Tactical Portfolios Review
We continue to review the performance of portfolios using our another core asset allocation strategy – Tactical Asset Allocation(TAA). The strategy is momentum based: it ranks momentum (trend score) of the total returns (i.e. dividend reinvested) of major core asset classes and chooses top assets to invest for a pre-selected risk level. We will comment the strategy in some more details at the end of this newsletter.
First, as quoted in the previous newsletter (January 8, 2018: Strategic Portfolios Review), emerging market stocks, developed country stocks and US stocks are the three best performing assets last year.
Major Index ETF Performance Comparison (as of 1/5/2018):
|ETF||2017||3Yr AR||5Yr AR||10Yr AR|
|VTI (Vanguard Total Stock Market ETF)||21.7%||12.8%||15.5%||9.5%|
|VEA (Vanguard FTSE Developed Markets ETF)||26.4%||11.0%||8.5%||2.9%|
|VWO (Vanguard FTSE Emerging Markets ETF)||31.5%||10.0%||3.9%||2.1%|
|VNQ (Vanguard REIT ETF)||7.0%||4.4%||8.4%||8.2%|
|DBC (PowerShares DB Commodity Tracking ETF)||4.9%||-2.4%||-9.5%||-6.3%|
|BND (Vanguard Total Bond Market ETF)||3.7%||1.9%||2.0%||3.7%|
|GLD (SPDR Gold Shares)||12.8%||2.7%||-4.8%||3.9%|
|TLT (iShares 20+ Year Treasury Bond)||9.2%||1.5%||3.9%||6.2%|
|JNK (SPDR Barclays High Yield Bond ETF)||3.9%||4.0%||3.4%||5.4%|
|TIP (iShares TIPS Bond)||1.8%||1.2%||-7.6%||-0.9%|
However, among the risk assets, commodities (DBC) commanded some strong momentum in November, 2017 that proved to be fleeting:
This fluctuation from commodities has negatively affected some of our portfolios reviewed below.
Multi-asset tactical portfolios are catching up
In 2017 global diversification based portfolios finally caught up US stocks/bonds only portfolios:
Portfolio Performance Comparison (as of 1/12/2018, all returns are dividend reinvested)
|Ticker/Portfolio Name||2017||3Yr AR||5Yr AR||10Yr AR||15Yr AR||Since 1/2/2001||Max Drawdown|
|P SMA 200d VFINX Total Return Bond As Cash Monthly||21.7%||11.9%||14.9%||13.7%||14%||12.7%||17.5%|
|P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds||22.2%||6.7%||9.8%||9.3%||13.4%||13.1%||17.2%|
|P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds Top 2||22.3%||4.0%||9.4%||8.8%||13.5%||13.3%||21.5%|
|VFINX (Vanguard 500 Index Investor)||21.7%||13.4%||15.8%||9.3%||9.7%||6.6%||55.5%|
The representative P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds can be found in our Advanced Strategies (its ETF equivalent is listed on that page but one can find the link through the ETF portfolio page there. The portfolio used here is based on index mutual funds that has much longer history).
What we can see is that:
- As the US stocks have advanced dramatically in the current bull market since 2009, S&P 500 total return (VFINX) now has a very comparable total returns compared with the Goldman Sachs Global Tactical Portfolios for the past 10 years. However, even for the past 10 years, the long term 200 day moving average based portfolio (P SMA 200d VFINX Total Return Bond As Cash Monthly) is still much better than the index (10 year AR (annualized return) 13.7% vs. 9.3%). The long term timing/tactical strategy not only has better returns but it has done so with much less maximum drawdown: 17% vs. 55%!
- In the longer history since 1/2/2001 or last 15 years, returns of all global tactical portfolios are better than the S&P 500 by a big margin: 13.3% vs. 6.6%.
- From time to time, we compare our representative tactical portfolio with another one (P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds Top 2) that chooses top 2 assets monthly to invest. P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds chooses top three assets (index funds). In general, the portfolio that chooses top two assets has the best long term performance but it achieves this with bigger risk. It can be more volatile too. For example, the GS top 2 fund portfolio did poorly in 2016 and 2015, compared with the top 3 portfolio (see year by year detailed comparison). If there are enough assets to choose from, we prove choosing top 3 assets instead.
We note that even though US stock index based portfolio (P SMA 200d VFINX Total Return Bond As Cash Monthly) has been on fire recently, we still believe that diversifying among global assets is appealing in the long term. As world economy has become more diversified and balanced, global oriented portfolios should prove to be beneficial longer time, even though it’s possible to suffer from some short term underperformance.
