Tag Archives: earnings-center

3 Things I Think I Think – Crashing Up And Down Edition

Here are some things I think I am thinking about recently: 1) What a boring year! The Global Financial Asset Portfolio is down about 1.2% year to date. This might come as a shock to people who are glued to financial TV all day and think of the “market” as the stock market. Yes, some stock markets are down quite a bit, but the aggregate “markets” really haven’t budged much. And this goes to show how damaging it can be to constantly be obsessing over the daily moves of your investments. (click to enlarge) More importantly, it shows how crucial it is to remain diversified and to avoid paying too much attention to the media’s infatuation with every minute-by-minute move in the stock market. Stocks are an important, but relatively minor slice of an aggregate portfolio. Odds are, if the stock market’s daily moves are driving you mad, you have misinterpreted your personal risk profile and might need a change… 2) The S&P 500 (NYSEARCA: SPY ) has value because of people like Donald Trump. I notice a lot of Donald Trump wealth bashing in the media. This story usually goes something like this – “Donald Trump isn’t nearly as wealthy as he claims”, or “Donald Trump is only rich because his daddy was rich”. These statements might be true to some degree. But there’s a good bit of hyperbole going on here. For instance, take this piece in VOX today claiming that Trump would have been better off if he’d just invested his inheritance in an index fund. The author writes: ” Trump is one of five siblings, making his stake at that time worth about $40 million. If someone were to invest $40 million in a S&P 500 index in August 1974, reinvest all dividends, not cash out and have to pay capital gains, and pay nothing in investment fees, he’d wind up with about $3.4 billion come August 2015. ” This is unreasonable on so many levels. First, Trump probably didn’t inherit a lump sum of cash. He probably inherited part of the family business, real estate and many other assets valued at $40 million. Second, NO ONE just invests their whole net worth in a zero-fee, zero-tax, zero-withdrawal all-stock portfolio and lets it ride. So, the assumptions here are totally unfair and reflect nothing more than a fiction. But let’s go further and apply something somewhat realistic. Let’s assume Trump had decided to be a “fat loser” (his words, not mine) and just let his daddy’s inheritance ride in the S&P, while spending a small portion of his net worth each year. For instance, if he’d withdrawn 5% of his portfolio per year so he could do nothing all day every day, he’d have compounded his S&P 500 portfolio into about $400,000,000 as of August 2015. Not bad, but well below the misleading billions that many assume. And keep in mind, that’s before taxes and fees. He’d likely have less than half that if he’d been paying taxes and fees every year. The more important point is that Trump inherited a lot of money and DID SOMETHING with it. He didn’t just turn into a slacker, like a lot of people do when they inherit money. He took a successful company and built it into something bigger and better. And that very production is why index funds have any value in the first place. The S&P 500 doesn’t just rise because some slacker waves a magic wand at higher prices. It rises over time because people like Donald Trump work their butts off to make companies more valuable. I find myself in a weird position here, because I think Trump has said a lot of awful things about people recently. So, there’s no denying he’s been rude to a lot of people and could benefit from a bit more humility. But people who try to make Trump out to be some rich, lazy slacker are barking up the wrong tree. 3) Stop the currency hedging madness! Vanguard has a wonderful piece of research out on currency hedging (see here ). Their conclusion – it’s just more fees cloaked in complexity. They conclude: ” For us, hedging equity exposure isn’t worth the added costs in those strategies that still have considerably less than half their assets in international equities and that have broader investment objectives than controlling volatility. ” This makes a lot of sense to me. If you’re using a passive long-term vehicle like an index fund, then why would you layer on a short-term, zero-sum trading vehicle on top of it? This is a total contradiction of strategies! Low fee indexing and currency hedging are not synonymous. After all, when you hedge currencies, you are essentially timing a zero-sum relative market. Over long periods of time, we should expect that currencies will generate a negative real return because they are zero-sum relative markets. It makes no sense to layer on a currency hedge if you’re adhering to a low-fee indexing strategy. I’ve noticed a lot of these currency hedging products coming on the market lately. They’re very likely just high-fee versions of index funds that come with a slick marketing campaign and little more.

