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, June 26, 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.

Summer Seasonality And Portfolio Management

Now that we are approaching to June, summer will soon be upon us. MyPlanIQ has maintained a summer seasonality portfolio (see STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash listed on Advanced Strategies page). This portfolio is based on an adage ‘sell in May and go away’. It has consistently demonstrated this so called seasonality (sometimes also referred as The Halloween Indicator ). In this newsletter, we revisit this stock market anomaly and discuss its use in portfolio management. 

The consistency of summer seasonality

To recap, the strategy used in STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash uses the following rules: 

  • Exit from S&P 500 index fund (Vanguard 500 index fund VFINX) and go to cash or to enhance returns, go to a total return bond fund portfolio such as Schwab Total Return Bond: after April 20 arrives, it does not exit the stock market until MACD triggers its next sell signal. See  MACD Strategy for its explanation. 
  • Entry to S&P 500 index fund: after October 16 arrives, it does not enter the stock market until MACD triggers its next buy signal. 

We have discussed the returns of the two portfolios (one uses cash and the other uses a total return bond fund portfolio in May 9, 2016: Boost Your Dull Summer Investments. Let’s look at its latest performance: 

Portfolio Performance Comparison (as of 5/19/2017)
Ticker/Portfolio Name 1 Week
1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe 10Yr AR 10Yr Sharpe
STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash -0.3% 7.1% 13.9% 2.3 8.3% 0.86 11.8% 1.23 9.7% 0.7
STS Seasonal Timing Using VFINX Bond VBMFX -0.3% 7.1% 11.2% 1.91 8.4% 0.88 10.0% 1.05 8.9% 0.65
STS Seasonal Timing Using VFINX -0.3% 7.1% 11.2% 2.13 8.1% 0.86 9.0% 0.96 6.6% 0.48
VFINX (Vanguard 500 Index Investor) -0.3% 7.2% 19.1% 1.93 10.3% 0.78 15.2% 1.2 6.7% 0.31

We can see that even though the portfolios have lagged behind in the past 5 years, it has done much better for the past 10 years. In fact, since 2001, it has outperformed S&P 500 (VFINX) by a big margin (annualized return 9.3% vs. 5.8%). Furthermore, it has done so with only 2/3 of S&P 500’s maximum drawdown. 

Looking more closely, we find that it did somewhat sidestep the last two bear markets. The portfolio manage to avoid the big Lehman Brothers’ debacle in September 2008, only lost -9.4% in that year, compared with VFINX’s -37%. In the tech bubble induced bear market from 2001 to 2002, the portfolio return -1.4% vs. -22.2% in 2002 and 8.1% vs. -12% in 2001. 

For much longer history, one can further study STS Seasonal Timing Using VFINX, a portfolio that uses cash. It shows the summer seasonality is indeed fairly consistent. Though it does not necessarily outperform VFINX every year (just look at the past 7 years), in a long enough time, such a portfolio shows its edge. 

Portfolio management

There are several ways to utilize this long standing market anomaly in portfolio management. Let’s look at them in more details:

  • Investors can allocate some part of overall investments to this portfolio as its tactical portion. The challenge to do so is that it’s hard for investors to persistently stick to such a cash or bond only portfolio for almost half a year every year, just like any active or tactical portfolio. Remember, such a portfolio does not outperform a market index like S&P 500 every year and it only shows its usefulness in a long enough period. 
  • Investors can also use this seasonality to properly guide rebalance for a strategic allocation portfolio. Here, one can perform rebalance at the entry and exit times instead of using a regular fixed period schedule. 
  • For a 401k investor, especially for those who have regular (usually monthly) salary deduction to a 401k account, one can invest the new deposits to the bond/cash portfolio during a summer and then invests this portion in the fall entry time. If this is done for a long period, we believe it will increase a portfolio return in some meaningful way. 
  • Similarly, one can invest any new money based on the seasonality. 

Current situation

As summer is upon us, we are also seeing the recent market upheaval, mostly because of the controversy surrounding the new administration. Furthermore, as we have pointed out repetitively, market valuation is extremely high by any historically proven metrics including Shiller CAPE 10 and Buffett Market Cap over GNP ratio (see Market Indicators for more details). Short term, stocks have also been persistently elevated with little volatility (the low volatility situation only changed very recently). All of these are calling for caution. It does seem that this time, markets are strongly hinting one should not ignore the seasonality. 

In a word, we believe that experienced investors should consider the summer seasonality as one of possible strategies to help mitigate risk and increase returns. 

Market Overview

Markets were showing anxiety and behaved more volatile last week. Investors have begun to doubt whether many economic growth or market friendly policies touted by the new administration can materialize. This uncertainty, coupled with the high market valuation, makes a violent and a sudden market crash or correction much more likely. As always, we call for staying the course and properly adjusting risk allocation. 

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

Now that the Trump administration is officially sworn in, the new president is facing the reality to deliver his many promises to make substantial changes. 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. Whether the new president can truly achieve this goal is still yet to be seen. One thing is certain: we will see more market volatilities. 

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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