Commodities and multi-assets
Another related topic is that commodities, similar to emerging market stocks (and European stocks) prior to last year, has been a big distractor to the recent returns of our portfolios:
Portfolio Performance Comparison (as of 1/12/2018):
|Ticker/Portfolio Name||1Yr AR||3Yr AR||5Yr AR||10Yr AR||15Yr AR||Since 12/31/2000||Max Drawdown|
|Six Core Asset Index Funds Tactical Asset Allocation Moderate||10.6%||2.4%||4.7%||6.1%||9.5%||9%||12.9%|
|Five Core Asset Index Funds Tactical Asset Allocation Moderate||16.6%||5.0%||6.2%||6.8%||9.8%||9.4%||13.8%|
|Three Core Asset Index Funds Tactical Asset Allocation Moderate||16.5%||5.4%||6.0%||4.9%||7%||6.9%||9.9%|
|VBINX (Vanguard Balanced Index Inv)||15.0%||8.4%||10.0%||7.5%||8%||6.4%||36%|
In the above, the candidate funds of Five Core Asset Index Funds Tactical Asset Allocation Moderate are the five major index funds without commodities, which is included in Six Core Asset Index Funds Tactical Asset Allocation Moderate:
|Major Asset Classes Covered:||REAL ESTATE, Emerging Market, INTERNATIONAL EQUITY, FIXED INCOME, US EQUITY|
The three core asset portfolios only uses US stocks (VTSMX), international stocks (VGTSX) and bonds (VBMFX) as candidate funds. This configuration is prevalent among company 401k plans.
We can see that
- Five core assets one has done much better than Six core asset portfolio for the past 1, 3 and years. Commodities has been an distractor for sure.
- Without commodities, five core and three core portfolios did better than VBINX last year.
- Even comparing for the past 10, 15 and 17+ years, commodities has not added much value.
- However, the same can not be said for emerging market stocks and REITs: for the past 15 and 17+ years, the six and five core portfolios have done much better than the three core one.
Regarding commodities, in addition to the recent performance distraction, the other concern we have is that most of these funds are future contract based (other than physical asset based such as gold fund GLD), this has added another uncertain factor (so called backwardation and contango related to future contract expiration and rollover to new contracts) that can possibly affect returns. On the other hand, we do recognize the added diversification benefit of commodities. For example, it’s possible that the recent strength in commodities can sustain further for multiple years if global economy continues to expand in the current late stage bull market.
So we would suggest some caution on commodities, especially for those who are more conservative. This means that if you have been following a plan that has commodities as an asset such as Six Core Asset ETFs, you might also want to consider to look at Five Core Asset ETFs. You can either switch to the five core plan or reduce weights when commodities are suggested in a six core portfolio.
This article only discusses momentum based investing among multiple assets. We will review momentum based investing at different levels (such as individual stocks, sectors etc.) in a future newsletter.
Dual momentum vs. relative and absolute momentum
Recently, a user asked us a question regarding MyPlanIQ’s TAA vs. so called dual momentum outlined by Gary Antonacci. The user asked:
In fact, we published an interview several years ago in 2013 Interview with Gary Antonacci on Momentum Based Investing on this subject. In the interview, we noted that our TAA uses a similar dual momentum method. Unfortunately, Gary interpreted this as our way to ask him to promote our TAA (see his comment). We have not responded his comment since and would like to clarify here.
MyPlanIQ independently developed our Tactical Asset Allocation(TAA) way earlier than 2013: internally it was developed during 2008-2009 and was publicly published in 2010. It incorporates the relative and absolute momentum (i.e. the dual momentum called by Gary) by including cash asset among all candidate funds/assets in a portfolio. Since cash always exhibits positive momentum, including it in our trend score ranking implicitly ensures the so called absolute momentum — any negative momentum would be ranked below cash’s (as negative momentum would have a negative trend/momentum score). What we want to point out is that MyPlanIQ has utilized and fine tuned such a strategy for almost 10 years and it’s completely independent. When we heard about Gary’s dual momentum concept, we were delighted and hoped to promote such a methodology (not just MyPlanIQ’s) to a wider user/community base. Hence the interview and the subsequent controversy.
So the short answer to the user’s question is that, yes, MyPlanIQ’s TAA does incorporate the dual momentum concept. As we have pointed out numerous times, the real challenge of momentum based investing is not some sort of secret source people haven’t uncovered. Instead, it’s the very nature of its behavior that can make it challenging to many investors short term (see, for example, July 22, 2013: Tactical Asset Allocation: The Good, The Bad And The Ugly). We don’t proclaim possessing super secret investing strategies, instead, we have been very open and believe our value lies in constant education, interaction and analysis on these strategies and human behavior.
The ‘melt-up’ of stocks continued since the New Year. It does seem that investors are now fully hopeful that a repeat of a similar late bull market in 1998 or so is in store. Based on many experts, recession is not on the near horizon and 2018 might prove to be another year of favoring risk assets (stocks). Regardless, bonds have sent some negative signals and this has affected rate sensitive assets including REITs and utilities (and even many consumer staple stocks). We have no strong opinion on where the markets will head and would prefer to stay the course and let markets guide us. As always, in the current over valued and over bought environment, manage risk accordingly.
For more detailed asset trend scores, please refer to 360° Market Overview.
Now that the Trump administration has been in the office for more than a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation and the promised infrastructure spending remains to be seen. On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in.
In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic on 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.
- 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