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 June 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.

Latest Portfolio And Trend Review

By now, investors have been mostly scared and likely are in a very bearish mood. In this newsletter, we review our portfolios and also comment on asset and economy trends. 

Mixed portfolio performance

Our latest portfolio performance can be summarized as: on equity side, we are in par with current stock major indexes such as S&P 500. On bond/fixed income side, we significantly outperformed broad bond index funds such as BND and all of the ‘excellent’ total return bond funds including PIMCO total return, PIMCO Income and DoubleLine total return fund, continuing our long streak of outperformance. 

Allocation portfolio Performance Comparison (as of 5/23/2022)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MPIQ ETF Allocation Moderate -11.7% -5.0% 9.6% 8.3% 8.3% 7.9%
VBINX (Vanguard Balanced Index Inv) -13.7% -5.4% 8.9% 8.3% 9.1% 6.9%
DGSIX (DFA Global Allocation 60/40 I) -10.4% -6.5% 7.6% 6.3% 7.5% 5.1%

The outperformance over VBINX (Vanguard Balanced Index Inv) is due to our outsized outperformance in fixed income portion that had timely shifted to ultra short term bonds earlier this year. If the current market weakness persists, we expect the portfolios will significantly outperform this standard 60/40 stock/bond portfolio with lower volatility. 

Year to date, the portfolio underperformed DGSIX, a global 60/40 index fund, a rare event in recent years. This is because international stocks have done much better than US stocks recently (see the major asset table below). It’s not surprising at all as international stocks have lagged behind US stocks for the most of past 15 years and now finally caught up somewhat. 

For more details on this portfolio, see Brokerage Investors page. 

Fixed income portfolio Performance Comparison (as of 5/23/2022)

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR
MPIQ ETF Fixed Income -5.2% -3.7% 4.8% 4.7%    
Schwab Total Return Bond -2.0% -2.1% 6.2% 5.1% 5.8% 6.9%
BND (Vanguard Total Bond Market ETF) -9.0% -7.8% 0.4% 1.5% 1.7% 3.3%
PTTAX (PIMCO Total Return A) -9.7% -8.2% 0.5% 1.4% 1.9% 4.0%
PONAX (PIMCO Income A) -6.4% -4.0% 1.9% 2.8% 5.3% 6.6%
DLTNX (DoubleLine Total Return Bond N) -6.6% -5.1% 0.3% 1.2% 2.3%  
TGMNX (TCW Total Return Bond N) -9.4% -8.4% 0.2% 1.0% 2.3% 4.4%

It’s worth mentioning that our total return bond mutual fund based portfolios such as Schwab Total Return Bond has been better than our ETF portfolio as this portfolio got hit less badly earlier this year because of its only exposure to total return bond funds that can’t have all of their allocation to high yield or junk bonds, unlike our ETF portfolio that was in a high yield muni bond fund earlier. This again demonstrates steadiness by limiting candidate funds to total return bond funds. Our mutual fund based fixed income portfolios have outperformed BND (bond index fund) and all of its candidate funds by some large margins since their debut in 2011. 

We want to emphasize that if we are indeed entering a secular rising rate cycle now or later, the fixed income portfolios will become even more important and they can derive much higher returns as when the bond market exits a bond bear market (such as the current one), these portfolios can derive much higher returns (from beaten down bond prices) while preserving much of capital during the bear market. We believe fixed income investors following our portfolios could start to get more excited as time goes. 

For more details on fixed income portfolios, see Fixed Income Investors page. Scroll down for total return mutual fund portfolios. 

Some of our advanced portfolios on Advanced Strategies such as P Composite Momentum Scoring Fidelity Select Funds and P Composite Momentum Scoring Fidelity Select Funds have continued their significant outperformance over broad stock index funds this year. Specifically, the Fidelity select fund rotation portfolio has been able to ride on energy related select funds this year, delivering positive return so far. Interested readers can visit the page and look at these funds’ transaction history for more details. 

We would also like to use this opportunity to draw our readers attention to P GS Global Tactical Include Emerging Market Diversified Bonds, a portfolio that uses our tactical asset allocation (TAA) strategy. This portfolio has underperformed for quite some time and now started to shine as it gradually moved to ‘safer’ assets such as TIPS (Inflation Protected Bonds) or gold funds this year. As we have said many times, we have confidence in this strategy’s long term performance. In fact, since 1997, this portfolio has gained more than double than S&P 500 (VFINX) with 1/3 of maximum drawdown: 

We expect that when international stocks outperform US stocks again, this portfolio will regain its previous outperformance, even compared with US stocks such as S&P 500. 

