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Can You Deal With A Stock Market Downturn?

Sometimes we’re late to interesting polls, but hey, they’re still interesting. Back in November, Gallup and Wells Fargo polled people to ask them how well they could stomach a “significant” market downturn, publishing the results on January 22nd . Or note, they defined significant as 5-10%. The results were quite confident: Gallup/Wells Fargo Downturn Poll Some wacky lines there – 87% of stockholders were at least moderately confident in their portfolios, and 82% of investors overall. People in a better position to actually handle downturns with smaller returns – those who don’t hold stocks – were only 61% moderately or better confident. Should We Trust Our Peers at their Word? In a word, no. These are interesting results, for sure, but I see lots of problems here – not just the fact that a significant downturn is defined as only 5-10%. The most recent recession saw drops an order of magnitude larger – in percentage terms (!) – of over 50% in major indices. We lost major financial institutions over a hundred years old, investors panicked, and maybe 10% of people (that’s a stretch) were confidently buying at any opportune time, let alone not panic-selling everything they owned. (We played around with what a “significant” drop might actually be in the past, but found you can be more than a few years early with your calls in some circumstances and still weather a downturn.) So let’s concentrate on our peers’ answers themselves. Do you really think this poll accurately reflects how people would react in a downturn? No, neither do I. You’ve got something of a Lake Wobegon effect going on here – you know, the “fictional” town where everyone was above average. In reality, stock markets have a tendency to over-correct – markets historically oscillate somewhere between ridiculously overpriced and a bargain (of course, identifying those periods is, perhaps, impossibly hard except in retrospect). That’s because previously confident people are selling into a downturn – “locking in losses” – and buying only when the stock market has come back “buying the highs!”. In fact, identifying actual investor results backs up those statements to a degree you’d almost think impossible. Dalbar releases studies on actual investor performance in the markets versus price (or dividend reinvested price) returns, and the results are crazily disconnected: through November 2015, in the order of earning 5.5% on S&P 500 funds in the last 20 years, versus stated returns around 9.85% . (We have a calculator so you can see dividend reinvested returns for the S&P 500 and the Dow Jones Industrial Average). Okay Smart Guy, What Then? For the average investor – and, Wobegon aside, we’re all probably closer to average than we tell ourselves – the best move is to set it and forget it. Consistently, when we do have market downturns, it turns out that many investors have actually overestimated their intestinal fortitude. For a typical person, the best move is to set your portfolio during market doldrums , with a mind to setting in up in such a way that you won’t mind too much if there is a massive move to either the upside or downside. As for re-balancing, it’s best if you go in with a plan, and openly rebalance at a standard time – and, if you can, avoid doing it that often. Believing in your portfolio is one thing, but investing during mania or a crash is no formula for a successful long-time plan. So, make the case. Would you be prepared for a significant downturn without selling most of your portfolio? Why, or why not?

