Flex Portfolio Performance Through October 2012

With the U.S. stock market doing relatively well for most of this year, short-term performance of Flex portfolios had been lagging thanks to their significant diversification.  The stock market has declined recently, though, and the Flex portfolios have been helpful in that time, with the short-term performance gap closing considerably.

For long-term investors, I believe the Flex portfolios remain the best way to both implement long-term strategy and maintain short-term flexibility.  Put another way, the ability provided by the Flex portfolios to have a strategic asset allocation that can make tactical adjustments is beneficial to investors.

NOTE:  Flex portfolio data shown on this blog is for the models, not for any specific client accounts, and such data is in no way a prediction or promise of any specific future performance or trends.

Here is the data through October 31, 2012:

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	-0.7%	4.6%	12.6%	9.6%	5.4%	8.1%	-2.4%	8.1%
S&P 500	-1.9%	3.0%	14.3%	15.2%	11.6%	13.2%	0.4%	6.9%
MSCI EAFE	0.8%	6.6%	11.0%	4.6%	0.2%	2.8%	-5.8%	7.7%
Barclays Agg Bond--US	0.2%	0.4%	4.2%	5.3%	5.1%	6.1%	6.4%	5.4%
Barclays Agg Bond--Global	-0.1%	2.0%	4.7%	3.5%	3.8%	4.8%	5.9%	6.5%
Moderately Aggressive	-0.4%	4.0%	10.9%	8.8%	5.7%	7.7%	-0.6%	7.3%
80 Flex II	-0.6%	3.7%	9.3%	6.4%	6.1%	8.8%	5.9%	11.0%
80 Flex IV	-0.6%	3.6%	9.2%	6.8%	6.3%	9.1%	6.3%	10.7%
80 Flex III	-0.9%	2.8%	8.4%	6.2%	5.1%	8.1%
80 Fidelity	-0.3%	4.2%	11.0%	9.2%	5.6%	7.9%	-0.7%	7.3%
Moderate	-0.4%	3.1%	9.1%	7.6%	5.5%	7.2%	1.2%	7.1%
60 Flex II	-0.3%	3.4%	9.7%	7.1%	5.9%	8.5%	6.6%	10.4%
60 Flex IV	-0.3%	3.9%	10.5%	8.2%	6.7%	9.4%	6.9%	10.9%
60 Flex III	-0.5%	2.7%	9.0%	6.9%	5.2%	8.0%	5.5%	9.5%
60 Fidelity	-0.2%	3.2%	9.1%	7.9%	5.3%	7.3%	0.9%	6.8%
Moderately Conservative	-0.3%	2.3%	7.2%	6.3%	5.2%	6.7%	3.0%	6.7%
40 Flex II	0.0%	3.2%	10.0%	7.8%	5.8%	8.2%	7.3%	9.9%
40 Flex IV	0.0%	3.8%	11.2%	9.4%	6.9%	9.5%	7.7%
40 Flex III	-0.1%	2.7%	9.5%	7.7%	5.3%	7.9%
40 Fidelity	-0.1%	2.2%	7.4%	6.8%	5.2%	6.8%	2.6%	6.3%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	22%	52%	15%	11%
80 Flex IV	26%	45%	20%	9%
60 Flex II	26%	39%	27%	8%
60 Flex IV	23%	39%	30%	8%
40 Flex II	30%	26%	38%	6%
40 Flex IV	25%	26%	43%	6%

Flex Portfolio Performance Through September 2012

Here are the performance data for the most commonly-used Flex portfolios in my practice.

The data is for the portfolio models, NOT for any actual client accounts.  Past performance is not a promise of specific future results.  But I use these data to get a sense of how well the Flex portfolios have performed in various time-periods.

My commitment to my clients is that the portfolios I use for them demonstrate consistent cost-justification of my advisory fee compared to the customized benchmark assigned to each Flex portfolio model.  Specifically, I aim to have each Flex portfolio show 10-, 5- and 3-year average annual returns that are outperform their benchmark by 1.25 percentage point (the fee I charge for most clients).

So far, so good.  (Clients:  YOUR specific results likely will differ based on a variety of factors.  Please contact me with any questions.)

