Mutual Fund/ETF Research Newsletter ... "With the markets overvalued, here's what to do." Hi davidrmoran,
Thank you for making comment on my post.
At first brush, I'd trend to agree with you; but, the message in the newsletter goes beyond your comment. Here is what the newsletter has to say on how to pick a fund.
'Which Funds Should Be Considered "Undervalued?"
OK, I know what your next question is going to be. How exactly can one recognize funds that are made up of stocks that are predominantly undervalued?
First an admonition: As implied above, the term "undervalued" is a relative one and and even "experts" don't agree on how to assess it. And, the term shouldn't suggest or imply that big gains will lie immediately ahead, even when correctly assessed. (Many experts rely on a statistic called the P/E ratio, or price divided by earnings, to define abnormally high or low valuation; unfortunately, many stocks, and stock funds, with relatively low P/E's will continue to underperform, while, conversely, funds with extremely high P/E's can continue climbing even for years. Therefore, even though the statistic for any fund is readily available, such as on sites such as morningstar.com, I wouldn't recommend paying that much attention to it.)
Of course, the opposite is also true. What is "overvalued" isn't always clear either and such funds don't always immediately start to underperform (although my research suggests that when measured as I will present below, they most likely will within a year or two). In fact, I have been saying that most types of funds have been overvalued since late Oct. 2013. Since then, most of these funds have continued to move ahead, although they appear to have slowed down somewhat since the start of this year.
Thus, while the concepts of over/undervaluation are frequently debated by the experts, and there is no absolute "yardstick," I will now give you a guideline that I use to help shape my own investment decisions.
Suppose you own a fund that has returned cumulatively in excess of more than 25% of what might have expected over the past few years. More specifically, stocks, on average, tend to return 9 to 10% a year. For simplicity, let's call that a cumulative return of 50% over 5 years. So if your fund returns 25% more than that, it would return 75% over 5 years. This, then, comes out to an average return of 15% a year.
Unlike a fund, when you own an individual stock, it can literally go to the moon. Once again, take Apple stock. Over the last 5 years, it has returned about 150%, or 30% per year. But over the last 10 years, it did even better - 38% a year, or 380% cumulatively. In other words, there may be nearly no limit to how far up any one stock might go. Of course, a badly performing stock might continue underperforming, inflicting huge losses, perhaps until the company goes out of business or goes bankrupt. Enron stock, a darling of Wall Street from 1996 to 2001, fell from over $90 per share to less than $1 before becoming totally worthless.
But with a mutual fund/ETF, the ride should be smoother since the fund hopefully invests in many, many stocks, lessening the impact of any one extreme success or failure. Since we can not know the future for sure, let's just say while, on average, 50% total gains over 5 years for a fund are close to the normal, 75% gains or more are approaching rarified air. A fund with the former result might be considered to have a "fair" or appropriate valuation; one with the latter is probably "overvalued," or approaching what I would consider being overvalued in the near future.
My research has shown that using such a 15% "yardstick," stretched out over time, can be a useful marker of likely overvaluation. Once most funds surpass it based on a 5 year period, one is typically better off investing at least some portion of a portfolio elsewhere, specifically in one or more funds that instead appear "undervalued."
We might think of an "undervalued" category or specific fund as one where its stocks have performed significantly worse than an annualized return of 9-10%. In fact, if the average fund in its category is currently showing only a 5% annualized return over the last 5 years, it may be underperforming an "average" performing fund by 25% cumulatively and an overvalued fund by at least 50% cumulatively (75% minus 25%).
For the short term, the "overvalued" fund, although probably not recognized as such by most investors, might appear the wiser choice. But for the longer term, the undervalued fund would appear to have much more potential for future gains.'
Thanks again for your comment. As can be gained for reading the above, I think you'll now agree that the newsletter's message goes well beyond just picking a value fund.
I wish all ... "Good Investing."
Old_Skeet
CNBC Guest Commentators Jerry Boyer: "I was a paid CNBC contributor for two years, 2008 and 2009. And my job was principally to appear on Kudlow’s show. I appeared as a guest well over a hundred times ..." Matt Goldwater, a former "news associate" at CNBC wrote in 2014: "I can confirm they get paid per appearance. I do not have any inside information, but presumably they are also paid to exclusively contribute to the network."
Apparently they demand "exclusive rights" from every guest except the A-listers. You're not allowed to appear on Bloomberg or, (by some reports) Fox Business on the same day as you appear on CNBC. When they can, they pursue complete exclusivity.
David
As Cognition Slips, Financial Skills Are Often The First To Go Didn't read the article, but I would think keeping your mind active as you age is just as important as exercise in old age. I can't think of any better mental exercise than following the markets. When I was young I use to sit in the brokerage boardrooms and watch the tape. I was always impressed with the mental vitality of those sitting with me - many in their 80s and even a few in their 90s. I attributed their mental alertness to their years of monitoring the markets and wanted to be just like them when I got old.
