January 3, 2022: The Year In Rear View: Portfolio And Asset Class Review

Jan 4, 2022 | Asset-Allocation, Bonds, Economy, Feature, Gold, Headline, Income, Investments, IRA, Markets, Mutual-Funds, Newsletter, Retirement

Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Tuesday February 1, 2022. 

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.

The Year In Rear View: Portfolio And Asset Class Review

In this newsletter, we look at our main portfolios and discuss some of main asset trends for the new year. Before we go on to this topic, we would like to let our readers know that we are working hard to introduce more investing, cash management and other features in the new year. Our service will more focus on making your investing and finance easier and better with ultra low cost. 

As we have written hundreds of weekly newsletters in the past, we are changing our newsletter publication frequency to biweekly. We will also make more efforts to summarize and categorize important investment topics that have been discussed before. 

MPIQ Asset Allocation Portfolios

First, let’s look at major asset returns in 2021:

Major asset name 2021 Return 3Yr AR 5Yr AR 10Yr AR 15Yr AR
VTI (Vanguard Total Stock Market ETF) 26.5% 26.0% 18.1% 16.4% 10.7%
VNQ (Vanguard REIT ETF) 42.7% 20.6% 11.6% 11.7% 7.3%
VEA (Vanguard FTSE Developed Markets ETF) 13.8% 15.3% 10.5% 8.7%  
VWO (Vanguard FTSE Emerging Markets ETF) 3.3% 12.8% 10.0% 5.6% 4.5%
DBC (PowerShares DB Commodity Tracking ETF) 41.4% 13.4% 6.2% -2.2% -0.7%
BND (Vanguard Total Bond Market ETF) -1.4% 4.9% 3.8% 2.8%  

Our main asset allocation portfolios have done what they were supposed to do: delivering a reasonable return while keeping a tab on risk. 

Portfolio Performance Comparison (as of 12/31/2021)
Ticker/Portfolio Name 2021 Return 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MPIQ ETF Allocation Moderate 15.9% 17.6% 12.1% 10.2% 9.1%
VBINX (Vanguard Balanced Index Inv) 14.1% 17.3% 12.2% 10.8% 8.2%
DGSIX (DFA Global Allocation 60/40 I) 13.52% 14.4% 9.8% 8.8% 6.4%

Observations:

Our moderate portfolio did better than VBINX, a 60% US stocks and 40% US bond index balanced fund in 2021. The outperformance is mostly attributed to 

  • Outperformance of our bond portion. More on this in the next section. 
  • Our oversize exposure to REITs (VNQ) than VBINX’s standard stock index composition. As always, we believe REITs plays an important role in diversification. This is especially important in the coming years as inflation is heating up and hard assets will be anchors for a portfolio to fight against inflation. 
  • Our portfolio has continued its consistent outperformance over other global allocation balance funds such as DGSIX for the past many years. 
  • The portfolio’s return, however, is again distracted/affected by its exposure to international stocks (developed and emerging market). The dismal returns of emerging market stock (VWO’s 3.3%) and developed market stocks (VEA’s 13.8%) are just yet another underperformance among many in the past decade. Anything but US stocks is a distraction for an asset allocation portfolio in the recent years. We’ll have more to discuss on this in a future newsletter.
  • Even though it has (dangerously) become a norm to simply compare returns without even mentioning possible large interim loss these days, as stocks have kept on going up, rarely experienced double digit loss (this is only for broad base stock indexes like S&P 500 index, many high profile individual stocks did suffer a great (more than 20% or 30%) loss in 2021), we want to emphasize that a big market correction is actually closer to us than many would imagine. Just like those in 2008 or 2000, when such a large loss occurs, it can take years to recover. So we believe that our portfolio, while keeping up with markets in good time, will outperform general balanced funds like VBINX in coming years during those stressed times. For us, a built-in risk management is not an option but a necessity.  

Looking at the stock only (i.e. risk profile being 0, target stock allocation can be 100%), our portfolio compares well against global funds but lacked behind US stocks only (VTI):

Portfolio Performance Comparison (as of 12/31/2021)
Ticker/Portfolio Name 2021 Return 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MPIQ ETF Allocation All Stocks 25.4% 24.3% 16.4% 14.2% 11.5%
VTI (Vanguard Total Stock Market ETF) 26.5% 26.0% 18.1% 16.4% 10.7%
VT (Vanguard Total World Stock ETF) 19.7% 20.9% 14.7% 12.2%  
URTH (iShares MSCI World) 22.3% 22.0% 15.3%    

The 1.1% underperformance against VTI (US stocks) could’ve been worse if it didn’t invest in REITs (VNQ) as VNQ had a much better return than VTI (see the first table in the above) last year. Unfortunately, as our portfolio is more global allocation oriented, it still lagged behind VTI last year. However, it has done way better than both VT and URTH, which are two world allocation stock index funds.

For more information on the portfolio, see Brokerage Investors page. 

