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, February 6, 2017. You can also find the re-balance calendar for 2017 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.

Long Term Trend Following Portfolio Review

Each year, we review the long term performance trend of our representative trend following portfolio. We analyze the portfolio’s year by year total returns (dividend reinvested) and its rolling 5 year returns. We compare with S&P 500 index total return (represented by Vanguard 500 index fund VFINX). We have kept the data since 1991. Notice that the data before 2009 are back tested. But since 2009, our data have been based on the live performance history. 

For previous year’s review, see the following

We again recommend readers who are not familiar with this topic to read the following newsletters

Long Term Tactical Asset Allocation Performance

In this year’s figure, we are using the performance data of  P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds.  In previous years’ newsletters, we stated that we preferred this portfolio over  P Relative Strength Trend Following Six Assets. The main reason is that the first portfolio, compared with the latter, uses a more logical diversified asset classes such as emerging market and developed market stocks than those geographical diversified assets such as Europe and Asia Pacific stocks. Furthermore, the Goldman Sachs Global TAA has a very diversified fixed income funds instead of just using a broad base index bond fund. Notice both portfolios are listed on Advanced Strategies page. 

The following updated charts incorporate 2016 data. Because the new portfolio does not have data before 1998, we opt to use those from P Relative Strength Trend Following Six Assets from 1991 to 1997. 


We make the following observations:

Portfolio Performance Comparison (as of 12/31/2016):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR AR since 1991
P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 3.6% 3.3% 6.9% 9.8% 13.4%*
P Goldman Sachs Global Tactical Benchmarks Based Include Emerging Market Diversified Bonds ETFs 0.3% 0.8% 5.4%    
P Relative Strength Trend Following Six Assets -0.5% -0.6% 6.1% 6.4%  
VFINX (Vanguard 500 Index Investor) 10.8% 8.9% 14.5% 6.8% 9.7%
TRXAX (Catalyst/MAP Global Total Ret Inc A) 1.6% 1.4% 5.1%    
GTAA (AdvisorShares Morg Crk Glbl Tacticl ETF) 1.8% -1.3% 0.8%    
GMOM (Cambria Global Momentum ETF) 4.0%        

*Before 1998, it uses the returns from P Relative Strength Trend Following Six Assets

  • From the chart, the TAA portfolio continues the underperformance since 2009. The TAA portfolio underperforms VFINX in two major periods: from 1991 to 1998 and from 2009 to 2016. Interestingly, both periods last for 7 years. 
  • However, since 1991, the TAA portfolio has bettered VFINX in terms of annualized return (AR) (13.4% vs. 9.7%) by a big margin. This has done with much less maximum drawdown (i.e. from peak to a following trough) which is not shown in the table. 

Is the tactical allocation strategy still effective?

Many investors have started to have a doubt on the TAA because of the string of underperformance. As we stated elsewhere in previous newsletters, a seven year underperformance is a very long period for an individual investor. Before making additional comments on this important topic,  we refer readers to some of previous relevant newsletters: 

The TAA’s underperformance in 2016 (and in the previous 6 years) is now at its 7th year. Will the underperformance continue? It’s a hard question to answer. From our figures since 1991, one can see that the current underperformance is not without precedence: from 1991 to 1998, TAA underperformed VFINX too. On the other hand, this also indicates that this period is near its end, just as the current bull market. 

Many investors are abandoning this strategy because of the poor performance. This is exactly like buy and hold (or strategic allocation) investors are bailing out at the bottom of a bear market, only to find out that is the worst time to do so. The behavior of these investors has been well documented and appeared again and again: when markets are at their bottoms, they switched to cash or other safer investments. In the subsequent market rallies, however, they are too afraid to step back into the markets, sitting on the sidelines or they switch to a tactical strategy, only to find out in the following bull market, such a strategy underperforms a strategic or buy and hold portfolio. 

To some extent, currently, tactical portfolios are at their “bear” market lows even though the tactical portfolios don’t actually incur large loss. Switching or abandoning them and going on to a strategic portfolio at an overvalued stock market is actually very risky: not only you might not be able to make much gains, very likely, you might incur a large loss when markets undergo a big correction. Doing so, not only you don’t derive the same large gains as early strategic investors, you might even lose the smaller gains you have made from tactical portfolios when a bear market strikes. 

For example, if an investor switches to VFINX in 1999, right after the TAA underperformance period, he would have derived an annualized return 5.3% in the period of 1999 to 2016, compared with the TAA portfolio’s 14% in the same period!

To summarize, investors should do a full due diligence on a particular strategy and understands its behavior, especially its downside. Such a mental exercise or preparation is imperative before committing to any strategy as there is no investment strategy in the world that always outperforms markets with low risk. No matter it’s a strategic or tactical, there will be a ‘bear’ market for this strategy. One just has to stick to the strategy with a long term vision to reap its benefits. 

Market Overview

Investors appeared to readjust their expectation for the new U.S. administration. Last week, both US dollar and bond yields dropped last week while US stock rally stalled. As we are near the new president’s inauguration, many expect markets will become more volatile. We want to echo what we said in the above: regardless of what investment strategies one employs, one should keep a long term vision and stay the course. 

For more detailed asset trend scores, please refer to 360° Market Overview

As now we have a president elect who promised to challenge the status quo and make substantial structural change (such as infrastructure building), we are now in a wait and see period: as the nation is posed to invest, the most important factor to watch is how productive the investments will be. Simply put, productive investments will result in better return on investment (ROI), tangibly or intangibly. They should also increase productivity that in turns will improve our standard of living. Capital misallocation can result in a higher growth but might not improve the real standard of living, which is the ultimate goal of economic activities.

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. 

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