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:
|Ticker/Portfolio Name||Since 10/18||YTD
|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:
|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,
|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.
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.
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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–Thanks to those who have already contributed — we appreciate it.
- February 11, 2019: “Best” Balanced Fund And Portfolios Revisited
- February 4, 2019: Cash And Money Market Funds: Interests And Safety
- January 28, 2019: Fixed Income Review
- January 14, 2019: Tactical Asset Allocation Portfolio Review
- January 7, 2019: Global Strategic Asset Allocation Portfolio Review
- December 17, 2018: Robinhood’s ‘Revolution’ Or Gimmick
- December 10, 2018: How Defensive Are REITs?
- December 3, 2018: Conservative Core Satellite Portfolio
- November 26, 2018: Allocation Mutual Fund Review
- November 19, 2018: Is The Recent Downtrend Sustainable?
- November 12, 2018: The Staggering Low Interest Rates From Big Banks
- November 5, 2018: The ‘Right’ Or ‘Wrong’ Decision
- October 29, 2018: Taxable Total Return Bond Plus Muni Bond Fund Based Portfolios
- October 22, 2018: DoubleLine Shiller CAPE 10 Based Fund Review
- October 15, 2018: Newsletter Collection Update
- October 8, 2018: Asset Trend Review
- October 1, 2018: Taxable vs. Tax Exempt High Yield Bonds
- September 24, 2018: High Yield Bonds In A Rising Rate Environment
- September 10, 2018: Value, Growth And Blend Stock Style Investing
- August 27, 2018: Money Market ETFs?
- August 20, 2018: How Momentum Investing Stacks Up?
- August 13, 2018: Total Return Bond ETF
- August 6, 2018: Fidelity Zero-Fee Index Funds
- July 30, 2018: Tax Efficient Portfolios
- July 23, 2018: Municipal Bond Funds And Portfolios
- July 16, 2018: A Guide To Conservative Portfolios
- July 9, 2018: Conservative Allocation Mutual Funds Based Portfolios
- July 2, 2018: Small Cap Stocks For The Long Term
- June 25, 2018: What Can We Learn From GE’s Removal From Dow Jones Index?
- June 18, 2018: The ‘Best’ Balanced Portfolio Continues To Excel
- June 11, 2018: Is 10 Year Long Enough For Portfolio Comparison?
- June 4, 2018: Action Plan: Risk Review For Investments
- May 21, 2018: Rising Rates, Consumer Staples And Stock Index
- May 14, 2018: Newsletter Collection Update
- May 7, 2018: Money Market Fund Taxonomy
- April 30, 2018: Momentum Investing Review
- April 23, 2018: Commodities In Current Environment
- April 16, 2018: Municipal Bonds As A Fixed Income Asset Class
- April 9, 2018: Exponential Or Compounding Nature In Investing
- April 2, 2018: Inside Of The Stock Chaos
- March 26, 2018: Total Return Bond Update
- March 19, 2018: Treasury Bills vs. Brokered CDs
- March 12, 2018: Defensive Conservative Portfolio Review
- March 5, 2018: Warren Buffett’s Advices
- February 26, 2018: Pros And Cons of Strategic And Tactical Portfolios In 2018
- February 12, 2018: Trend Review
- February 5, 2018: Market Selloff And Long Term Investing
- January 29, 2018: The New Addition To Our Total Return Bond Fund Candidates
- January 22, 2018: Where Are Bonds Heading?
- January 15, 2018: Tactical Portfolios Review
- January 8, 2018: Strategic Portfolios Review
- December 18, 2017: Record Highs And Risk
- December 11, 2017: Cash Return And Interest Rate Update
- December 4, 2017: Mutual Fund Star Ratings: Are They Useful?
- November 20, 2017: Thankful And Mindful
- November 13, 2017: Is This A Good Time For Retirees Or Would Be Retirees?
- November 6, 2017: Newsletter Collection Update
- October 30, 2017: Rising Interest Rates
- October 23, 2017: A Primer For Portfolios
- October 16, 2017: REITs As An Asset Class
- October 9, 2017: Conservative Portfolios Revisited
- October 2, 2017: The Role of Short Term Bond Funds
- September 25, 2017: Fees In Cash Investments
- September 18, 2017: Conservative Portfolios Review
- September 11, 2017: International Diversification Effect
- September 4, 2017: Invest And Speculate Revisited
- August 28, 2017: Total Return Bond Fund Portfolios: Where Do They Fit?
- August 21, 2017: Portfolio Performance: A Walk In The Past
- August 14, 2017: Fidelity Commission Free ETFs Update
- August 7, 2017: I Didn’t Learn Anything — Mistake vs. Temporary Underperformance
- July 31, 2017: Asset Classes And Fund Choices: A Primer
- July 24, 2017: Total Return Bond Fund Portfolios And Cash
- July 17, 2017: Long Term Stock Holding Periods For Retirement
- July 10, 2017: Half Year Asset Trend Review
- June 26, 2017: How To Beat The Best Balanced Allocation Fund
- June 19, 2017: Newsletter Collection Update
- June 12, 2017: A Mixed Bag Performance of Momentum Investing
- June 5, 2017: How To Start A New Portfolio
- May 29, 2017: Alternative Assets And Their Role In Portfolios
- May 22, 2017: Summer Seasonality And Portfolio Management
- May 15, 2017: Cash: Banking Or Investing?