As Cognition Slips, Financial Skills Are Often The First To Go Yes. Its important to develop a complete will (or living trust) early and to keep it updated. It is also important to do some contingency financial planning regarding what happens if you do suffer from significant mental decline. And, it is important to self evaluate your financial mental fitness as time passes (and that, if you are in a long term relationship with someone, that you discuss the importance of honestly reporting to each other about what you observe about that significant other).
My father lived with dementia for the last 15 years of his life. He had handled most of my parent's financial affairs during their 60 years together. My parents did very little "what if" planning regarding this possible outcome. Fortunately, I was able to make myself available to handle their financial and many of their other personal affairs during those years. This experience clearly showed me that planning for this possible outcome is important.
As Cognition Slips, Financial Skills Are Often The First To Go It's interesting. I remember being told when I was younger that the first thing you forget when you've been drinking are the things you most recently learned- like driving. At that time, the point was don't drink and drive.
This says that the first things to be forgotten due to mental disease are things you've known for a very long time, rather than the stuff you just learned, like how to use your new iPhone or the name of your second wife who you've only been married to for 10 years rather than the 70 years you've been able to count backwards from 100 by 7.
I'm not trying to make any real point other than finding it interesting, but I guess it must mean the parts of the mind affected by alcohol are different than those affected by mental disease.
Negative interest rates put world on course for biggest mass default in history ""The financial crisis was meant to have exploded the credit bubble once and for all, but there's very little sign of it. Rising public indebtedness has taken over where households and companies left off.""
LOL. The financial crisis would have busted the credit bubble if governments let it. Instead, they scrambled to reflate it (and then some) as soon as possible. As I've noted previously, no one learned anything - the only question was, "How fast can we reboot to a few years prior?"
Now you have:
"The combined public debt of the G7 economies alone has grown by close to 40 percentage points to around 120pc of GDP since the start of the crisis, while globally, the total debt of private non-financial sectors has risen by 30pc, far in advance of economic growth."
"need constant infusions of financially destabilising debt to keep them going."
...which is certain to end well.
Negative interest rates put world on course for biggest mass default in history This somewhat alarmist headline by Jeremy Warner caught my eye this morning. He is a widely read British financial commentator with about 30
years in the business. Its interesting to read a commentary coming from that side of the pond.
Here are a couple of "facts" I gleaned from the article:
"According to investment bank Jefferies, some 70pc of all German bunds now trade on a negative yield. In France, it's 50pc, and even in Spain, which was widely thought insolvent only a few
years ago, it's 17pc."
"The combined public debt of the G7 economies alone has grown by close to 40 percentage points to around 120pc of GDP since the start of the crisis, while globally, the total debt of private non-financial sectors has risen by 30pc, far in advance of economic growth."
Here are three of the author's conclusions:
"The financial crisis was meant to have exploded the credit bubble once and for all, but there's very little sign of it. Rising public indebtedness has taken over where households and companies left off."
"For all kinds of reasons, advanced economies, and perhaps emerging ones too, seem to have run out of productivity-enhancing growth and therefore need constant infusions of financially destabilising debt to keep them going."
"The flip side of the cheap money story is soaring asset prices. The bond market bubble is just the half of it; since most other assets are priced relative to bonds, just about everything else has been going up as well."
The author does not lay out a clear case for why a mass default lies ahead rather than some other less dramatic "muddle our way through" outcome. But perhaps he does successfully argue there is a fat tail risk for that or another similarly disruptive outcome ahead for the global economy in the not too distant future.
Here is the link:
telegraph.co.uk/finance/comment/jeremy-warner/11569329/Jeremy-Warner-Negative-interest-rates-put-world-on-course-for-biggest-mass-default-in-history.html
Top Performing Health Care Funds Bruised
A Better Retirement Planner Hi Dex,
I did not follow your analyses in any detail, but I believe you are being far too pessimistic. A 30-year projected retirement is doable with less funds than your analyses suggest.
How do I know this? I did a few calculations using the Monte Carlo simulator that I referenced on this exchange. Please give it a try using your specific constraints. I believe it offers some hope for initial retirement portfolio values in the one-half to one million dollar range for a COLA adjusted withdrawal rate starting at $30,000 annually.
Using end of period portfolio survival probability as the success criteria, a one-half million dollar initial portfolio worth is only a coin flip likelihood. That’s not acceptable. But a one million dollar portfolio has a survival likelihood in excess of 90%. Those odds were estimated with a diversified portfolio with an average annual return of 8% and a standard deviation of 15%.
I did some what-if scenarios also. For the inadequate one-half million dollar portfolio, the survival likelihood odds can be incrementally improved by about 10% if a more aggressive equity portfolio is postulated, or if a portfolio with a reduction in standard deviation is assembled, or if a flexible drawdown strategy is practiced. Flexible meaning that COLA raises are held to zero for negative return years. These tactics can be individually deployed or used in concert.
My analyses were very incomplete and were done for illustrative purposes only.
Stay strong, all is not lost. And use the referenced Monte Carlo code.
Best Wishes.