Asset and economy trends

Major asset returns and trend scores (as of 5/23/2022):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR Trend Score
VTI (Vanguard Total Stock Market ETF) -17.5% -7.3% 13.0% 11.9% -9.76%
VNQ (Vanguard REIT ETF) -16.4% 0.1% 6.8% 7.1% -6.6%
VEA (Vanguard FTSE Developed Markets ETF) -11.9% -9.6% 7.5% 5.0% -5.5%
VWO (Vanguard FTSE Emerging Markets ETF) -13.9% -17.0% 5.0% 3.6% -9.9%
BND (Vanguard Total Bond Market ETF) -9.0% -7.8% 0.4% 1.5% -4.1%
DBC (PowerShares DB Commodity Tracking ETF) 35.6% 53.1% 22.9% 13.9% 22.3%

As stated before, YTD international and emerging market stocks have lost much less than US stocks. On the other hand, commodity prices have risen dramatically, signaling serious inflation scare. 

This also signals that recent asset price loss is still in orderly fashion. We are still not yet in a complete risk off mode. In fact, energy, utility and health care sectors still possess positive trend scores: 

US Sectors Trend (as of 05/20/2022)

Description Symbol 1 Week 4 Weeks 13 Weeks 52 Weeks Trend Score
Energy XLE 1.23% 7.31% 20.16% 66.54% 29.74%
Utilities XLU 0.43% -3.38% 8.34% 12.69% 5.27%
Healthcare XLV 0.92% -2.91% 1.78% 6.33% 0.9%
Materials XLB -0.08% -3.87% -1.72% -2.58% -2.79%
Consumer Staples XLP -8.12% -10.78% -7.01% 2.83% -4.72%
Industries XLI -3.61% -8.83% -8.75% -11.39% -9.41%
Technology XLK -3.53% -8.4% -14.03% -2.88% -10.41%
Financial XLF -1.82% -8.99% -16.06% -10.44% -10.43%
Telecom IYZ -1.59% -8.02% -12.49% -18.17% -11.3%
Consumer Discretionary XLY -7.82% -20.14% -21.99% -16.07% -19.88%

Again, we want to emphasize that so far, market weakness mostly centers on inflation, interest rates and only recently, it started to spread to some defensive industries such as consumer staples.

Economy slowdown

Here are our latest take on economy: 

  • Retail sales and personal real income have been down. Fiscal stimulus in 2021 (and before) for the pandemic has phased out. Consumers are now facing an income cliff. 
  • Weakness now starts to show up in inventory build in large retailers like Walmart, Home Depot and Target. Cathie Wood stated ‘Walmart’s inventories increased 33% in nominal terms on a year over year basis, translating into 20-25% in real or unit terms, as Target’s inventories increased by 42% and 30-35%, respectively. In my 45 years in this business, I have never seen such inventory excesses.’ So now the inflation issue will start to become a growth issue (company earnings and revenue growth (thus GDP) slowdown) and it might eventually lead to deflation. Or inflation will slow down significantly. 
  • Consumer confidence is now the lowest since 2011, based on University of Michigan’s survey. It’s hard to see consumers will be able to keep up with their spending when they are this pessimistic, especially in a rising rae and rising price environment. 

  • On the other hand, employment is still strong (employment is a lagging indicator). But we are hearing more and more news on company slowing down hiring or stopping hiring. If the inflation (rising prices, rising wages and other rising cost) and income decline persist, we expect unemployment rate will rise again. 

Put simply the ending of fiscal stimulus, interest rate hikes and rising cost will gradually affect various economy sectors and eventually show up in employment. If the current trends continue, it’s very likely that the US will be in a recession. 

Market Overview

Though the above analysis seem to be gloomy, we again want to emphasize that markets are forward looking (or forward guessing). To be rigorous, there is always a chance that markets can revert themselves once investors (and the central banks) start to accept a deflationary or significant economy slowdown narrative. All we can do is to stick to our strategies and be prepared for frustration. We believe this might be the best psychological attitude one can adopt at this moment. 

We again call for patience and ask investors to stay the course: 

  • 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 preferably much longer given the current high valuation. 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 and preferably many more 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 has dropped. However, it is still high by historical standard. For the moment, we believe it’s prudent to be extra cautious. 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.

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