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Time Management?

Time is our most precious resource. When we’re investing, the length of time an investment can be held is the single most important factor to consider. Given enough time, risky investments become safe, and safe investments become risky. Having an investment plan that takes time into account is critical to investment success. Because there’s always enough time, if we use it well. Time is our most precious resource. We can’t make more of it, it’s difficult to manage, and everyone wants some of yours. We can try to stretch time, to enjoy an event or experience for longer, but the clock ticks relentlessly forward: time waits for no one. When we’re investing, the length of time an investment can be held is the single most important factor to consider. Given enough time, risky investments become safe, and safe investments become risky. Over the last 30 years, risk-free T-Bills have averaged 3.3% per year – barely above inflation. By contrast, the S&P 500 – with all its ups and downs – has grown 10.6% per year. Source: Bloomberg If your goal is to retire in 30 years, safe investments don’t help very much. But if you want to retire in 5 years or less, having all your money in stocks is foolish. There can be multi-year periods, where you’d have to draw on the funds when the market is down. Safe investments keep you from having to sell stocks after they’ve fallen – turning temporary price fluctuations into permanent losses. But the longest duration investments – those that in the short-run are the most volatile – are the ones that return the most over a long period. Having an investment plan that takes time into account is critical to investment success. Because there’s always enough time, if we use it well. Share this article with a colleague

