Re-balance Cycle Reminder
The next re-balance time will be on next Monday, March 4, 2013. You can also find the re-balance calendar of 2013 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.
Asset Class Scenario Analysis
Now that we are fully into 2013, we will try to have outlooks on major asset classes. We understand fully that any attempt to forecast short term movement of an asset (class) is futile, as we have stated many times that we don’t believe we have an edge on this. As a matter of a fact, we don’t believe anyone has a strong edge on this (other than those high frequency trading people, even for those, we highly doubt that without resorting to murky information, that is even possible).
However, we find that it is often very useful to do various scenario analysis, especially under a solid asset allocation framework such as the Four Pillar Foundation one:
For more detailed description of this foundation, see
April 23, 2012: All Weather Portfolio Construction
August 6, 2012: Four Pillar Foundation Based Portfolio Review
Here are some scenarios. We will analyze how a permanent portfolio such as Harry Browne Permanent Portfolio or their related (see Permanent Global Portfolio ETF Plan for more details) will behave:
- Economies are back to goldilocks (or shall we say back to good old days?): we are in a growth corner that has mild inflation or deflation. In this case, stocks will do very well while bonds will not incur much damage (maybe some mild damage for sure, considering the currently elevated price or extremely low rate environment) . Gold for inflation protection is a wild card as it does not warrant much protection. In this case, we would say a permanent portfolio will do OK as stocks will have strong pull and offset minor loss from gold and/or bonds. If we are truly back to good old days, bond prices might even stay the same or go lower, another bonus to the permanent portfolio. But as we mentioned many times, we don’t believe this scenario will likely happen in a current environment: too much debt and no structural economic change (such as new technology, work force structure & skill sets etc.)
- Economies will experience phantom high growth with inflation rising dramatically. This is likely down the road (maybe in 2 or 3 years?) but maybe not now. Since central banks in the world have been injecting so much liquidity and governments have been borrowing so much to prop up economies or just to kick the can down the road, this scenario is not inconceivable. In fact, we personally believe that this is one of the very likely scenarios. When this happens, there might be several mini-scenarios:
- When economies start to pick up, stocks will do well while other assets languish. We might be in this phase.
- Economies are overheating, interest rates start to pick up, stocks might encounter difficulty and gold will rise dramatically. Bond prices will start to decline
- Economies are now stalled in hyperinflation environment, gold will start to drop as investors and speculators alike sense it is possible the end of inflation. Bonds are crashing.
- The black horse here is gold: whether gold will respond accordingly as on one truly understands its economic value. In the case that investors lose faith in fiat money, gold will certainly serve as the last resort to store value.
- Economies will soon go to a recession as the European debt issue grows out of hand and emerging market economies can not change their export driven model fast enough to help stimulate global demand. In the meantime, US economy is stuck at high unemployment rate. Public sector demand is weak due to deleveraging of government debts. Aggregate global demand is weak again and the over-leveraged global financial system once again needs to be deleveraged. It is also possible that emerging market economies will contract. Another global recession is at hand. This is again a scenario that is likely. In this case, bond prices will be high and even go higher (albeit not much higher, considering current high prices) while gold can be lower short term while still being strong long term (as investors expect many more quantitative easing or just simply due to currency depreciation from currency wars). We are in the deflation corner.
It is also interesting to point out several secular trends in global economies:
- European economy is weak and the debt issue has not been resolved. Anything done so far are just short term patches.
- US economy is stuck at a low growth mode, regardless of the short term (1 to 2 years) growth. We just don’t see any new industry can start to provide enough job opportunities to many who have lost jobs. Furthermore, unless the ‘we design they sweat’ model continues to work and emerging market economies provide enough demand to offset the loss from developed markets (due to over consumption), we don’t see how enough high skilled jobs can be created to satisfy weak global demand.
- Emerging market economies are at a turning point: if they can successfully create sufficient internal demand to change their export driven model, there is a possibility that we can enter the goldilocks economy once again in some sustainable fashion. For now, we just don’t see they are turning the corner fast enough for this.
The above are by no means complete and accurate. In fact, precisely because of recognizing our limits to understand unknowns, we resort to diversification and trend following for our investment management. But it is certainly a useful exercise to examine possible scenarios under our existing asset allocation framework to see how portfolios can be impacted.
