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 22, 2016. You can also find the re-balance calendar for 2015 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.

Strategic Asset Allocation: A Cautious Outlook

Strategic Asset Allocation (SAA) has been more popular these days, mostly due to the good performance of U.S. stocks.  Let’s first review some typical SAA portfolios first. 

Strategic Asset Allocation Performance in 2015

For SAA portfolios, U.S. centric investors have benefited much more as U.S. stocks have outperformed others in this bull market. However, global asset allocation based portfolios have done worse. The following table shows how popular portfolios have performed: 

Portfolio Performance Comparison (as of 1/15/2015):

Ticker/Portfolio Name 2015 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
P David Swensen Yale Individual Investor Portfolio Annual Rebalancing 1.5% -4.9% 5.9% 7.4% 6.5% 0.38
7Twelve Original Portfolio -6.9% -12.3% -0.8% 1.3% 3.6% 0.19
AssetBuilder Model Portfolio 09 -3.9% -8.0% 0.0% 1.3%    
Betterment Moderate Portfolio -1.8% -5.9% 2.6% 3.8%    
Wealthfront Moderate Portfolio -2.0% -7.0% 1.5% 2.8%    
Six Core Asset ETFs Strategic Asset Allocation – Equal Weight Moderate -3.6% -8.8% -1.1% 1.2% 3.6% 0.22
Six Core Asset ETFs Strategic Asset Allocation – Optimal Moderate -1.8% -6.8% 1.4% 3.0% 4.0% 0.25
Six Core Asset ETFs Tactical Asset Allocation Moderate -4.7% -7.5% 3.0% 3.5% 8.2% 0.75
PASDX (PIMCO All Asset D) -10.8% -12.9% -4.6% 0.4% 3.0% 0.27
MALOX (BlackRock Global Allocation Instl) -0.8% -5.1% 2.6% 3.0% 5.2% 0.39
VFINX (Vanguard 500 Index Investor) 1.3% -3.7% 10.6% 9.9% 6.0% 0.25
VBINX (Vanguard Balanced Index Inv) 0.4% -3.2% 6.7% 7.1% 5.7% 0.41

Year by year detailed comparison >>

As what’s been stated numerous times, global diversified portfolios have underperformed for the past 1, 3,  and 10 years, compared with U.S. stocks or just U.S. stocks and bonds balanced funds (such as VBINX). We also note that the three robo advisor suggested portfolios (Asset Builder, Betterment and Wealthfront) have been comparable or worse than our Six Core Asset ETFs SAA Optimal portfolio. 

In fact, our TAA portfolio has done better than most global diversified portfolios. All in all, global diversification has hurt these portfolios’ performance for recent years. 

Stock Valuations Are Still High

Unfortunately, even after the recent decline, stock valuations are still high. In fact, based on our Market Indicators,  US stocks are overvalued in a range from 29% to over 50% (Buffett stock market indicator and Shiller CAPE10 ratio). If one uses a reverse to mean valuation to calculate the returns in the coming 10 years, U.S. stocks would return in a range of 1% to 2%. 

For other asset classes, let’s look at the following two reputable sources. 

GMO 7-Year Asset Class Real Return (as of November 30, 2015) (see

Other than emerging market stocks and debts, all other asset class returns are forecast to be negative or close to 0%. It is not a rosy picture. Please note the returns here are real returns, meaning they are after inflation. So, one would probably add 2% or so (CPI or inflation) to these figures to derive so called nominal returns. 

Next, let’s look at the asset return forecast from Research Affiliated (as of 12/31/2015, see their interactive tool): 

The forecast is more optimistic than GMO (though this is a 10 year forecast, compared with GMO’s 7 year). Unfortunately, US stocks will still return a bit over 1% after inflation, REITs 2%. However, International developed markets (EAFE Equity in the above) will return 5.3% while emerging markets will return 7.9%! This might explain why PASDX (PIMCO All Asset D), a fund managed by Research Affiliated, has overweighed very much in international stocks. Unfortunately, so far, the bet seemed to be way too early. 

Caution Ahead

From the above data, it seems clear that U.S. stocks are overvalued and they will deliver a very meager return. Furthermore, U.S. bonds will not fare much better either. This indicates that the tide will turn against U.S. centric investors. 

For international developed market stocks, valuation metrics are still not entirely optimistic: GMO and Research Affiliated have two very different views. 

For emerging market stocks, the two research firms seem to agree with each other more. At the moment, iShares MSCI Emerging Market stocks ETF EEM has been down -8.0% annually for the past 5 years!. 

Interestingly, after suffering from -15.5% annual return for the past 5 years (PowerShares DB Commodity Tracking DBC), commodities is forecast to return 2.6% annually by Research Affiliated. 

At the risk of running another forecast, which we admit we have no talent and ability to carry out, we offer the following educated observations: 

  • U.S. stocks will suffer from a big correction or bear market. Though we have no confidence to predict when this will happen, we suspect as the current bull market has been long in the tooth and current valuations are still very high, the risk of such a decline is increasingly possible. 
  • Short term (one or two years), we have no confidence for international and emerging market stocks to stage a big come back. The key reason is that the global economy and financial system have not undergone a more fundamental (or structural) change since the last financial crisis in 2008 and it is hard for us to believe that without such a change, these economies can emerge out robustly without scratch. 
  • It is thus very likely that strategic asset allocation based portfolios will endure some big correction/loss before they can recover or grow again. In fact, it is not the question of if but when as it is just the nature of markets: it goes through overshoot and undershoot phases.

So caution is warranted. On the other hand, investors should understand that one should stick to an SAA portfolio through thick and thin. At the moment, the best defense is to properly adjust the risk of a portfolio to a level one is comfortable with. If your current stock or risk asset exposure is too high, it is still not too late to pare it down. On the other hand, investors should pay more close attention to markets and perform rebalances more actively especially if stocks are down substantially. 

Market Overview

Stocks continue to decline and now reach a short term over sold situation. For now, investors are risk averse and exhibit a flight to safety herd mentality. Small cap stocks have declined more than 20% from their peak. More than 50% of NYSE stocks have entered a bear market (or declined more than 20%). However, keep in mind that in a typical bear market, stocks will go through several phases of strong decline-then-bounce in a downtrend. For now, we are still at a very early stage if the bear market materializes. At the moment, both S&P 500 and Nasdaq 100 have not broken down their respective lows made in August last year. We shall stay on course. 

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

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

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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