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, March 18, 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.

‘Bad’ Tactical Strategy

It goes without saying that our Tactical Asset Allocation(TAA) portfolios have been hit hard recently. Some screamed that ‘whipsaws killing us’. Many are wondering whether this strategy can recover. In this newsletter, we want to closely look at this in a historical context and discuss some of the questions. 

The ‘bad’ performance

Though it’s been known for a while that recently, our tactical portfolios have underperformed broad based markets (i.e. strategic or buy and hold like S&P 500 index funds), the underperformance since last October is particularly concerning: 

Recent tactical portfolio performance (as of 2/22/2019):
Ticker/Portfolio Name Since 10/18 YTD
1Yr AR
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds -7.8% 1.3% -7.9%
P SMA 200d VFINX Total Return Bond As Cash Monthly -15% 0.6% -7.0%
VFINX (Vanguard 500 Index Investor) -3.8% 11.7% 5.2%

The table lists the two representative tactical portfolios employed in MyPlanIQ. The 200 day SMA (Simple Moving Average) based portfolio is the worst: having suffering from a classic ‘whipsaw’ trades since October. 

Currently, stocks have staged a strong recovery while the tactical portfolios have not done much. This can lead to some even more serious underperformance or outperformance, depending on how markets will move in the next several months. 

Long term performance

As what we have repeatedly claimed before (see, for example, June 11, 2018: Is 10 Year Long Enough For Portfolio Comparison?), we prefer holding a tactical portfolio like the above two for at least 15 years. So let’s look at the long term returns again here:

Long term tactical portfolio returns (as of 2/22/2019):
Ticker/Portfolio Name 3Yr AR 5Yr AR 10Yr AR 15 Yr AR Since 1/2001 18yr+
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 7.8% 5.4% 9.1% 10.1% 11.8%
P SMA 200d VFINX Total Return Bond As Cash Monthly 8.5% 7.3% 12.8% 10.8% 11.2%
VFINX (Vanguard 500 Index Investor) 15.0% 10.8% 16.0% 8.2% 6.4%

From the above table, one can see that even at this particular bad time right now, the two tactical portfolios have outperformed the S&P 500 index fund VFINX by some big margins for the past 15 and 18 years (the reason we use 1/2001 is because the SMA portfolio started on 1/2001). So however how bad currently the portfolios are, the tactical ones have kept the 15 years’ promise — delivering reasonable returns for 15 years or longer. Furthermore, even for the past 10 years, the portfolios’ returns are still fairly reasonable (though lagged behind S&P 500). 

The above table does not show the maximum drawdowns (losses) from a peak to a subsequent trough for the two portfolios and VFINX. They have done so much better if we consider this factor: 55% for S&P vs. 20% or less for the two portfolios. 

But the recent returns are still frustrating, in fact, last year (2018), the maximum drawdown for the two portfolios are about 17% and 21% respectively, both are the biggest since 2001. So one can say last year was the worst year since 2001 in terms of volatility for the two portfolios. 

Naturally, one wonders whether in the past, such a ‘bad’ (or even worse) period existed for the two portfolios. Specifically, one would like to know whether there were more 10 year periods in the past when the portfolios underperformed S&P 500 index. In the following, we drilled down further. 

The historical ‘bad’ periods for tactical portfolios

Since both the two portfolios have shorter history, we resort to portfolio P SMA 200d VFINX Monthly that has data since 3/31/1981. Unlike P SMA 200d VFINX Total Return Bond As Cash Monthly, this portfolio switched to CASH instead of a total return bond fund when VFINX’s total return (dividend reinvested) value is lower than its 200 day moving average. As explained before, we believe this portfolio roughly underperformed the bond fund as cash portfolio for about 1-2% annually. 

It turns out that there have been many such bad 10 year periods in the past when the portfolio underperformed. Specifically, 

Timing/tactical portfolio long term returns (as of 2/22/2019):
Ticker/Portfolio Name AR since 3/31/81 AR 1990-1999 AR 1985-1994 AR 1985-1999 (15 yrs)  AR 1982-1999 (19 yrs)
P SMA 200d VFINX Monthly 10.2% 12.4% 7.1% 12.3% 12.7%
VFINX (Vanguard 500 Index Investor) 10.2% 17.8% 12.4% 17.5% 16.7%

*AR: Annualized Returns

** 1990-1999 inclusive, means from 12/31/1989 to 12/31/1999

It’s interesting to see that for about 38 years since 1981, the tactical portfolio delivered the exact same annualized return as S&P 500 index (buy and hold), both 10.2%. It’s still a win for the tactical investor as he/she suffered much lower volatility. 

If instead switching to a total return bond fund (intermediate bond fund) when goes to cash, the tactical portfolio would have delivered 2% more annualized return than VFINX. 

The periods in 1980s and 1990s are all less friendly to the tactical portfolio. We can see in the two typical 10 year periods (90-99, 85-94), the tactical returned much less than VFINX. Unfortunately, this underperformance even went on to last for 15 years (85-99) and longer (82-99). 

However, for that 15 years from 1985 to 1999, the tactical delivered annualized 12.3% return (again without 1-2% extra returns if using a bond fund as cash substitute), a very reasonable one, even though it does not ‘beat’ the market. 

If you are old enough, you probably remembered that financial media and brokers all ditched market timing in late 1990s (the so called technology bubble period) based on the past performance data. Of course, they soon found out  that the market timing portfolios didn’t do that bad at all after the bear market in 2000-2003. 


The above data show us that there have been multiple periods (in fact, worse periods) in history when tactical strategies underperformed the market. At the moment, tactical portfolios are still outperforming S&P 500 for the past 15 years or so. However, it’s possible (how likely is subject to debate) that the current period can turn into the one from 1980s to 1990s. In that case, one needs to be prepared for much longer term underperformance. 

Unfortunately, no one knows for sure whether the current long term bull market will extend to such a long time. So one has to decide whether to forgo the tactical to bet on such a chance. For those who have committed to a tactical strategy, it’s probably the worst time to switch now as markets are over-extended and significantly overvalued. 

In the meantime, we are certainly aware of and experiencing the pain of underperformance. We do believe that it’s possible to improve the tactical strategy over our currently existing ones. However, we want to emphasize that whatever we are going to do, we want to stick to the principles that have guided us: first, the strategy has to have strong intuition backing. It has to be simple enough. These principles are important in order to avoid intensive data snooping, i.e. using past performance data to keep fine tuning parameters to make the back testing performance look good. 

We also want to avoid tweaking strategies on the fly. Again, we emphasize: ‘a strategy is not a strategy anymore if it keeps changing’. It’s a dangerous game to keep ‘improving’ along the time. 

Finally, by the statistical nature of investing, regardless how well a strategy is designed, it’s bound to encounter difficulty in some periods of time. Every investor should be prepared for this psychologically.  

Market overview

Stocks have shown some strong short term momentum recently. By now, major US stock indexes have risen above their long term 200 days moving averages. In the meantime, fundamentals are showing a mixed picture: based on Factset report, S&P 500 companies have delivered better last quarter’s earnings. However, the expectation of Q1 2019 earnings has kept coming down, now at -2.1% vs. previous -1.7%. Similarly, the full 2019 earnings expectation also came down to 4.5%. Short term, investors are now turning attention to the US-China trade deal, among several other important factors. We have no strong conviction/speculation on these events and thus, we will stay the course and manage risk accordingly. 

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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