Stock Investors Bask In The Economic Slowdown’s Glow

Once more, the U.S. economy is flirting with trouble. On the other hand, euphoria on the high probability that the Fed will abstain from 2015 rate hikes has given hope that a 4th quarter rally may materialize. If investors push prices much higher from existing levels, they’d be back to exorbitant P/E and P/S multiples. The financial markets will only support extreme overvaluation if the Fed is in “stimulus” mode, as opposed to “de facto” tightening. By July of 2012, a wide range of indicators suggested that the U.S. economy was flirting with trouble. Job growth was decelerating. Business investment was deteriorating. Meanwhile, manufacturing via the ISM Manufacturing Survey (PMI) was flirting with contraction. Up until that moment in time, the Federal Reserve had already left rates at zero percent for three-and-a-half years. What’s more, they had already created trillions of electronic dollars to acquire government debts and push borrowing costs to unfathomable lows to ward off a double-dip recession (i.e., “QE1,” “QE2,” “Operation Twist”). However, the end of those programs seemed to show that the U.S.economy was still too fragile to stand on its own. Not surprisingly, leaked rumors about a more awe-inspiring economic jolt began taking over the July 2012 business headlines. Terms like “QE3, “QE Forever,” and “QE Infinity” had been making the rounds. Indeed, by September of 2012, The Fed had unleashed an open-ended bond buying program that rivaled anything investors had seen previously. Fast forward three years. Once more, the U.S. economy is flirting with trouble. The percentage of 25-54 year-olds (19.5%) that are out of work has risen sharply. (Retirees? College students?) Median household income is sagging. Business investment in research, plants, equipment and human resources development is virtually non-existent, with virtually all after-tax profits going to share buybacks and shareholder dividends. Non-revolving consumer credit has grown from 14.6 percent of after-tax income at the end of the recession (6/2009) to 18.7 percent (6/2015). And manufacturing via PMI? Falling throughout 2015 and hanging on by a thread (50.2), we’re right back to the type of environment that prompted previous calls for more quantitative easing (QE) “cowbell .” From an investment standpoint, the demand for U.S. treasury bonds in recent government auctions still points to risk aversion. Recall Monday’s 3-month T-Bill auction (10/5) where $21 billion had been acquired at 0%. Zero percent! It was the lowest yield for the 3-month T-bill on record . On Wednesday (10/7), another $21 billion went to auction on 10-year Treasury bonds. The high yield of 2.066% was the lowest since April. Equally worthy of note (no pun intended), the indirect bidding component that includes significant central banks acquired $13.1 billion (62.2%) – the second highest percentage on the record books. On the other hand, euphoria on the high probability that the Fed will abstain from 2015 rate hikes has given hope that a 4th quarter rally may materialize. For instance, the New York Stock Exchange (A/D) Line shows September’s successful retest of the August lows. Remember, it was the A/D Line that foreshadowed the dramatic sell-off in the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ) before its mid-August arrival. Higher lows and higher highs on the A/D Line from here forward would likely signal a shift in attitude toward greater risk taking. Another trend that is worth watching? Consider the relationship between U.S. treasuries and crossover corporates – U.S. company bonds that straddle the line between low-end investment grade (Baa) and higher-rated “junk” (Ba). A rising price ratio for iShares 7-10 Year Treasury Bond ETF (NYSEARCA: IEF ) : iShares Baa-Ba Rated Corporate Bond ETF (BATS: QLTB ) is a sign a of risk aversion. Granted, IEF:QLTB is still rising alongside its 50-day trendline. On the other hand, the fact that IEF:QLTB is lower than it was in August may be a sign that risk taking is on its way back. Put another way, a tightening in spreads between treasuries and crossover corporates would be a sign that investors might be looking for a return on capital again, rather than a return if capital alone. Indeed, the battle between risk-on and risk-off has reached a crossroad. Many of the significant stock ETF proxies – the SPDR S&P 500 Trust ETF ( SPY ), the iShares Russell 2000 ETF (NYSEARCA: IWM ), the V anguard FTSE All-World ex-U.S. ETF (NYSEARCA: VEU ), Vanguard FTSE Developed Markets ETF (NYSEARCA: VEA ) rest near resistance levels of 50-day moving averages. Similarly, the S&P 500 itself fights to reclaim the psychological level of 2000, while the Dow Industrials toils to climb back above a psychological level of 17,000. Keep in mind, though, analysts widely anticipate earnings and revenue declines for the third consecutive quarter . If investors push prices much higher from existing levels, they’d be back to exorbitant P/E and P/S multiples. And if recent history is any guide on investor comfort will overvalued equity valuations, investors would not take kindly to a 4th quarter rate hike campaign; that is, the financial markets tens to support extreme overvaluation when the Fed is in “stimulus” mode. A three-month stock celebration (Oct-Dec) may come down to these factors: (1) the Fed stays at the zero-bound, (2) the 10-year stays at 2%-2.25% to keep the credit bubble blowing, and (3) the earnings and revenue picture surprises at the flat-line, as opposed to disappointing with sharper than projected deterioration. In the meantime, pay attention to the market internals via the A/D Line as well as the spreads between treasuries and corporates. 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.