Four Top-Ranked Municipal Bond Mutual Funds For Stable Returns

The debt securities category will always be the first choice for risk-averse investors, because this class of instruments provides a regular income flow at low levels of risk. Income from regular dividends helps to ease the pain caused by plunging stock prices. When considering the safety of capital invested, municipal bond mutual funds are second only to those investing in government securities. In addition, the interest income earned from these securities is exempt from federal taxes, and in many cases, from state taxes as well. Below, we will share with you four top-rated municipal bond mutual funds. Each has earned a Zacks #1 Rank (Strong Buy) and is expected to outperform its peers in the future. To view the Zacks Rank and past performance of all municipal bond mutual funds, investors can click here . Federated Municipal High Yield Advantage Fund (MUTF: FHTFX ) invests in securities that are believed to provide federal tax-free interest income. It normally invests in long-term securities, but may also invest in securities of medium quality and that are rated below investment grade. The Federated Municipal High Yield Advantage F fund is non-diversified and has a three-year annualized return of 4.4%. Lee R. Cunningham II is one of the fund managers of FHTFX since 2009. American Century California High Yield Municipal Fund Investor (MUTF: BCHYX ) seeks a tax-exempted high level of current income. It invests a major share of its assets in municipal securities that are expected to provide income exempted from federal and California income taxes. The fund mainly invests in California municipal debt securities that are rated below investment grade and are expected to provide high yield. BCHYX may also invest in unrated securities. The fund is non-diversified and has a three-year annualized return of 5.1%. BCHYX has an expense ratio of 0.50%, as compared to the category average of 0.9%. PIMCO New York Municipal Fund A (MUTF: PNYAX ) invests a large portion of its assets in debt securities whose interest is exempted from regular federal income tax and New York income tax. It may invest in “private activity” bonds having interest, which is a tax-preference item for the purpose of the federal alternative minimum tax. The fund is non-diversified and has a three-year annualized return of 3.2%. Joe Deane is one of the executive vice presidents and has managed PNYAX since July 2011. Dreyfus High Yield Municipal Bond Fund (MUTF: DHMBX ) seeks a tax-exempted high level of current income. It invests the majority of its assets in municipal securities that are expected to provide return free from federal income tax. The fund is generally expected to maintain a dollar-weighted average maturity of more than 10 years. It is non-diversified and has a three-year annualized return of 3.6%. As of January 2016, DHMBX held 91 issues, with 3.71% of its assets invested in Tobacco Settlement Financing Corp N Asset 5%. Original Post

Best And Worst Q1’16: Mid Cap Value ETFs, Mutual Funds And Key Holdings

The Mid Cap Value style ranks tenth out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Mid Cap Value style ranked seventh. It gets our Dangerous rating, which is based on aggregation of ratings of 9 ETFs and 124 mutual funds in the Mid Cap Value style. See a recap of our Q4’15 Style Ratings here. Figure 1 ranks from best to worst all nine Mid-Cap Value ETFs and Figure 2 shows the five best and worst-rated mid-cap value mutual funds. Not all Mid Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 36 to 1761). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Nuance Mid Cap Value Fund (MUTF: NMVLX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The Vident Core US Equity Fund (NASDAQ: VUSE ) is the top-rated Mid Cap Value ETF and the BMO Mid-Cap Value Fund (MUTF: BMVGX ) is the top-rated Mid Cap Value mutual fund. VUSE earns a Very Attractive rating and BMVGX earns an Attractive rating. The PowerShares Russell Midcap Pure Value Portfolio (NYSEARCA: PXMV ) is the worst-rated Mid Cap Value ETF and the Nuveen Mid Cap Value Fund (MUTF: FASEX ) is the worst-rated Mid Cap Value mutual fund. PXMV earns a Dangerous rating and FASEX earns a Very Dangerous rating. East West Bancorp (NASDAQ: EWBC ) is one of our favorite stocks held by BMVGX and earns an Attractive rating. Over the past decade, East West Bancorp has grown after-tax profit ( NOPAT ) by 14% compounded annually. Since 2008, the company has improved its return on invested capital ( ROIC ) from 2% to 14% for the last twelve months. Best of all, the recent share price decline has provided a great buying opportunity. At its current price of $31/share, East West Bancorp has a price-to-economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects East West Bancorp’s NOPAT to permanently decline by 10% from current levels. If EWBC can grow NOPAT by just 7% compounded annually for the next decade , the stock is worth $39/share today – a 26% upside. American Campus Communities (NYSE: ACC ) is one of our least favorite stocks held by TCVAX and earns a Dangerous rating. Despite positive GAAP net income, which doesn’t fully account for changes to the balance sheet, American Campus Communities has generated negative economic earnings in each year since 2005. Over that same time frame, the company’s already low ROIC of 5% in 2005 has fallen to a bottom quintile 4% over the last twelve months. Despite the fundamental issues above, ACC is significantly overvalued. To justify its current stock price of $43/share, ACC must stop destroying shareholder value and grow NOPAT by 12% compounded annually for the next decade . This expectation seems awfully optimistic given ACC’s track record. Figures 3 and 4 show the rating landscape of all Mid Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. 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.