Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on next Monday, October 20, 2014. You can also find the re-balance calendar for 2013 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.

Embrace volatility

As stocks have rapidly retreated, many of our readers have felt the pain. Some of them chose to stop following. However, as what we addressed several times in our newsletters, this correction/retreat is not a surprise at all. In fact, it should have been anticipated. Furthermore, the behavior of the portfolios you are following should be expected. There will be many bumps along the road, but the key here is to ask whether there is a mistake made in your investments, which is different from the temporary loss just incurred. To understand the difference, please refer to the following newsletter: 

We also highly recommend the following two newsletters to anyone who hasn’t read it: 

In the following, let’s review the markets first.

Broad base stock retreat or not?

The following table, taken from 360° Market Overview, shows how major assets have behaved: 


Description Symbol 1 Week 4 Weeks 13 Weeks 52 Weeks Trend Score
Municipal Bonds MUB 0.88% 1.64% 3.14% 10.59% 4.09%
Intermediate Treasuries IEF 1.69% 3.07% 3.05% 6.84% 3.83%
US Equity REITs VNQ 1.56% 1.01% -2.19% 12.86% 3.79%
Emerging Mkt Bonds PCY 0.45% 0.24% -0.51% 8.72% 2.6%
Total US Bonds BND 0.74% 1.69% 1.72% 5.62% 2.53%
Mortgage Back Bonds MBB 0.54% 1.38% 1.41% 5.04% 2.23%
US Credit Bonds CIU 0.53% 1.04% 0.82% 4.79% 1.79%
Treasury Bills SHV 0.02% 0.01% 0.01% 0.06% 0.02%
US Stocks VTI -4.74% -6.1% -5.57% 9.85% -0.88%
International Treasury Bonds BWX 0.78% -0.31% -4.18% 0.57% -1.17%
US High Yield Bonds JNK -2.26% -2.47% -3.63% 3.9% -1.25%
Emerging Market Stks VWO -1.92% -5.02% -5.56% 0.44% -1.92%
Gold GLD 2.15% -0.1% -5.73% -3.51% -2.9%
International REITs RWX -1.59% -6.06% -8.79% -1.77% -4.02%
International Developed Stks VEA -4.3% -8.48% -11.16% -3.72% -6.96%
Frontier Market Stks FRN -3.93% -8.93% -11.16% -6.07% -7.37%
Commodities DBC -2.29% -5.32% -12.61% -13.58% -9.72%
Performance of major assets in the last 3 months

We make the following observations:

  • The correction is pretty much broad base, all of the major stock indexes have had substantial correction. 
  • This is further corroborated by the strength of Treasury notes and bonds, especially long term 10 plus year Treasury bonds. It does signal a flight to safety.  
  • However, there are still several pockets of strength that show markets are not in a panic mode:
    • REITs has recovered for the past 1 and 4 weeks, even though it has lost some for the last 3 months (13 weeks). 
    • Utilities stocks have done well (you can find the sector performance info in the sector table on 360° Market Overview). In fact, the utility sector is the only sector that has positive return in 1, 4 and 13 weeks. Every other sector has had negative return for those periods. 
    • Unlike high yield bonds, emerging market bonds have withstood the correction relatively well so far. 

Regarding the out performance of REITs, we would like to point out investing in this sector in the current ultra low interest rate environment has a big advantage: many REIT firms have taken advantage of the ultra low rate condition to refinance or finance for a long period (such as 15 years loan or bonds) of time. In the rental business, this is one of the best deals out there: if interest rates and inflation indeed climb later, these companies can enjoy higher rent while still paying the ultra low interest. No wonder Warren Buffett said “getting a mortgage to buy a home now is a no brainer” (even though he referred to non-commercial housing, the principle is the same). We believe investors should pay more attention to this sector in the coming decade. 

Shallow or deep correction?

