index funds (VGSIX or VNQ). Again, we recommend using the following ETFs as substitutes for those who want to have more flexibility and tax efficiency: 


To summarize, MyPlanIQ subscribers can have several balanced portfolios to follow. These balanced portfolios can rival and better the ‘best’ balanced allocation fund out there in terms of returns and risk.  Furthermore, they give more flexibility to accommodate individual needs. 

Market overview

Latest economic indicators are still showing a resilient economy: unemployment rate is still very low, industrial production is still pointing to expansion. Even though retail sales has shown some sign of weakness, real estate markets are still very healthy. In fact, anecdotal evidences in key real estate markets such as California, New York, Florida and Texas are all still showing a somewhat seller’s market. Inflation has been slowed down and CPI is cooling off. For now, it’s hard to argue that the US economy is entering or near a recession. On the other hand, loosen financial conditions will again present challenge to the Federal Reserve Bank and it’s not a sure thing for them to stop interest rate hike.

Corporate earnings wise, based on Factset, as of 5/19/2023, for Q1 2023, the blended earnings decline for the S&P 500 is -2.2% (with 95% of S&P 500 companies reporting actual results) is -2.2%, much better that previous expected decline -6.7% on 3/31/2023. Investors are encouraged by both positive earnings news and cooling inflation and now stocks are in demand again. 

As always, 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 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 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 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.

Stock valuation has dropped and now valuation is becoming less hostile. However, it is still not cheap by historical standard. 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 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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