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 Wednesday July 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

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.

Minimum Equity Portfolios

Yesterday we had a monthly rebalance. We have made some change on our (Asset Allocation Composite (AAC)  based portfolios. In this newsletter, we will explain the change and then discuss the current market conditions. 

Core satellite minimum equity holding portfolios

We are constantly refining our services to a more simplified model for average investors. We offer MPIQ Core ETFs Asset Allocation Composite Moderate or mutual fund one for taxable brokerage accounts and also customizable AAC portfolios for a retirement plan (such as 401k or 457) (see for example, retirement plan page). Before we go into any further, we want to emphasize that the change is only applicable to the AAC based portfolios related to a plan. The composite momentum based portfolios on Advanced Strategies are not changed. We want expert users to still have options to assemble from several advanced portfolios. 

For users who are following these AAC portfolios, they might have noticed that these portfolios started to take some exposure to stocks. However, they mos likely didn’t go to the full target stock exposure level. 

This is because we now incorporate the core satellite portfolio concept to our AAC portfolios. For core satellite portfolios, please refer to our latest newsletter May 18, 2020: Core Satellite Portfolios In The Current Pandemic published two weeks ago. 

AAC portfolios now always have  some minimum up to 20% equity (stock) holdings. The exposure is progressively changed as risk tolerance level increases. For a risk profile 90 portfolio (i.e. at most 10% in stocks), it now holds at least 5% stocks, for a risk profile 70 portfolio, it now holds at least 15% stocks. For portfolios with risk profile 60 or lower, its minimum stock holdings are 20%. In an unusual cheap market condition, this minimum stock exposure can go up to 25% to 30% at most. 

What the above means is for an AAC portfolio with ultra conservative risk profile such as 90%, it always holds 5% or 10% stocks instead of either 0% or 10% stock exposure. 

As discussed in the previous newsletters, the rationale to always have some stock exposure is to mitigate market whipsaw without incurring meaningfully higher risk.

We view this is especially pertinent to the current market condition and thus decide to release this change in the latest rebalance. 

Lopsided stock markets

Let’s take a look at the following table to understand the current condition of stock markets:

Asset Trend Comments
S&P 500 top 5 stocks: Microsoft, Apple, Amazon, Google, Facebook Close to all time highs These 5 stocks take up more than 20% of S&P 500 index
US Largecap stocks Neutral and up Just above 200 day moving average. 
US High Yield Bonds Neutral and up Just above 200 day moving average
Utility stocks Downtrend Below 200 day moving average
US Midcap Stocks Neutral Below 200 day moving average
US Smallcap Stocks Downtrend Below 200 day moving average
US Equity REITs Downtrend Below 200 day moving average
Internaltional Developed Stocks Downtrend Below 200 day moving average
Emerging Market Stocks Downtrend Below 200 day moving average

If we view this as a pyramid, we can see that on the basis are most of global stocks that have been weak for many years (not just in the current pandemic crisis). We then narrow to US stocks. Among them, most small and mid cap stocks are still in downtrend. NYSE composite, that is more representative to stocks of all size, is still way under its 200 day moving average:

Even among stock segments, the important bellwether utility stock sector is still in a downtrend, in addition to REITs. 

Only when we further go up to this pyramid to the top, will we find those few mega cap stocks that have been doing very well. These few stocks are really the force behind the current strength of popular stock index such as S&P 500 and Dow Jones Industrial average. 

The above market indicators are all pointing to a mixed picture. Couple with extremly high stock valuations and the already extended markets, it doesn’t seem that one will miss a powerful market rally if not hurry for now. This is why the recent AAC portfolio rebalances didn’t fully get back to stock target allocations even though popular indexes like S&P 500 are now in an up trend. 

In general, we believe our AAC strategy makes a reasonable decision in terms of risk and reward consideration. Waiting for a month or two to get more confirmation is worth it, given the ample market uncertainties/potential risk right now. Historically, for example, the AAC strategy waited until August 3, 2009 to get into stocks although S&P 500 had risen above its 200 day average by May 29, 2009 : 

In the coming months, if it does turn out that we are in yet another big bull market cycle, our strategy will not need to wait for too long to get into the market as it’s already close to its tragger point. So before the next peak, it can still capture some meaningful gains albeit it’s a few percents lower than an index like S&P 500. On the other hand, if it turns out there will be another major weakness very soon, our strategy will avoid the substantial loss and thus, eventually will come out with less risk and possibly higher returns. The tradeoff seems to be worth it. 

Market overview

The current pandemic situation adds another uncertainty to the above situation. In fact, at the moment, we are seeing three major uncertain factors present: First, the second wave of Covid19 infections might occur and that can create yet another dent to an already fragile economy. Second, the US-China frictions (Hong Kong, Coivd19 and trade war) might escalate into something way more serious, greatly damaging economy along the way. Third, the recent racial tension in the US might become out of control and it can not only affect the pandemic containment and treatment, but also slow down business reopening, among other economic activities. Simply put, even though more and more businesses are reopenning right now, we are still not out of wood. The current fast and furious stock rising in the U.S. is way ahead of the reality, in our opinion.  

Regardless, the best defense is for us to stay the course. In times like this,  we again emphasize the following: 

  • 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.

For more detailed current market trends, please refer to 360° Market Overview.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far. 

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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