- May 8, 2017: Holding Period of Long Term Timing Portfolios
- May 1, 2017: Debate on Risk vs. Volatility
- April 24, 2017: The Long Term Stock Market Timing Return Since 1871
- April 17, 2017: Risk vs. Volatility: Long Term Stock Market Returns
- April 10, 2017: Total Return Bond ETFs And Portfolios
- April 3, 2017: Quarter End Asset Trend Review
- March 27, 2017: Practical Consideration For IRAs And 401k Accounts
- March 20, 2017: Fund Fees: That’s (Still) Outrageous
- March 13, 2017: Long Term Stock Valuation Review
- March 6, 2017: Asset Classes for Retirement Investments
- February 27, 2017: Fidelity Total Bond Fund Review
- February 20, 2017: Long Term Stock Timing Based Portfolios And Their Roles
- February 13, 2017: Alternative Investment Portfolios Review
- February 6, 2017: Tax Free Municipal Bond Investments Review
- January 30, 2017: Brokerage Specific Conservative Portfolios
- January 23, 2017: Fixed Income Portfolio Review
- January 16, 2017: Long Term Trend Following Portfolio Review
- January 9, 2017: Tactical Asset Allocation Review
- January 3, 2017: Strategic Asset Allocation Review
- December 12, 2016: Enhanced Index Funds
- December 5, 2016: Review Of Broad Base Core Mutual Funds For Brokerages
- November 28, 2016: Core Index ETFs Review
- November 21, 2016: International Exposure Of U.S. Large Companies
- November 14, 2016: Asset Trends After The Election
- November 7, 2016: Rising Rate And Current Bond Trend
- October 31, 2016: Economy Power And Long Term Stock Returns
- October 24, 2016: Current Commodity Trend And Managed Futures
- October 17, 2016: Investment Mistakes And Good Or Bad Investment Strategies
- October 10, 2016: Momentum Investing Review
- October 3, 2016: Survey & Feedback
- September 26, 2016: Fixed Income Investing: Actively Managed Funds vs. Index Funds
- September 19, 2016: Stock Investing: Actively Managed Funds vs. Index Funds
- September 12, 2016: Newsletter Update
- September 5, 2016: Overvalued Markets And Long Term Timing Strategies
- August 29, 2016: Your 401K Finally Draws Attention
- August 22, 2016: Inflation Protected Securities TIPS For Current Overvalued Markets
- August 15, 2016: Risk On: Emerging Market Stocks And Small Cap Stocks
- August 8, 2016: Portfolio Construction Using Stock ETFs And Bond Mutual Funds
- August 1, 2016: Adding Value To Your Own Investments
- July 25, 2016: Tactical Asset Allocation Funds Review
- July 18, 2016: Strategic Asset Allocation & Lazy Portfolio Review
- July 11, 2016: Asset Trend Review
- June 27, 2016: Secular Cycles For Tactical And Strategic Investment Strategies
- June 20, 2016: A World of Debt
- June 13, 2016: Managed Futures For Portfolio Building
- June 6, 2016: Newsletter Summary
- May 30, 2016: Swensen Portfolio And Permanent Portfolios
- May 23, 2016: AAII Article And Some Web Changes
- May 16, 2016: The PIMCO (Dis)Advantages
- May 9, 2016: Boost Your Dull Summer Investments
- May 2, 2016: Low Cost Index Fund Investing
- April 25, 2016: Tax Free Municipal Bond Funds & Portfolios
- April 18, 2016: Asset Class Trend Review
- April 11, 2016: Construction of Sound And Conservative Portfolios
- March 28, 2016: Total Return Bond ETFs Review
- March 21, 2016: Small And Large Company Stock Performance In Different Economic Expansion Cycles
- March 14, 2016: Are Tactical And Timing Strategies Losing Steam?
- March 7, 2016: Defined Maturity Bond Fund Analysis
- February 29, 2016: Smart Strategic Asset Allocation Rebalance When Market Trend Changes
- February 22, 2016: Be Cash Smart
- February 15, 2016: Bond ETF Portfolios
- February 8, 2016: Newsletter Collection Update
- February 1, 2016: Total Return Bond Fund Portfolios In A Volatile Period
- January 25, 2016: Alternative Portfolios Review
- January 18, 2016: Strategic Asset Allocation: A Cautious Outlook
- January 11, 2016: Review Of Trend Following Tactical Asset Allocation
- January 4, 2016: What Worked And Didn’t In 2015
- December 21, 2015: Distressed Assets
- December 14, 2015: High Yield Bonds And Their Correlation With Stocks
- December 7, 2015: Diversification And Global Allocation
- November 30, 2015: Investors and Speculators Combined
- November 23, 2015: Active Stock Fund Performance Consistency
- November 16, 2015: Permanent, Risk Parity And Alternative Portfolios Review
- November 9, 2015: Broad Base Core Mutual Fund Review
- November 2, 2015: Broad Base Index Core ETFs Review
- October 26, 2015: Total Return Bond Fund Review
- October 19, 2015: Advanced Portfolio Review
- October 12, 2015: What About Commodities?
