November 16, 2020: Higher Return Portfolios | Better Financial Future -- MyPlanIQ

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 December 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.

Higher Return Portfolios

As you might know, our service for basic subscribers is designed for simplicity and reasonable returns. For this group of users, they might not want to deal with overly complicated portfolios or those that demand more active involvement, both physically (rebalancing/trading) and mentally (too much volatility/fluctuation of a portfolio’s value). Our basic portfolios are asset allocation portfolios. For brokerage accounts, they are essentially AAC (Asset Allocation Composite) portfolios based on low cost ETFs (MPIQ ETF Allocation Moderate or customized with different risk profile like MPIQ ETF Fixed Income or others with more risk exposure). For 401k plan accounts, they are again AAC portfolios tailored to a plan’s investment options.

However, every now and then, we are often asked by our subscribers on higher return portfolios. We do provide a small subset of portfolios which are considered to be suitable for advanced (expert) subscribers. They are usually listed on Advanced Strategies. In this newsletter, we will discuss several higher return portfolios for brokerage investments.

Technology ETF to boost global tactical portfolio’s return

One way to boost returns is to include technology specific funds. With our strong technology background, we have a strong belief (and might be biased) on the technology impact to our economy and social life. In fact, as AI (Artificial Intelligence), big data, communication and genome/bio technology are advancing rapidly in recent years, many traditional industries are disrupted and upended. In the coming decades, technology driven industries are going to become a norm instead of a novel thing.

A simple way to boost returns is to add Nasdaq 100 ETF (QQQ) as a candidate fund to portfolio P Composite Momentum Scoring Global Risk Assets that’s listed on Advanced Strategies. Doing so would sometimes create a more US 100% centric exposure as this portfolio selects top two funds every month to invest. In addition to QQQ, the US candidate funds include VFINX (Vanguard 500 index fund) and VGSIX (Vanguard REITs). It has the following candidate funds:

VFINX, QQQ, VGSIX, VGTSX (Vanguard Total Intl Stock index fund), VEIEX (Vanguard Emerging Mkt Fund) and VFITX (Vanguard Intermediate Treasury Fund).

Before 12/31/2000, Fidelity Select Technology (FSPTX) was used in place of QQQ as QQQ started in 1999.

The following table compares the new portfolio with the existing one:

Portfolio Performance Comparison (as of 11/13/2020):

Ticker/Portfolio Name	Max Drawdown since 1996	1Yr AR	3Yr AR	5Yr AR	10Yr AR	15Yr AR	Since 1996 AR
P Composite Momentum Scoring Global Risk Assets With Nasdaq 100	26.9%	20.2%	12.7%	17.3%	14.1%	15.3%	17.4%
P Composite Momentum Scoring Global Risk Assets	22.7%	16.8%	13.0%	17.0%	12.3%	14.2%	15.7%

Detailed comparison link >>

So adding QQQ to the candidate fund list boosts annualized return (AR) by 1.7% since 1996. It does incur a bit more volatility (maximum drawdown 26.9% vs. 22.7%).

ARK ETFs rotation portfolio

The next portfolio represents some of the hottest technology driven funds: a momentum portfolio that’s rotated among ARK ETFs. Before we go on to present the portfolio, let’s talk about ARK ETFs.

ARK ETFs are essentially technology stock based ETFs. Their most famous ETFs are actively managed. Founder & CEO Catherine Wood has a long history in technology and so called thematic investments. She has made some big bets in her career such as early Amazon investments. ARK ETFs focus on picking up industry leaders that possess disruptive technology and franchise potential. The key to ARK ETFs’ success lies in their ability to invest in some big time business disrupters in their early days. A famous example is its bet on Tesla.

The following are the list of ARK Actively Managed Innovation ETFs

ARKK	ARK Innovation ETF
ARKQ	Autonomous Technology & Robotics ETF*
ARKW	Next Generation Internet ETF*
ARKG	Genomic Revolution ETF
ARKF	Fintech Innovation ETF

ARKQ and ARKF are two ETFs that have over $600 Million asset under management (AUM). All other ETFs’ AUM exceed $2 Billion. These ETFs are very liquid.

On the other hand, they are certainly very volatile. Investing in these ETFs is not for faint heart. There will be hits and (many) misses in these funds. What they hope is that a few can turn up as huge winners to compensate for losses in other stocks. It’s essentially a venture capital investment fund in public technology companies.

The following portfolio uses our composite momentum strategy (which our AAC strategy is based on). Its candidate funds are the five ARK ETFs mentioned above and IEI (iShares intermediate Treasury ETF). It selects one ARK ETF to invest every month.

Portfolio Performance Comparison (as of 11/13/2020):

Ticker/Portfolio Name	YTD Return**	1Yr AR	3Yr AR	Since 1/1/2016 AR	Max Drawdown
P Composite Momentum Scoring ARK ETFs	77.8%	86.3%	31.1%	38.1%	31.2%
QQQ (PowerShares QQQ ETF)	37.4%	45.2%	24.6%	23.3%	28.6%

Compared with the flagship ARK ETF ARKK:

So the portfolio has had a comparable return as ARKK but has lower maximum drawdown.

In our opinion, experienced investors can consider having some exposure to technology related investments, if desired. As our future is more and more tied to technology innovation, some emphasis on technology in portfolio construction might be warranted. However, investors should be fully aware that these stocks are highly volatile and can overshoot and undershoot in a wild fashion. It’s thus important to utilize risk managed strategies such as our AAC or TAA strategies to reduce risk in a market downturn. It’s also critical to control one’s overall exposure to these portfolios.

To summarize, there are several ways to find higher return portfolios. We will present other alternatives in our future newsletters.

Market overview

The most exciting news of this year belong to the vaccine clinical trial results from Pfizer/Biontech and Moderna. For us, we now have a high confidence that this pandemic will be finally contained and eliminated. What’s significant is that both vaccines confirm with each other: they both had very high effective rates: over 90%. In general, it becomes much more certain if a drug/experiment is independently confirmed with multiple entities. In this case, the two companies are independent (actually, they are competitors).

However, in the current upside-down markets, investors should look out ahead as good news might soon become bad news because strong fiscal and monetary policies might be withheld or even reduced, inflation might start to rise etc. in the presence of big improvements on the pandemic front. These, coupled with the extreme high valuation of stocks, can spell trouble for stocks and/or bonds.

Investors shouldn’t be complacent on the markets. As always, we should follow our strategies to navigate through this period:

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 now reached another high. 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.

There will be no newsletter next week. We wish everyone a good Thanksgiving holiday in advance!

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