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	3.1%	6.7%	13.4%	22.0%	7.7%	7.8%	-1.7%	8.9%
S&P 500	2.6%	6.4%	16.4%	30.2%	14.8%	13.2%	1.1%	8.0%
MSCI EAFE	3.0%	6.9%	10.1%	13.8%	1.5%	2.1%	-5.4%	8.2%
Barclays Agg Bond--US	0.1%	1.6%	4.0%	5.2%	5.2%	6.2%	6.5%	5.3%
Barclays Agg Bond--Global	1.2%	3.3%	4.8%	5.1%	4.5%	5.0%	6.2%	6.5%
Moderately Aggressive	2.3%	5.7%	11.4%	18.3%	7.6%	7.4%	-0.1%	7.9%
80 Flex II	2.4%	5.0%	10.0%	14.6%	7.8%	8.7%	6.8%	11.3%
80 Fidelity	2.2%	5.3%	11.3%	18.6%	7.4%	7.4%	-0.1%	7.9%
80 Flex III	1.9%	4.3%	9.4%	13.9%	7.0%	8.1%
Moderate	1.9%	4.7%	9.5%	14.8%	7.0%	7.1%	1.8%	7.5%
60 Flex II	2.2%	4.8%	10.0%	13.9%	7.2%	8.4%	7.3%	10.7%
60 Flex IIi	2.4%	5.2%	10.8%	14.7%	8.1%	9.4%	7.6%
60 Fidelity	1.7%	4.3%	9.3%	14.9%	6.7%	6.9%	1.4%	7.2%
60 Flex III	1.8%	4.3%	9.5%	13.3%	6.6%	8.0%
Moderately Conservative	1.4%	3.8%	7.5%	11.2%	6.3%	6.6%	3.4%	7.0%
40 Flex II	2.0%	4.5%	10.0%	13.1%	6.6%	8.1%	7.8%	10.0%
40 Flex IIi	2.3%	5.2%	11.3%	14.4%	8.0%	9.7%	8.3%
40 Fidelity	1.1%	3.3%	7.5%	11.5%	6.1%	6.5%	3.0%	6.5%
40 Flex III	1.7%	4.2%	9.6%	12.8%	6.2%	7.8%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	40%	28%	8%
40 Flex II	28%	27%	39%	6%

Flex Portfolio Performance Through August 2012

The Flex portfolios continue to outperform their benchmarks in the 3-, 5- and 10-year periods by significant amounts.  This is the objective.  If you are in a portfolio consisting of index funds or exchange-traded funds blended to meet a Moderately Conservative, Moderate, or Moderately Aggressive risk profile, you are very likely underperforming in those important time periods.  Same if you are using "actively managed" funds of the highest quality.  It is important to maintain a long-term strategy consistent with the asset allocations guided by Modern Portfolio Theory--it's how we strike the optimal balance of risk and reward over the long-haul--but I have determined that the use of global and/or flexible mutual funds, that can bring additional diversification and/or tactical adjustments to the portfolio, reduces risk and increases performance.

My commitment to clients is to self-police the Flex strategy.  If I find a trend away from benchmark-beating performance, I will make adjustments.  Thusfar, Flex remains the best way I have found to run a long-term portfolio.

Here are the #s through August of 2012:

US and Foreign Stocks/Bonds	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	1.1%	11.0%	9.7%	10.8%	8.3%	8.4%	-1.5%	7.7%
S&P 500	1.2%	10.5%	13.4%	22.4%	15.2%	13.7%	1.0%	6.8%
MSCI EAFE	1.3%	12.4%	6.2%	1.6%	2.4%	2.8%	-0.5%	7.0%
Barclays Agg Bond--US	0.3%	1.4%	3.8%	5.0%	5.5%	6.5%	6.7%	5.4%
Barclays Agg Bond--Global	1.0%	2.3%	3.5%	1.3%	5.3%	5.4%	6.5%	6.3%
Moderately Aggressive	1.1%	9.4%	8.6%	10.1%	8.2%	8.0%	0.1%	7.0%
80 Flex II	1.4%	6.4%	7.3%	4.5%	7.9%	9.2%	7.1%	10.8%
80 Fidelity	1.0%	9.3%	8.6%	10.5%	7.9%	7.8%	0.0%	7.0%
80 Flex III	1.1%	6.9%	7.3%	3.3%	7.4%	8.7%
Moderate	1.0%	7.3%	7.2%	8.4%	7.7%	7.6%	1.9%	6.9%
60 Flex II	1.1%	6.0%	7.5%	4.6%	7.3%	8.8%	7.6%	10.2%
60 Fidelity	0.8%	7.2%	7.3%	9.0%	7.2%	7.3%	1.5%	6.5%
60 Flex III	0.9%	6.4%	7.5%	3.7%	6.9%	8.5%
Moderately Conservative	0.9%	5.3%	5.9%	6.6%	7.0%	7.1%	3.6%	6.6%
40 Flex II	0.8%	5.7%	7.7%	4.7%	6.7%	8.4%	8.1%	9.7%
40 Fidelity	0.7%	5.2%	6.1%	7.6%	6.5%	6.9%	3.1%	6.1%
40 Flex III	0.6%	5.9%	7.7%	4.1%	6.4%	8.2%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	41%	27%	8%
40 Flex II	29%	27%	38%	6%