- October 5, 2015: Core Satellite Portfolios In A 401k Account
- September 28, 2015: Risk Managed Strategic Asset Allocation Portfolios Revisited
- September 21, 2015: Quest For The Best Investment Strategy
- September 14, 2015: Core Satellite Portfolios In Market Turmoil
- September 7, 2015: Market Rout Creates An Opportunity to Reposition Your Portfolios
- August 31, 2015: Review of Asset Allocation Funds and Portfolios
- August 24, 2015: Market Rout And Your Portfolios
- August 17, 2015: ETF or Mutual Fund Based Portfolios
- August 10, 2015: Updated Newsletter Collection
- August 3, 2015: Slippery Asset Trends
- July 27, 2015: Performance Dispersion Among Momentum Based Portfolios
- July 20, 2015: Global Balanced Portfolio Benchmarks
- July 13, 2015: Pain in Tactical Portfolios
- July 6, 2015: Fixed Income Total Return Bond Funds In Strategic Asset Allocation Portfolios
- June 29, 2015: Core ETF Commission Free Portfolios
- June 22, 2015: Secular Asset Trends
- June 15, 2015: Giving Up Bonds?
- June 1, 2015: Summer Blues?
- May 26, 2015: Cash, Bonds and Stocks In A Rising Rate Environment
- May 18, 2015: Portfolio Update
- May 11, 2015: Pain in Fixed Income?
- May 4, 2015: The Balanced Stock and Long Term Treasury Bond Portfolios
- April 27, 2015: Long Term Treasury Bond Behavior
- April 20, 2015: 529 College Savings Plan Rebalance Policy Change
- April 13, 2015: Total Return Bond Funds As Smart Cash
- April 6, 2015: The Low Return Environment
- March 30, 2015: Brokerage Specific Core Mutual Fund Portfolios 2
- March 23, 2015: Investment Arithmetic for Long Term Investments
- March 16, 2015: Brokerage Specific Core Mutual Fund Portfolios
- March 9, 2015: Newsletter Collection Update
- March 2, 2015: Total Return Bond ETFs
- February 23, 2015: Why Is Global Tactical Asset Allocation Not Popular?
- February 16, 2015: Where Are Permanent Portfolios Going?
- February 9, 2015: How Have Asset Allocation Funds Done?
- February 2, 2015: Risk Management Everywhere
- January 26, 2015: Composite Portfolios Review
- January 19, 2015: Fixed Income Investing Review
- January 12, 2015: How Does Trend Following Tactical Asset Allocation Strategy Deliver Returns
- January 5, 2015: When Forecast Fails
- December 22, 2014: Long Term Asset Returns: How Long Is Long?
- December 15, 2014: Beaten Down Assets
- December 8, 2014: Implementing Core Asset Portfolios In a Brokerage
- December 1, 2014: Two Key Issues of Investment Strategies
- November 24, 2014: Holiday Readings
- November 17, 2014: Retirement Spending Portfolios Update
- November 10, 2014: Fixed Income Or Cash
- November 3, 2014: Asset Trend Review
- October 27, 2014: Investment Loss, Mistakes And Market Cycles
- October 20, 2014: Strategic Portfolios With Managed Volatility
- October 13, 2014: Embrace Volatility
- October 6, 2014: Tips For 401k Open Enrollment
- September 29, 2014: What Can We Learn From Bill Gross’ Departure From PIMCO?
- September 22, 2014: Why Total Return Bond Funds?
- September 15, 2014: Equity And Total Return Bond Fund Composite Portfolios
- September 8, 2014: Momentum Based Portfolios Review
- September 1, 2014: Risk & Diversification: Mint.com Interview
- August 25, 2014: Remember Risk
- August 18, 2014: Consistency, The Most Important Edge In Investing: Tactical Case
- August 11, 2014: What To Do In Overvalued Stock Markets
- August 4, 2014: Is This The Peak Or Correction?
- July 28, 2014: Stock Musings
- July 21, 2014: Permanent Portfolios & Four Pillar Foundation Based Framework
- July 14, 2014: Composite Portfolios Review
- July 7, 2014: Portfolio Behavior During Market Corrections
- June 30, 2014: Half Year Brokerage ETF and Mutual Fund Portfolios Review
- June 23, 2014: Newsletter Collection Update
- June 16, 2014: There Are Always Lottery Winners
- June 9, 2014: The Arithmetic of Investment Mistakes
- June 2, 2014: Tips On Portfolio Rebalance
- May 26, 2014: In Praise Of Low Cost Core Asset Class Based Portfolios
- May 19, 2014: Consistency, The Most Important Edge In Investing: Strategic Case
- May 12, 2014: How To Handle An Elevated Overvalued Market
- May 5, 2014: Asset Allocation Funds Review
- April 28, 2014: Now The Economy Backs To The ‘Old Normal’, Should Our Investments Too?
- April 21, 2014: Total Return Bond Investing In The Current Market Environment