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, January 22, 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.

Strategic Portfolios Review

It’s a good time to review what has happened in 2017. Several things stood out last year: stock indexes were unusually strong and calm, seldom had large correction. Everything seemed to go up that year in a near perfect Goldilocks environment (low inflation and reasonable growth).

Nevertheless, let’s first look at the returns of major assets.

Returns of major assets

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%

Several notable observations:

  • Stocks in other parts of the globe did better than the US ones. Emerging market stocks had the best returns among all major assets.
  • Real Estate Investment Trusts (REITs) disappointed. It returned 7% last year. The tax reform bill passed last year clearly benefit to REITs. However, REIT investors were not as excited on the sector as in other sectors. It seemed that they are more concerned about the rising interest rates.
  • Commodities did reasonably well in the first half of the year but didn’t catch up in the second half. Gold, however, did better than broad base commodities.
  • Another disappointing asset is high yield bonds: JNK had a somewhat uncharacteristic low return, compared with the much higher general stock market returns.
  • Inflation or inflation expectation was muted last year:  TIPs did even worse than general bonds.

The low returns in REITs and commodities offset higher returns from foreign stocks in our global balance portfolios.

Strategic Asset Allocation (SAA) Portfolios Returns

The following table shows how our typical brokerage specific SAA mutual fund portfolios performed last year. You can find performance data of other ETF based SAA portfolios on Brokerage Investors page.

Portfolio Performance Comparison (as of 1/5/2018):

Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 15 Yr AR
Schwab Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 12.4% 7.2% 7.5% 6.9% 9.5%
Fidelity Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 12.6% 9.1% 8.5% 7.4% 9.3%
Vanguard Select Mutual Funds Strategic Asset Allocation – Optimal Moderate 11.7% 6.1% 6.1% 5.3% 8%
Schwab Income Mutual Fund Select List Strategic Asset Allocation – Optimal Moderate 12.0% 6.3% 6.8% 6.5% 8.4%
Etrade Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 12.4% 8.0% 8.0% 7.4% 9.7%
Merrill Edge Core Mutual Funds Strategic Asset Allocation – Optimal Moderate 12.8% 7.9% 7.5% 6.8% 9.1%
VBINX (Vanguard Balanced Index Inv) 14.0% 8.2% 9.9% 7.4% 7.9%

These global oriented portfolios did well, though mostly are slightly lagging behind VBINX (Vanguard Balanced Index Inv), a 60% US stocks and 40% US bonds index fund.

As the strength of US stocks continued, the 10 year annualized returns of these global portfolios are now similar or slightly worse than VBINX’s. However, if we extend our view to 15 years’ (since 1/5/2003), we can see that these portfolios are still showing better returns than the US centric VBINX, indicating a long term diversification benefit by exposing to other asset classes.

Asset outlook

Though we hate to show off our ‘lousy’ crystal ball to predict any possible outcome, we feel it’s warranted to make our comments on the general state of the assets we are investing in.

  • Stocks: as stated previously, we believe US stocks are at a very overvalued level. See for example, December 18, 2017: Record Highs And Risk.  Compared with international developed country stocks (European stocks in particular) and emerging market stocks, US stocks are also more expensive. However, the expensiveness of US stocks is somewhat mitigated by the recently passed tax bill, which clearly has some short term benefits for stock shareholders.
  • Bonds: as central banks around the world are exiting from loose monetary policies and interest rates are rising, bonds will be under some pressure. However, as we repeatedly pointed out several times, even in a rising rate environment, it’s still possible to derive reasonable returns in fixed income (bonds). Investors just need to be more nimble and adopt a more active fixed income strategy such as the ones adopted in our total return bond fund portfolios (see, for example, August 28, 2017: Total Return Bond Fund Portfolios: Where Do They Fit?).
  • Commodities and gold: assuming the bull market can continue its last leg for some time, commodities will do reasonably well as they usually do in a late stage bull market cycle.

Key major risk factors:

  • High valuation and very overbought stock and bond markets
  • Rising interest rate
  • Full or peak employment will start to put wage pressure to corporations, which in turn will stoke inflation (fear). This will have adverse impact on company earnings.
  • Geopolitical risks in middle East and Asia. 

In general, we again are cautious on the environment. It’s thus important to revisit one’s overall risk exposure and keep it at a comfortable level even in the face of 50% or so stock correction. However, once that’s settled, investors in strategic portfolios should be prepared to hold on the assets in the portfolio for a long time to come to reap benefits of long term reasonable returns that are inherent in stock and bond assets. Again, we refer our readers to various newsletters on this subject (such as October 31, 2016: Economy Power And Long Term Stock Returns).

Market Overview

The incredible stock market clam continued in the new year: stocks continued to break record highs in the first week of 2018. Here are some of interesting (or surprising) facts on US stocks in 2017:

  • Courtesy of New York Times, this bull market has been one of the longest, only trailing the one from 1987 to 2000.

  • There wasn’t a single day S&P 500 index dropped more than 2% in 2017. That’s unseen since mid-1960s. Similarly, we have shown the CBOE implied volatility index VIX has been the lowest since 1990 when it had data.

Even though the tax bill has been signed into law, investors are still looking forward to it’s potential benefits to stock shareholders and economy. However, the unusual clam of the markets and their overvaluation are something investors shouldn’t be too complacent about. As always, stay the course.

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. 

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