Flex Fund Performance through July 2012

The stock markets have been moving up, albeit on low-volume and despite several major economic and geopolitical risks.  My Flex portfolios have lagged their benchmarks in the past year because of relatively strong stock market performance.  They have pretty much kept pace over the 2-yr period.  They have outperformed in the 3-, 5- and 10-yr periods (massively so in the latter two).

Given the potential for further solvency issues in the Eurozone, China's slowdown, and stubbornly slow growth in the USA, as well as increasing potential for military flare-ups, or even war, in the Middle East, I believe it is important to remain flexible and diversified.  The stock markets will hopefully continue to rise, but a correction (dropping 10% or more), or even another bear market (dropping 20% or more), can happen suddenly.

My Flex portfolios have been much less volatile than standard portfolios and the stock markets.  When we have had pullbacks, corrections, and bear markets, Flex portfolios have protected us relatively--but significantly.  For example, a moderately-aggressive investor using a portfolio of popular index funds from Fidelity during the worst 12-month period of the 2007-9 economic/market crisis would have been down 39%, compared to only down 22% if using 80 Flex II.  Someone using just the S&P 500 (SPY, or the TSP's C-Fund, for example) would have been down 43%.  Despite providing that relative protection, 80 Flex II still delivered better overall results--6.7% average annual gains in the 5-yr period, compared to -0.2% per year for 80 Fidelity and just 1.1% per year for the S&P 500.

Each quarter, I spend a great deal of time evaluating and tweaking my Flex portfolios, as well as designing and testing new ones to possibly replace them.  But the risk-reward balance still appears to be best with the current line-up.

If you want to invest money for the long-term, not have to worry about making adjustments yourself, but also know the portfolio is being tactically adjusted by several professionals working for us, the Flex portfolios are a prudent solution.

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	1.3%	-2.7%	7.7%	-1.9%	7.7%	8.8%	-1.7%	7.2%
S&P 500	1.4%	-0.8%	11.0%	9.1%	14.3%	14.1%	1.1%	6.3%
MSCI EAFE	1.1%	-4.2%	4.1%	-11.5%	1.8%	3.2%	-5.7%	6.2%
Barclays Agg Bond--US	1.4%	2.3%	3.8%	7.3%	5.8%	6.9%	6.9%	5.7%
Barclays Agg Bond--Global	1.2%	0.6%	2.7%	1.8%	5.4%	5.7%	6.5%	6.5%
Moderately Aggressive	1.2%	-1.6%	6.7%	-0.1%	7.8%	8.4%	-0.1%	6.6%
80 Flex II	0.6%	-2.0%	5.4%	-1.1%	7.8%	9.5%	6.7%	10.9%
80 Fidelity	0.9%	-1.9%	6.6%	-0.6%	7.4%	8.2%	-0.2%	6.6%
80 Flex III	0.7%	-1.6%	5.5%	-2.0%	7.5%	9.0%
Moderate	1.2%	-0.8%	5.8%	1.5%	7.4%	8.0%	1.8%	6.6%
60 Flex II	1.0%	-0.9%	6.0%	0.1%	7.3%	9.1%	7.3%	10.4%
60 Fidelity	0.9%	-0.9%	5.7%	1.1%	6.8%	7.6%	1.4%	6.3%
60 Flex III	1.0%	-0.7%	6.1%	-0.6%	7.1%	8.8%
Moderately Conservative	1.2%	0.0%	4.8%	2.9%	7.0%	7.4%	3.6%	6.5%
40 Flex II	1.3%	0.1%	6.6%	1.3%	6.8%	8.7%	7.9%	9.9%
40 Fidelity	1.0%	0.2%	5.0%	3.1%	6.4%	7.2%	3.0%	6.0%
40 Flex III	1.4%	0.3%	6.6%	0.8%	6.6%	8.5%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	41%	27%	8%
40 Flex II	29%	27%	38%	6%

