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 Friday September 1, 2023. 

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.

Portfolio Calculator (Simulator) And Rolling Returns

Amidst numerous newly introduced features and web pages on (with more changes on the horizon), we have recently unveiled the Portfolio Calculator. This lightweight backtest simulator is designed for any portfolio comprising ETFs, mutual funds, and even stocks. We believe that this calculator holds significant utility for investors seeking to comprehend a portfolio’s historical returns and associated risks. This holds true whether it’s an asset allocation portfolio (primarily composed of ETFs or mutual funds for targeted asset class exposure) or a standard portfolio containing stocks and funds of your preference.

Notably, the calculator generates historical rolling returns for the portfolio. We firmly believe that this distinctive feature has the potential to provide a much more accurate representation of long-term returns and risks. In this newsletter, we will discuss this in some detail. 

The calculator is free and doesn’t require a login. You can try it here

Portfolio Calculator (Simulator)

Let’s first look at the usage of the calculator. You can find the calculator from Resources->Calculators->Portfolio Calculator

Brief instructions: 

This calculator simulates (backtests) a portfolio of ETFs or mutual funds (we also support stock tickers).

Portfolio Holdings: You enter the target (allocation) holdings in the Portfolio Holdings box in the following example format:

SPY   45.5%
VNQ   14.5%
BND   40%

Each line should have a form of Symbol Percentage%.

Symbol is a ticker symbol of an ETF or a mutual fund. Examples are like VTI (Vanguard Total Stock Index ETF) or VBMFX (Vanguard Total Bond Index Mutual Fund). You can also enter CASH for the purpose of Cash holding.

Percentage% should be a positive number followed by %.

The percentages should sum up to 100%

Start date: You can specify the start date for the simulation (backtesting). By default, the simulator automatically finds the earliest start date when all holding funds have price data.

Rebalance frequency: You can also specify rebalance frequency that can be either monthly, quarterly, annually, or no rebalance. Rebalance means at the interval specified, the portfolio will sell and buy some existing holdings to bring back the allocation (percentage) of the symbols back to the initial allocation (the target allocation).

Clicking on ‘Run the Calculator’ will initiate simulation or backtesting of the portfolio using the symbols and allocation you entered initially, and it will regularly rebalance if Rebalance frequency is not ‘no rebalance’. 

It will then produce simulation results that include

Returns: the portfolio’s annualized returns for the past periods, including the past one year, three years, five years, … 

Detailed returns & risk analytics: As usual, the simulator also produces some detailed analytics, including maximum drawdown, Sharpe ratio, and Sortino ratio for each trailing period and each calendar year. 

Return chart: This shows the historical portfolio value growth. 

Rolling returns: It shows the portfolio’s rolling returns for 5,10,15 and 20-year periods. 

Rolling returns: a good (long-term) portfolio indicator

The rolling returns for different timeframes set the portfolio calculator’s results apart. To elaborate, a rolling 5-year return, as of a specific date, represents the investment’s performance over the preceding five years leading up to that date. The calculator presents charts displaying rolling annualized returns for 5, 10, 15, and 20 years. For instance, in the 5-year rolling chart, the value on any given date corresponds to the annualized return for the preceding 5 years up to that very date. Thus, for instance, the chart value on 8/28/2015 reflects the annualized return from 8/28/2010 to 8/28/2015.

These rolling returns contrast with the most recent 5, 10, and 15-year returns, as they solely depict the returns for those respective periods leading up to the most recent date, without encompassing every date in the historical record.

The following shows 5,15 and 20 year rolling return charts for a 60% VFINX (S&P 500) and 40% VBMFX (bonds) portfolio:

The 60/40 balanced portfolio exhibits a notable trend – it has not experienced any negative returns over 5, 15, or 20-year spans. For instance, during a 5-year duration, the portfolio achieved an annualized return of nearly 0% (0.18%) on 2/27/2009, meaning a 0.18% annualized return from 2/27/2004 to 2/27/2009. Conversely, the lowest annualized return over 20 years was realized on 6/30/2022, indicating a 6.06% annualized return from 6/30/2002 to 6/30/2022.

