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, November 24, 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.

Investment Loss, Mistakes and Cycles

As stock markets are again recovering from its recent low, media reports are again full of advice and reports that advocate both tactical and buy and hold strategies. Many, taken from the writers’ angles, have valid points. However, many also make some incorrect claims, some of them are even outrageously false. 

We believe it is the time again to reiterate some of key points we have written several times. These should keep us under a balanced perspective. 

Investment loss vs. mistakes

As our Tactical Asset Allocation(TAA) strategy made a recent rebalance in one way while our Strategic Asset Allocation (SAA) strategy kept its allocation in another way, it is bound to see these two strategies will produce different outcomes in the near term. Some people may find it frustrating as they are used to right or wrong in a binary black and white fashion. So let’s say if markets turn around and collapse, they will say SAA is incorrect while on the other hand, if markets continue its ascend from here on, they would claim TAA makes a mistake here. Regardless of the semantics, the key here is to understand the difference between investment loss and investment mistakes. In 

we quoted Warren Buffett’s mentor Ben Graham’s contract bridge story to illustrate the following

In contract bridge card games, based on the distribution of the 52 cards, the bidding process (assuming players are rational to convey their holdings to their partners) and the cards played so far, one can infer probability of remaining cards in various hands, sometimes fairly accurately. Thus, rules are formulated for higher odds of winning. 

However, these are still probabilities and in a particular play of a game, you follow the rule and could still lose.  So in this case, you actually play it right because you follow the rules with higher winning odds. It is only when many many games are played, correctly following these rules will eventually show the benefits. 

For many weaker or novice players, they often attribute a winning that results from a mistake ofnot following the rules as their abilities and blame the rules when they lose a game because of following the rules precisely. 

So an investment loss is not necessarily a mistake, in fact, that particular loss might be well expected in a well defined and sound strategy. On the other hand, an investment gain might not be the result of a good play but purely from  luck. 

For those who understand the above, the next question is certainly more crucial: how about the strategy you use? Is that sound? Does it provide above average positive returns in a long run? How long is long?

We answered some of these questions in the above newsletter by stating: 

On the other hand, the other hardest problem is whether the strategy is well defined and has the average outcome you would expect, in the future. Unfortunately, nobody can predict the future. That is why in addition to the historical performance and back testing, one needs to understand the intuitions behind the strategy. There should be some very easy but true valid arguments for the strategy, regardless of what economic and market conditions it is in.

Or refer to this newsletter March 11, 2013: How To Evaluate Investing Strategies for more intuitions behind the strategies we are using. 

Market cycles

For “how long is a long term” type of questions, our simple answer is that to evaluate an investment strategy, you should at least look at it for a full market cycle which normally consists of a bear and a bull market. For example, if we start our market cycle as the bear market low in March 2009, we will need to get to next bear market low to have a complete market cycle. Or one can go from previous bull market peak (about 10/09/2007) to the peak in the current bull market. For example, assuming the last S&P 500 high on 9/18/2014 was the peak of the current bull market, we would say there is a full market cycle from 10/09/2007 to 9/18/2014. Now we can evaluate our strategy performance. 

In the above case, just for fun and for reference, we use MyPlanIQ’s tool to calculate the performance for both Vanguard 500 (VFINX, a proxy to S&P 500 total return) and our Six Core Asset ETFs Tactical Asset Allocation Most Aggressive, we have the following

So, the TAA portfolio beats the S&P 500 by a big margin. Of course, the big drop in the last bear market helps in this case. On the other hand, just keep in mind that maybe the current bull market peak has not been made yet. So the above comparison is still premature. 

For market cycles and long term investing, we recommend: 

Beware of what was claimed

A user referred to us an article published by Mark Hulbert on In the article, it stated: 

While market-timing systems based on the 200-day moving average had impressive records in the earlier part of the last century, they have become markedly less successful in recent decades — to the point that some are openly speculating that they no longer work.

In fact, since 1990 the stock market has actually performed better than average following “sell” signals from the 200-day moving average.

What Hulbert did was to study the average returns of various periods (especially four and 13-week) after a ‘sell’ signal is issued of the markets vs. the average returns of other days. 

On the other hand, MyPlanIQ has monitored a portfolio P SMA 200d VFINX Monthly that uses 200 days simple moving average as buy and sell signal for VFINX (when a ‘sell’ signal is issued, it just went to cash). The following is the performance comparison: 

Portfolio Performance Comparison (as of 10/27/2014): 

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR Since 1/1/90
P SMA 200d VFINX Monthly 7.7% 13.6% 18.1% 13.2% 11.7% 10.4%
VFINX (Vanguard 500 Index Investor) 7.7% 13.6% 18.4% 14.9% 8.1% 9.26%

See detailed comparison >>

So it turns out that not only the moving average based strategy has outperformed S&P 500 (buy and hold) since 1990, it actually has done that with much less risk. 

In fact, there is no conflict for both data are correct as what Hulbert did was the average returns in some preset periods after a sell signal is issued. The return metric does not include the other details such as the moving average might swing back to ‘buy’ quickly for many such ‘sell’ instances so that the averages in all of these instances can add up as many small losses to drag down the overall average while what really matters for the moving average strategy are a few instances that result in substantial market loss. 

The above just reminds us of the importance to read behind a claim and do your own homework. 

Portfolio Review

We compared several tactical funds with our portfolio in the previous newsletter July 23, 2012: The Difference Between Investment Loss & Investment Mistakes mentioned above. We thought it is interesting to look at their performance again:

Portfolio Performance Comparison (as of 10/27/2014):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
Six Core Asset ETFs Tactical Asset Allocation Moderate 2.4% 4.6% 7.9% 7.4% 10.4% 0.92
GTAA (Cambria Global Tactical ETF) 0.8% -0.2% 2.6%      
DWTFX (Arrow DWA Tactical A) 1.2% 5.7% 10.6% 7.5%    
GDAFX (Goldman Sachs Dynamic Allocation A) 1.0% 3.4% 4.6%      
MALOX (BlackRock Global Allocation Instl) 0.6% 3.2% 7.7% 6.7% 8.3% 0.65

See up to date detailed comparison>>

Our portfolio has done well. 

Market Overview

Stock markets have recovered some. US stocks have bounced strongly. For now, we are back to US is the cleanest in the dirty list scenario with emerging market and European stocks still being in a downtrend. As markets will soon resolve this transient condition soon, we call for patience. 

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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