The One Thing You Must Do When The Market Tanks

By Tim Maverick It’s a scenario that repeats itself during every stock market downturn: At the first sign of distress, mom and pop investors head for the hills. And the year 2015 is no exception. During July and August, investors withdrew money from both stock and bond mutual funds. According to Credit Suisse, this is the first time withdrawals have occurred in both categories in consecutive months since 2008. That was, of course, during the last financial crisis. I believe Yogi Berra said it best: “It’s like déjà vu all over again.” Here’s What You Need to Do I’ve been in the investment business since the 1980s and have been through every market selloff since 1987. Even though I’m no longer a professionally licensed advisor, I do have a few thoughts on investor behavior during selloffs. First of all, if you’re in your 20s, 30s, or 40s, don’t worry. The stock market’s long-term track record is undeniable. For those of you in your 50s or 60s, I would’ve, at one point in time, warned about bear markets possibly lasting as long as a decade. But with the Federal Reserve reacting to every market sniffle with lots of money, the dynamics have changed. Look at last week’s turbulence. Already, prominent voices like Bridgewater Associates Founder Ray Dalio have said that further turmoil would encourage more quantitative easing (QE). Thus, for regular investors, the only real danger point – as I’ve described in a previous article – is shortly before and shortly after your retirement . And if you’re in such a time frame, your stock allocation should’ve already been lowered. Thus, the one thing investors should do during this current downturn is take a serious look at their portfolios and make sure everything is allocated properly. Most likely, a rebalancing is in order. Rebalancing Really Works Rebalancing a portfolio between stocks, bonds, and cash is important – and it can actually improve your returns. In 2012, Columbia Business School professor Andrew Ang conducted a study. He looked at returns from January 1926 through December 1940, a period that includes the Great Depression. Here’s what he found: A portfolio of 100% stocks returned 81% with dividends reinvested. A portfolio of 100% government bonds returned 108%. But a portfolio of 60% stocks and 40% bonds, rebalanced quarterly, returned 146%! Now, I don’t think rebalancing quarterly is necessary. And you definitely shouldn’t rebalance in the midst of market volatility. Instead, get your game plan in order now, and put it in place after the dust has settled. That will likely be in a few months. After all, we’re in that nasty seven-year cycle period (1987, 1994, 2001, 2008, 2015) when bad things tend to happen to the stock market. One final point: If you do rebalance in a taxable account, there will be tax consequences. How to Reallocate What do I mean by reallocating or rebalancing your assets? Well, I use the words of legendary investor Sir John Templeton as a guide. He recommended “to buy when others are despondently selling and to sell when others are greedily buying.” This translates to a counter-intuitive action: Sell a portion of your winners and add those funds to lagging categories. But only do so if your percentages are seriously out of whack. Here’s a hypothetical, simplified example: A year ago, in the stock portion of your portfolio, you had 20% in technology and biotechnology stocks, and 20% in energy and emerging market stocks. But now, with tech and biotech red-hot, these stocks represent 30% of your portfolio. Meanwhile, ice-cold energy and emerging markets stocks are down to 10% of your holdings. You should sell where the greed is – where analysts are saying the “trees will grow to the sky” – and buy where investors are fleeing en masse. In other words, bring them back into balance at 20% each. This strategy will still keep you exposed to the current winning sectors while also boosting your exposure to tomorrow’s winners. Take a look at this data from Franklin Templeton on emerging markets. It shows that the bull phases are longer and stronger than the bear phases in these markets: Thus, you want to be positioned to take advantage of such situations. You also don’t want to be highly exposed to a hot sector if it crashes, a la tech stocks in 2000-01. John Wooden on Investing To summarize, I’d like to quote legendary basketball coach John Wooden: “If you’re too engrossed and involved and concerned in regard to things over which you have no control, it will adversely affect the things over which you have control.” That’s a great philosophy for life – and it applies to investing, as well. Don’t worry about the stock market. You can’t control it. On the other hand, you can control how you put your money to work for you. Original Post

Stocks Will Go Higher

China-led market volatility has roiled global asset markets, and potentially shaken investors faith in the current bull market. Loss averse investors heading to the sidelines should understand the performance of domestic equities over rolling 10 and 20-yr time periods to avoid missing future gains. This article borrows from recent quotes from famed investor Warren Buffett and stock price information from Nobel laureate Robert Shiller. Market optimism is falling with global share prices, but I want to offer some respite to Seeking Alpha readers. Stocks will go higher. I can not tell you about today, this week, this month, or even the rest of this year. However, as you extend your investment horizon, stocks almost invariably perform. In an August 10th interview on CNBC, Warren Buffett, the famed investor and chairman and CEO of Berkshire Hathaway ( BRK.A , BRK.B ) stated: ” Stocks are going to be higher, and perhaps a lot higher 10 years from now, 20 years for now .” To test his time horizon, I pulled from the long time series of online data that Robert Shiller uses to calculate his famed Cyclically Adjusted Price Earnings (NYSEARCA: CAPE ) Ratio. Below I show cumulative ten-year total returns for the S&P 500 (NYSEARCA: SPY ) and predecessor indices from the Shiller data dating back to 1900. The blue lines are cumulative price returns and the pink lines include dividends. Periods of negative ten year cumulative returns are very limited. The presence of negative ten-year cumulative periods overlapping the tech bubble collapse and the global financial crisis may make myopic investors unduly concerned about the long-run prospects of domestic equities. (click to enlarge) Buffett’s quote first focused on ten-year periods, but expanding a holding period to twenty-years would have only yielded negative total returns (including dividends) in a period that overlapped the 1929 stock market crash and World War II. (click to enlarge) In this interview, Buffett went further stating that “my game is to own decent businesses and decent prices and you are going to make a lot of money over time if you do it, but I think the ability of people to dance in and out of markets is quite limited and in my case is zero.” This statement is consistent with the s tudies linking Buffett’s performance to low volatility equities – he buys businesses that perform through multiple business cycles. Long-time readers know that I am not an unabashed bull, cautioning against the prospect of subnormal returns and increased volatility in my semi-annual market outlook . I also demonstrated earlier this year that equity multiples appeared stretched , including a look at the aforementioned Shiller data. However, if you are uncertain what to do with your domestic stock holdings in these times of heightened volatility, plan to buy high quality businesses on weakness and be prepared to hold these investments for long time periods. If history is a guide, you are very likely to come out a winner. Disclaimer : My articles may contain statements and projections that are forward-looking in nature, and therefore inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance, and investment horizon. Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.