Consider the inception date of 8/3/1987 (when both VFINX and VBMFX data were available) to elucidate this more intuitively. If an individual were to invest on any given date and then evaluate the return after 20 years, they would achieve at least a 6.06% annual return for that timeframe – a commendable outcome. However, for investors prioritizing shorter-term results, such as needing capital in 5 years, there’s a scenario where they experienced nearly 0% annualized return – specifically, during the 5 years from 2/27/2004 to 2/27/2009.

Conversely, an investor who exclusively allocates to VFINX (Vanguard S&P 500 index fund) may encounter less favorable outcomes for select five and 10-year intervals. The following charts depict rolling return trends for a portfolio solely composed of VFINX holdings:

Examining the charts above reveals multiple 5-year periods during which investors experienced losses. Likewise, the scenario doesn’t significantly improve when focusing on a 10-year holding of stocks (S&P 500 or VFINX). The 10-year rolling return chart indicates a -2.24% annual return over the 10-year period spanning from 2/27/1999 to 2/27/2009.

Nonetheless, should the investor maintain a stock (VFINX) holding for at least 20 years, the least favorable outcome they could encounter is a 6.48% annual return registered between 3/31/2000 and 3/31/2020. It’s worth noting that this return surpasses the 6.06% minimum 20-year return observed in the aforementioned 60/40 portfolio. It’s important to mention that the rolling periods for the 20-year spans are restricted to dates preceding 8/2003, as any date beyond that lacks a 20-year data history.

Upon scrutinizing rolling return charts, it becomes apparent that a balanced portfolio (comprising 60% stocks and 40% bonds) delivers more predictable returns over five years than a pure stock portfolio (100% invested in VFINX). However, when holding the S&P 500 stock fund for an extended duration, our data illustrates that stocks generally yield superior outcomes over any 20-year interval.

Rolling return charts offer a more precise insight into a portfolio’s risk and return stability (including funds or individual stocks). This is particularly true when focusing on the minimal return points within a rolling return chart as a measure of portfolio risk. A well-known observation, often attributed to ‘Murphy’s law’, is that it tends to perform poorly when investors decide to follow a portfolio due to its recent strong returns. Sound familiar? Information regarding minimum rolling returns could help mitigate this predicament. Investors can opt for a portfolio showcasing high minimum rolling returns within their preferred holding durations. In fact, merely possessing knowledge of such minimum rolling period returns can anchor investors’ expectations.

For instance, let’s consider an investor who follows a model portfolio (or even simply purchases and holds a fund like VFINX or SPY) for 10 years. Armed with knowledge of this portfolio’s minimum 10-year rolling return since its inception date or the fund’s inception (in the case of VFINX, recognizing that the minimum 10-year rolling return since 1987 could be as low as -2.24%), the investor should reasonably anticipate the potential for the portfolio to incur losses over the forthcoming 10 years.

We believe that presenting the average and minimum rolling returns across different periods offers a more precise evaluation of a portfolio’s performance concerning risk and returns.

Market Overview

The strength of the US economy has managed to surprise even the most optimistic expectations among analysts. With an extremely tight labor market and a very strong GDP: The Atlanta Fed’s GDP Now model predicts 5.9% GDP growth for the third quarter of this year.  This again prompted the Federal Reserve Chairman Jay Powell’s somewhat hawkish statement on whether there would be another interest rate hike. High-interest rates will continue to pressure corporations’ profitability even though, at this moment, US corporations have shown resilience to past interest rate hikes. Coupled with elevated valuation, US stocks are vulnerable.

As always, we call for staying the course which is guided by the well defined and sound strategic and tactical strategies:

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as 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, 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 during this time. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This is true time and time again.

Stock valuation has dropped, and now valuation is becoming less hostile. However, it is still not cheap by historical standards. 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 market 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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