For now, our position is as follows:
- Diversification is extremely important, both in Strategic Asset Allocation and Tactical Asset Allocation. For strategic allocation, it gives a mean to counter many possible scenarios. For tactical allocation, it provides more opportunities to catch a trend (‘there is always a bull market somewhere’).
- Four pillar or permanent portfolios are the best all weather portfolios.
- For secular trend based strategic allocation, we prefer US stocks over other stocks and emphasize hard assets. This is what our Strategic Asset Allocation – Optimal is positioned currently.
- To counter ultimate unforeseen disaster scenarios, we believe one should adopt some form of tactical allocation for part of his/her capital. So far, we believe trend based Tactical Asset Allocation over a diversified array of major asset classes is one of the most effective ways to do so.
Portfolio Performance Review
In the following, we review the tactical model portfolios of on Overview & Featured ETF Portfolios page:
Portfolio Performance Comparison (as of 2/11/2013)
| Ticker/Portfolio Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| VFINX | 1.5% | 6.6% | 14.8% | 105.6% | 14.6% | 77.2% | 4.9% | 13.7% | 8.2% | 32.2% |
| Vanguard ETFs Tactical Asset Allocation Moderate | 0.8% | 0.9% | 8.8% | 147.2% | 11.1% | 108.5% | 7.9% | 64.7% | 10.5% | 81.2% |
| Permanent Global Portfolio ETF Plan Tactical Asset Allocation Moderate | 0.4% | 1.1% | 3.0% | 54.9% | 10.0% | 95.7% | 6.8% | 58.8% | 10.9% | 88.8% |
| Six Core Asset ETFs Tactical Asset Allocation Moderate | 0.5% | 0.9% | 5.9% | 103.8% | 7.6% | 78.4% | 7.3% | 67.1% | 10.4% | 86.8% |
| VBINX | 0.9% | 3.9% | 9.9% | 146.2% | 11.3% | 100.4% | 5.9% | 32.6% | 7.7% | 52.8% |
| Retirement Income ETFs Tactical Asset Allocation Moderate | 0.2% | 1.6% | 7.3% | 119.5% | 12.1% | 128.1% | 7.6% | 70.4% | 11.7% | 99.3% |
| MyPlanIQ Diversified Core Allocation ETF Plan Tactical Asset Allocation Moderate | 0.6% | 1.6% | 9.6% | 149.7% | 9.4% | 97.0% | 7.9% | 73.2% | 10.7% | 94.1% |
*: NOT annualized
**YTD: Year to Date
See the latest and year by year comparison >>
Vanguard balance index VBINX (60% US stocks /40% US bonds) has done much better than all of the portfolios in the above. This is because US stocks have done much better than other stocks and asset classes:
Major asset class returns
| Ticker/Portfolio Name | 1 Week Return* |
YTD Return** |
1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe | 10Yr AR | 10Yr Sharpe |
|---|---|---|---|---|---|---|---|---|---|---|
| VWO (emerging mkt stocks) | -0.0% | -0.6% | 2.4% | 32.5% | 7.5% | 26.4% | 1.7% | 1.9% | ||
| VTI (US stocks) | 1.5% | 6.9% | 14.8% | 125.1% | 15.3% | 76.0% | 5.5% | 16.2% | 8.6% | 34.7% |
| VNQ (US REITs) | 0.8% | 4.9% | 13.5% | 108.7% | 23.3% | 88.5% | 7.6% | 12.2% | ||
| VEA (Intl stocks) | 0.3% | 3.0% | 11.4% | 91.3% | 7.3% | 28.0% | 0.1% | -4.0% | ||
| GLD (Gold) | 0.1% | -0.3% | -4.8% | -32.9% | 15.8% | 81.3% | 12.5% | 56.4% | 16.2% | 71.1% |
| BND (US bonds) | -0.1% | -0.7% | 1.9% | 51.2% | 4.7% | 132.6% | 4.9% | 79.7% |
Market Overview
Stocks have fluctuated: US stocks continued to do well while both emerging market stocks and international stocks have started to show weakness. For now, long term Treasuries, gold and international bonds have all had negative trend scores, ranked below cash. See the major asset trend ranking table on Asset Trends & Correlations or more detailed ones on 360° Market Overview for more details.
We again copy our position statements (from previous newsletters):
Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible.
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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Diversified Asset Allocation Portfolios For Your Plans