Flex Portfolio Performance through July 2012

The stock markets have been moving up, albeit on low-volume and despite several major economic and geopolitical risks.  My Flex portfolios have lagged their benchmarks in the past year because of relatively strong stock market performance.  They have pretty much kept pace over the 2-yr period.  They have outperformed in the 3-, 5- and 10-yr periods (massively so in the latter two).

Given the potential for further solvency issues in the Eurozone, China's slowdown, and stubbornly slow growth in the USA, as well as increasing potential for military flare-ups, or even war, in the Middle East, I believe it is important to remain flexible and diversified.  The stock markets will hopefully continue to rise, but a correction (dropping 10% or more), or even another bear market (dropping 20% or more), can happen suddenly.

My Flex portfolios have been much less volatile than standard portfolios and the stock markets.  When we have had pullbacks, corrections, and bear markets, Flex portfolios have protected us relatively--but significantly.  For example, a moderately-aggressive investor using a portfolio of popular index funds from Fidelity during the worst 12-month period of the 2007-9 economic/market crisis would have been down 39%, compared to only down 22% if using 80 Flex II.  Someone using just the S&P 500 (SPY, or the TSP's C-Fund, for example) would have been down 43%.  Despite providing that relative protection, 80 Flex II still delivered better overall results--6.7% average annual gains in the 5-yr period, compared to -0.2% per year for "80 Fidelity" and just 1.1% per year for the S&P 500.

Each quarter, I spend a great deal of time evaluating and tweaking my Flex portfolios, as well as designing and testing new ones to possibly replace them.  But the risk-reward balance still appears to be best with the current line-up.

If you want to invest money for the long-term, not have to worry about making adjustments yourself, but also know the portfolio is being tactically adjusted by several professionals working for us, the Flex portfolios are a prudent solution.

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	1.3%	-2.7%	7.7%	-1.9%	7.7%	8.8%	-1.7%	7.2%
S&P 500	1.4%	-0.8%	11.0%	9.1%	14.3%	14.1%	1.1%	6.3%
MSCI EAFE	1.1%	-4.2%	4.1%	-11.5%	1.8%	3.2%	-5.7%	6.2%
Barclays Agg Bond--US	1.4%	2.3%	3.8%	7.3%	5.8%	6.9%	6.9%	5.7%
Barclays Agg Bond--Global	1.2%	0.6%	2.7%	1.8%	5.4%	5.7%	6.5%	6.5%
Moderately Aggressive	1.2%	-1.6%	6.7%	-0.1%	7.8%	8.4%	-0.1%	6.6%
80 Flex II	0.6%	-2.0%	5.4%	-1.1%	7.8%	9.5%	6.7%	10.9%
80 Fidelity	0.9%	-1.9%	6.6%	-0.6%	7.4%	8.2%	-0.2%	6.6%
80 Flex III	0.7%	-1.6%	5.5%	-2.0%	7.5%	9.0%
Moderate	1.2%	-0.8%	5.8%	1.5%	7.4%	8.0%	1.8%	6.6%
60 Flex II	1.0%	-0.9%	6.0%	0.1%	7.3%	9.1%	7.3%	10.4%
60 Fidelity	0.9%	-0.9%	5.7%	1.1%	6.8%	7.6%	1.4%	6.3%
60 Flex III	1.0%	-0.7%	6.1%	-0.6%	7.1%	8.8%
Moderately Conservative	1.2%	0.0%	4.8%	2.9%	7.0%	7.4%	3.6%	6.5%
40 Flex II	1.3%	0.1%	6.6%	1.3%	6.8%	8.7%	7.9%	9.9%
40 Fidelity	1.0%	0.2%	5.0%	3.1%	6.4%	7.2%	3.0%	6.0%
40 Flex III	1.4%	0.3%	6.6%	0.8%	6.6%	8.5%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	41%	27%	8%
40 Flex II	29%	27%	38%	6%