ETF Issues: What You Don’t Know Might Hurt You

ETFs can be great options for investors. But you have to know what you are buying. iShares, for example, isn’t making that easy, though it’s doing the best it can. Exchange traded funds, or ETFs, are an incredible work of human ingenuity. They are pooled investment vehicles that trade close to net asset value while being traded all day long. And while there are good reasons to like these hot products, there are also reasons to dislike them. And a single data point provided by iShares shows one of those reasons. I don’t hate ETFs To start, I don’t hate ETFs. I just don’t like them as much as most investors seem to. And certainly not as much as Wall Street does, based on how many ETFs have been brought to market in recent years. Yes, they are cheap to own and provide quick and easy diversification. But it’s so easy to buy an ETF that people aren’t looking closely enough at what they are buying. That may not matter much if you pick up the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ), a clone of the S&P 500 Index. But with more and more esoteric ETF product being created by rabid Wall Street salesmen, taking the time to get to know what you own is starting to matter more and more. For example, I recently wrote about the fine print in the prospectus of the Global X Yieldco Index ETF (NASDAQ: YLCO ). Essentially, this ETF is focused on buying 20 stocks in a new and niche sector that doesn’t really have 20 stocks to buy. YLCO is all about the story, not so much about the substance, in my eyes. Maybe YLCO will be a great ETF at some point, but right now it’s a risky proposition that all but the most aggressive investors should avoid. So, yes ETFs can be good. But Wall Street has been perverting this goodness in an attempt to make a buck. iShares isn’t evil But don’t think it’s only exotic fare about which you need to be concerned. Even more “normal” stuff can lead you astray. For example, the iShares NASDAQ Biotechnology ETF (NASDAQ: IBB ) has some problems of its own. Now iShares is the ETF arm of giant asset manager BlackRock (NYSE: BLK ). And, for the most part, BlackRock is a stand up company. But that doesn’t mean every product it sells is a good investment option. For example, a quick look at IBB’s overview page shows a P/E ratio of 25. That might not be too surprising given that biotech companies are high growth. You wouldn’t expect a P/E of 10 for this group. In fact, you might even say it’s on the low side for the sector, which is known for housing money losing companies looking for a big score via the creation of new drugs. Which is why you should click the little information icon next to that P/E stat. That’s where you’ll learn that the P/E ratio doesn’t include companies that don’t have earnings. So, essentially, the P/E really tells you less about the ETF’s portfolio than you might at first believe. Interestingly, the same issue pops up throughout iShare’s data on P/E. For example, the iShares U.S. Oil & Gas Exploration & Production ETF (NYSEARCA: IEO ) has a P/E that’s listed at a little over 8. With 70% of its assets in the oil and gas exploration sector, where companies are bleeding red ink, you have to step back and wonder what’s going on. A low P/E makes sense for an out of favor sector, but does that average really tell you the whole story? The thing is the warning about P/E is a standard disclosure on the iShares site and holds true for everything from a niche biotech fund to the company’s S&P 500 Index clone. And iShares really isn’t doing anything malicious. It’s a database issue. You can’t calculate a meaningful P/E if a company doesn’t have any E to work with. So in order to get the job done, in this case calculating an average P/E, you toss the garbage numbers. And, thus, you create a P/E by using only those companies with earnings. Which, unfortunately, biases the number you have just created so that it may offer a misleading picture of the portfolio. So I’m not hating on iShares, there’s not much else it could do to provide site-wide data. And at least it goes the extra step of disclosing this little problem. But it should make you step back and take pause. If you own that biotech fund or the oil and gas fund, the stats you are using to validate your purchase may, in fact, not be reliable. This issue can be found at open-end mutual funds, too, so don’t think ETFs are the only problem child. The best example comes from Morningstar. This research and data house is very open about the way it calculates most of its data, you just have to look. And when it comes to average P/E, they have a workbook available that explains, “If a stock has a negative value for the financial variable (EPS, CPS), the stock will be excluded from the calculation.” EPS is earnings per share and CPS is cash flow per share. So any site that uses Morningstar data will be impacted by this issue… like Fidelity (read the fine print at the bottom of the data page). The question is to what degree is there a problem. In some cases it’s a minor issue. In the case of IBB, roughly half of the ETF’s holding don’t make any money and are excluded from the P/E calculation, according to The Wall Street Journal . That makes the P/E figure provided by iShares pretty much useless in my eyes. And it points out yet another problem that ETF investors may not realize when they buy what is currently a hot Wall Street product. Know what you own For many investors ETFs are seen as a short cut. A punt option that doesn’t require much thinking. In many cases that’s true, but in many others it isn’t. Which is why knowing what you own is so important. Can you accept the average P/E for an S&P 500 Index fund at face value? Yeah, probably. But what about an ETF honed in on an industry that’s filled with money-losing companies, like biotech? I don’t think that passes the sniff test. You’d be better off doing a little more digging into the portfolio to get a good understanding of what’s in there. Again, I don’t hate ETFs. But they are so popular and have been pushed so hard by Wall Street that I fear investors don’t have any clue what they own. Too many people have been lulled into complacency by slick marketing and an avalanche of new products. I don’t think that’s a story that ends well. If you own an ETF, I recommend taking a deeper dive just to make sure you really own what you think you own.