MPIQ Fixed Income Portfolios

Our general ETF portfolio again has done well, outperformed all but one (LSBRX) total return bond mutual funds in 2021:

Portfolio Performance Comparison (as of 12/31/2021):
Ticker/Portfolio Name 2021 Return 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MPIQ ETF Fixed Income 2.1% 8.1% 6.1%    
Schwab Total Return Bond 3.1% 7.9% 6.2% 6.1% 7.3%
BND (Vanguard Total Bond Market ETF) -1.4% 4.9% 3.8% 2.8%  
PONAX (PIMCO Income A) 2.2% 5.4% 4.9% 6.7%  
LSBRX (Loomis Sayles Bond Retail) 2.98% 5.6% 3.6% 4.3% 4.9%
TGMNX (TCW Total Return Bond N) -1.2% 4.6% 3.5% 3.8% 5.2%
PTTAX (PIMCO Total Return A) -1.16% 5.1% 3.9% 3.3% 4.7%

The portfolio returned more than 3.5% over BND. This helped greatly to an asset allocation portfolio (like MPIQ ETF Allocation Moderate) whose fixed income portion utilizes this portfolio. 

The portfolio has been consistently doing better than all of the excellent total return bond funds for the past 5 years and counting. Its mutual fund cousin such as this one Schwab Total Return Bond (customized for Schwab accounts) has done even better, both in terms of last year and for the past 10 years and longer. For more details on the ETF and total return bond fund based portfolios, see Income Investors page. 

We attributed the portfolio’s outperformance to it’s exposure to high yield muni ETF (HYD) in 2021. For mutual fund portfolio, it invested in PIMCO Income (PONAX) bulk of time in 2021. This mutual fund based portfolio’s outperformance is from this kind of funds that have more exposure to high yield corporate bonds and some foreign bonds. 2021 proves to be yet another year that paid off if you ventured to higher risk spectrum in bonds. 

MPIQ Ultra Short Term Bond (Enhanced Cash) Portfolio

Our enhanced cash portfolio has done reasonably well last year, returning 0.1%, similar to MINT (PIMCO Enhanced Short Maturity Active ETF) but lagged behind NEAR (iShares Short Maturity Bond ETF). 

Portfolio Performance Comparison (as of 12/31/2021)
Ticker/Portfolio Name 1Yr AR 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
MPIQ Ultra ST Bond ETFs 0.1% 1.7% 3.37 1.8% 2.92
NEAR (iShares Short Maturity Bond ETF) 0.5% 1.8% 0.3 1.7% 0.3
MINT (PIMCO Enhanced Short Maturity Active ETF) 0.1% 1.7% 0.73 1.7% 0.83

5-Year return chart: 

A few comments:

  • Though our portfolio’s returns in the past 1, 3 and 5 years are about the same as these two ultra short term ETFs, one important distinction is that our portfolio has a built in risk avoidance mechanism to switch to a real cash (or Treasury money market fund) when markets are in turmoil. This has helped the portfolio in the 2020 Covid19 induced crisis. On the other hand, all of these ultra short term ETFs might have larger interim loss, disqualifying them as money market fund substitute (see our previous newsletter for more details on what’s entailed to be a money market fund). 
  • Cash is not in great demand as investors, being in TINA (There Is No Alternative) situation, pile on to stocks. However, as inflation is heating up and the Federal Reserve as well as bond investors are demanding higher interests from fixed income, we believe cash yield will reach a meaningful level in the coming years. If history is any guide, it’s not impossible to imagine that interest rates will even reach 5% or so in the coming years. So maintaining such an ‘enhanced cash’ investment can be helpful for your short term need. The trick here is to keep its value stable enough in turbulent times and then invest back to gain higher interests. 

To summarize, our portfolios delivered reasonable returns in 2021. As we are now sitting in a yet another higher level of stock prices that command historically high valuation, we want to emphasize that it’s important to

  • Remember risk: risk is actually increasing. In addition to the frothy market levels and expensiveness, we believe the following two factors rising inflation and Covid pandemic ending might result in an financial regime change (such as quantitative tightening and higher interest rate). This can drastically change both economy and financial asset prices. 
  • Maintain a balanced view: markets can be irrational longer than you would normally imagine. It’s hard to predict how markets behave and thus it’s better to properly react to market change with a tight risk management scheme. 

In the next newsletters, we will discuss in more details on important asset classes and factors such as foreign stocks, US dollars,  commodities and REITs. All of these are related to the aforementioned regime change. 

Market Overview

Stocks did recover and experienced a mini Santa Clause rally in the last few days of last year. What’s encouraging is that both NYSE stock internals and Nasdaq 100 stock internals improved: 

In general, beaten down stocks did recover in some broad fashion. 

We remain cautiously optimistic and advocate the following practice:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

Stock valuation is still extremely high by historical standard. For the moment, we believe it’s prudent to be cautious while riding on market uptrend. However how serious a correction might be, we have confidence in the US economy in the long term and thus in the stocks in aggregate. We just need to manage through interim losses carefully.  

We again would like to emphasize that 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.

We wish everyone a happy holiday season. We all deserve one after this long pandemic ordeal!

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