Flex Portfolio Performance Through June 2012

After a terrible month of May, the U.S. stock markets had a terrific month of June.  Our "Flex" portfolios continue to provide reduced volatility and are tracking closely their customized/blended benchmarks in the near-term while significantly out-performing the stock markets and the blended benchmarks for the 3-, 5- and 10-year periods.  Data is below:

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50/40/10)	3.3%	-4.5%	6.3%	-3.6%	10.9%	11.1%	-2.3%	6.1%
S&P 500	4.1%	-2.8%	9.5%	5.5%	17.4%	16.4%	0.2%	5.3%
MSCI EAFE	7.0%	-7.1%	3.0%	-13.8%	6.0%	6.0%	-6.1%	5.1%
Barclays Aggregate Bond--US	4.0%	2.1%	2.4%	7.5%	5.7%	6.9%	6.8%	5.6%
Barclays Aggregate Bond--Global	0.5%	0.6%	1.5%	2.7%	6.6%	6.0%	6.7%	6.5%
Moderately Aggressive Benchmark	4.5%	-3.5%	5.4%	-2.2%	10.8%	10.4%	-0.7%	5.7%
80 Flex III	3.0%	-2.3%	4.8%	-1.8%	9.4%	10.7%
80 Flex II	2.9%	-2.8%	4.8%	-1.1%	9.5%	11.1%	6.7%	10.4%
80 Fidelity	4.4%	-3.6%	5.7%	-2.8%	10.7%	10.5%	-0.8%	5.7%
Moderate Benchmark	4.8%	-2.4%	4.9%	-0.1%	10.1%	10.0%	1.4%	6.2%
60 Flex III	1.9%	-1.2%	5.0%	-0.2%	8.3%	10.0%
60 Flex II	3.7%	-2.2%	5.2%	-0.5%	9.0%	10.6%	7.1%	10.1%
60 Fidelity	3.3%	-2.3%	4.8%	-0.5%	9.3%	9.3%	0.9%	5.6%
Moderately Conservative Benchmark	1.8%	0.7%	3.6%	2.7%	8.6%	8.3%	3.4%	6.1%
40 Flex III	2.0%	-0.5%	5.2%	-0.9%	7.5%	9.4%
40 Flex II	2.0%	-0.7%	5.2%	1.3%	7.6%	9.6%	7.8%	9.5%
40 Fidelity	1.8%	-0.8%	4.0%	2.5%	7.8%	8.2%	2.7%	5.6%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	21%	52%	15%	12%
60 Flex II	25%	39%	27%	9%
40 Flex II	29%	26%	38%	7%

TSP now offers Roth TSP option

Good morning.  The federal government's popular defined contribution retirement plan, the Thrift Savings Plan (TSP), recently began to offer a "Roth TSP" option.  Federal employees should figure out whether or not to use it.

Current TSP participants should contact their tax advisor about whether or not the Roth TSP is a good choice (and I'll join the call with you, if you want).

I do not provide formal tax advice—taxes are not my area of professional expertise.  That said, I have some thoughts and info to share:

1. Roth TSP contributions are from already-taxed money, instead of being tax-deductible like normal TSP contributions.
2. Roth TSP withdrawals in retirement, however, are tax-free (with some exceptions), while normal TSP withdrawals in retirement are taxable.
3. Tax rates are now pretty low by historical standards.  They might increase in the coming decades.  If they do, it is likely that "the better deal" is to give up the tax-deduction now in favor of the tax-free withdrawals later.
4. Many tax professionals I have read or heard from favor Roth anyway, even if income tax rates do not change.
5. This article provides a good overview, as well as some helpful details:  http://www.fedsmith.com/article/3408/unraveling-mysteries-roth-tsp.html

I generally favor Roth TSP over TSP, but each federal employee should consult their own tax advisor on this matter.

FYI, and please contact me with any questions or if you want my list of recommended tax professionals.

--Gary


Garo Linck Partoyan
Financial Advisor
Potomac Wealth Strategies, LLC
(703) 746-8195
(855) 347-9483 fax
Garo.Partoyan@PotomacWealthStrategies.com
www.PotomacWealthStrategies.com