At this moment, there is no strong evidence to suggest an economic collapse in the U.S., Europe (on the verge of a recession), Japan or emerging markets (China, India and Brazil). For stock markets, we see two possible outcomes from here: 

  • A shallow correction. This can be due to a minor  economic slowdown as what we experience right now. Furthermore, a central bank ‘put’ or strong monetary stimulus might be again initiated in several major economic regions. Specifically, if the U.S. central bank again adopts a quantitative easing (or just simply slow down the process further) or the Chinese government unleashes another round of stimulus, markets can again be stimulated and the correction can be short lived. 
  • A deep correction. If current economic slowdown is further exacerbated by other events such as Ebola caused panic and/or other geopolitical or economic events, markets can go a free fall. This is very likely, to quote John Hussman’s Present conditions create an urgency to examine all risk exposures. Once overvalued, overbought, overbullish extremes are joined by deterioration in market internals and trend-uniformity, one finds a narrow set comprising less than 5% of history that contains little but abrupt air-pockets, free-falls, and crashes. See Hussman’s weekly commentary

Embrace the correction

Because of the uncertain market condition, we believe both Strategic Asset Allocation (SAA) and Tactical Asset Allocation(TAA) have their merits. In fact, we believe one should adopt a core satellite approach to mitigate both weakness. 

At this moment, for SAA investors, it is imperative to review your risk level. It is one thing to simply hand wave to state that you are comfortable with the risk, it is the other when you actually encounter a large loss and can no longer bear with it. You need to be prepared for the deep correction scenario which can result in a loss that exceeds 20% (20-40%). We believe now is probably the very last window to adjust your risk level before a more vicious correction hits (if there is one). In a word, SAA investors should embrace a big loss, maybe a substantial one and be prepared for sitting out of it. 

For TAA investors, you should be prepared for some major adjustments. Furthermore, be ready to embrace possible market whipsaws (as what we experienced in 2011). If for whatever reasons (such as central banks again intervene the markets), this correction turns out to be deep enough to cause TAA to have major risk level reduction while in the meantime shallow enough to turn around, rising or rebounding rapidly again, TAA portfolios can suffer from small loss(es), that again can make these portfolios under perform against their SAA counter parts. 

As much as we try to avoid risk right now, as markets continue to decline, we are feeling more and more comfortable with them. In fact, the possible undershoot (if there will be indeed one this time) will create many exciting buying opportunities. This is another perspective an investor should take. 

In any case, embrace the upcoming events. Also, remember staying the course that has been well planned and researched, being strategic or tactical, will pay off in a long term. 

Portfolio Review

The following table compares our simple TAA portfolio with many tactical and global allocation funds.

Portfolio Performance Comparison (as of 10/13/2014): 

Ticker/Portfolio Name 1 Week
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Moderate -1.6% 1.5% 5.7% 7.5% 7.0% 10.4% 0.92
GTAA (Cambria Global Tactical ETF) -1.2% 0.1% 0.9% 2.5%      
DWTFX (Arrow DWA Tactical A) -4.2% -3.7% 3.9% 8.6% 7.0%    
GDAFX (Goldman Sachs Dynamic Allocation A) -1.0% 1.0% 6.1% 5.1%      
MALOX (BlackRock Global Allocation Instl) -2.9% -1.0% 3.4% 8.2% 6.4% 8.0% 0.65
VAISX (Virtus Allocator Premium AlphaSector I) -2.1% -0.8% 3.8% 7.6%      
PASDX (PIMCO All Asset D) -0.2% 3.5% 3.7% 7.1% 7.0% 5.8% 0.58
BRAVX (Braver Tactical Opportunity N) -1.0% -3.5% -0.5%        
LCORX (Leuthold Core Investment Retail) -0.2% 3.3% 11.0% 10.8% 6.3% 7.4% 0.46

See detailed year by year comparison >>


If markets continue to stumble, we will soon see more performance divergence. 

Market Overview

As stated above, stock markets are clearly in a downtrend while bond markets are in favor. However, the best way to cope with a rapid market development is to still maintain a well defined discipline and pace, consistently execute the plan. For now, we call for patience and consistency. 

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

We would like to remind our readers that markets are more precarious now than other times in the last 5 years. It is a good time and imperative to adjust to a risk level you are comfortable with right now.  However, recognizing our deficiency to predict the markets, we will stay on course. 

We again copy our position statements (from previous newsletters): 

Our position has not changed: We still maintain our cautious attitude to the recent stock market strength. Again, we have not seen any meaningful or substantial structural change in the U.S., European and emerging market economies. However, we will let markets sort this out and will try to take advantage over its irrational behavior if it is possible. 

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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