Category Archives: apple

The Hazards Of Over-Diversification In Investment Advice

One thing I have learned over the course of my career is there are never any shortage of opinions or strategies on how you should be investing your nest egg. Everywhere you look there are hedge funds, mutual funds, ETFs, advisors, newsletters, insurance companies, and other fringe “experts” touting their methods. There is no doubt that each approach will have their own benefits and drawbacks. Opportunities and risks will be characterized by security selection, position size, timing, and costs. However, the problem that many investors run into is when they try to implement several divergent paths simultaneously. I had an investor email me the other day and say that they are subscribing to several newsletters in tandem with placing multiple accounts with different investment advisors. He wanted to know more about how we use ETFs – in effect shopping for one more opinion on what he should do with his money . I know his intentions were quite genuine. He is likely thinking that this structure is highly diversified and allows him to cover numerous bases with his investment portfolio. However, the reality is that he is trying to drink from a fire hose of information and absorbing opinions from a wide range of conflicting sources. Some questions immediately come to mind when I think about this common dilemma: How do you decide the weighting of each advisors’ opinion or strategy? What systems are you actually using and which ones are just there for “market research”? Are you increasing your overall costs by implementing all these services continually? Do each of these services enhance your total return or are they just giving you something to do? Are you just needlessly searching for the holy grail of strategists that will outperform in every market environment? (hint: they don’t exist) In any group of 4 or 5 advisors, there are probably going to be at least one that is taking a contrarian viewpoint and possibly even implementing that in their recommendations. That means you are likely absorbing opposing views that will erode your confidence in sticking with a simple and reliable plan . Let me tell you from experience what will happen. You see one guy tell you to buy bonds as a core allocation and shock absorber for your portfolio. The next guy tells you that rising rates are going to destroy the foundation of the American economy. The only reasonable course of action then is to do absolutely nothing – and you will. Sitting in cash fretting about which person to believe and then only likely implementing the correct answer long after the move has been made. The funny thing is that both of these recommendations will likely be right at some point. The problem is that we only know which one (and when) with the clarity of hindsight. Or worse, you end up going long bonds in one account and short bonds in another account, which effectively offsets both trades. There is nothing quite like the experience of paying to go nowhere. The same can be said of stocks as well. I read three articles last week talking about how consumer staples stocks were risky because of their high relative valuations. This morning I woke up to an explanation of how consumer staples are historically some of the best stocks to own during the summer months. It’s that kind of conflicting advice that permeates this industry. One argument is fundamentally driven, while the other is data-driven. Both have their own merits. Who do you believe? There Is An Easier Way My best advice is to pare down the number of advisors with a substantial influence on your portfolio. One or two professionals that have proven their worth through your experience or research should be enough to guide you through the best and worst of times. This should also include tuning out the noise of the media and allowing a specific philosophy a reasonable time to work. I’m not here to advocate for the “best strategy” because everyone has a different philosophy, risk tolerance, goals, and experience. There are many different ways you can make money in the market as long as you realize the benefits and drawbacks of your specific method. My personal view is that you should be focusing on a relatively simple framework using low-cost ETFs as core holdings. You can easily customize a well-honed list of funds to your specific needs and make small adjustments over time as conditions warrant. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.

Cash-To-Debt Ratio Demonstrates Why Riskier Assets Have Limited Upside Potential

Cash on corporate balance sheets grew at a 1% pace to $1.84 billion in 2015. That’s a record level of dollars on the books. On the other hand, debt grew at a clip of nearly 14.8% to $6.6 trillion from $5.75 trillion. That’s a 15% surge in debt obligations. In fact, American companies have grown their debt load at a double-digit annualized rate since the economic recovery began in 2009. Doing so has put corporations in a precarious situation – circumstances where cash as a percentage of debt is lower than at any time since the Great Recession. Obviously, the data points themselves are unnerving. Yet, the trend for cash as a percentage of total debt over time may be even more alarming. Consider what transpired between 2006 and 2008. Cash growth began to slow. Debt began to skyrocket. And cash as a percentage of debt steadily declined until, eventually, stocks of corporations found themselves losing HALF of their value. Are stocks set to log -50% bearish losses going forward? Perhaps. Perhaps not. Yet the notion that debt can perpetually grow at a double-digit rate without adverse consequences is about as inane as the idea that the U.S. government’s debt troubles are irrelevant to the country’s well-being. At least in the U.S. government’s case, its leadership can print currency and/or manipulate borrowing costs. (Note: That is not an endorsement of policy; rather, it is an acknowledgement of government power.) Companies? They’re at the mercy of the corporate bond market such that, when existing obligations are retired, new debt may need to be issued at much higher yields to entice investors. Think about it. Ratings companies like S&P may find themselves downgrading scores of corporate bonds to junk status due to ungodly cash-to-debt ratios. What’s more, yield-seeking investors might squeamishly back away from speculation if spreads between corporates and treasuries widen further. Additionally, Fed efforts to raise overnight lending rates may push junk yields further out on the ledge where the combination of widening spreads, rating agency downgrades and Fed policy direction collectively reinforce a negative feedback loop. By many accounts, low-rated bonds have been struggling for quite some time. Get a gander at the three-year chart of the SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) below. Granted, the bounce off of the February lows is astonishing. (Channel your gratitude toward a 70%-plus recovery in crude oil prices.) Nevertheless, the total return for JNK is a scant 1.4% over the three-year period. That is negligible reward for a huge amount of risk . In contrast, the iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) offered a total return of 9.2% over the same period. That is low risk for reasonable reward. The problem may only get worse. At present, junk status (‘BB’) is the average rating for companies issuing bonds. How bad is that historically? It’s worse than before, during or after the financial collapse in 2008-2009. Indeed, you have to travel back to the 2001 recession to find an average rating as anemic as the one that exists right now. It is certainly true that when the European Central Bank (ECB) announced its quantitative easing (“QE”) intentions in the first quarter, the reality that they’d be acquiring corporate bonds as well as sovereign debt provided a fresh round of speculative yield seeking. Income producing assets that had been struggling under the worry of multiple Fed rate hikes in 2016 – emerging market sovereigns via the PowerShares Emerging Markets Sovereign Debt Portfolio ETF (NYSEARCA: PCY ), the SPDR Barclays International Treasury Bond ETF (NYSEARCA: BWX ), high yield via the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ), crossover corporates via the iShares Baa-Ba Rated Corporate Bond ETF (BATS: QLTB ) as well as the iShares Intermediate Credit Bond ETF (NYSEARCA: CIU ) – rocketed higher. On the flip side, the belief that yield-seeking and risk-seeking behavior will occur as long as central banks keep borrowing costs subdued is flawed. In the bond world, bad ratings eventually override yield-seeking speculation. In the stock world, stretched valuations eventually cap upside potential . It is worth noting, in fact, that the S&P 500 has been flat for 18 long months, which roughly corresponds to when corporate earnings peaked back on 9/30/2014 . Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.