Grantham: the end is not nigh Hi, guys.
I know that Grantham is sort of a divisive figure here, with a bunch of folks describing him as some combination of failed and a perma-bear. There are two drivers of his failure to join the recent party. His firm's discipline is driven by mean-reversion. Their argument is, first, that stock valuations can be weird for years, but not weird forever. They keep reverting to about the same p/e they've held in the long-term. Why do they revert? Because stocks are crazy-risky and, unlike The Donald, most investors aren't willing to risk multiple bankruptcies on their way to great returns. Expensive stocks are riskier, so their prices don't stay permanently high. And, second, that profit levels can be weird for years, but not weird forever. Why do they revert? At base, if you're making obscene profits, competitors will eventually come in and find a way to steal them from you. More companies competing to provide the same goods or services drives down prices, hence profits.
Sadly, it hasn't worked that way for a long while. Grantham's argument is that price reversion has been blocked by the Fed since the days of Alan Greenspan. What happens when the market begins to crash? The Fed rushes in to save the day. In effect, they teach investors that pricey stocks aren't all that risky which encourages investors to keep pursuing higher priced stocks. Leuthold noted, for instance, that valuations at the bottom of the 2007-09 crash were comparable to those at the peak of most 20th century cycles. The problem with relying on the Fed is that pretty clear. And he argues that profit reversion has been blocked by a shift in executive compensation: executives are personally (and richly) rewarded for short-term stock performance rather than long-term corporate performance. If an executive had a billion to spend on a new warehouse distribution system that might payoff in five years or on dividend checks and a stock repurchase that plumped the price (and their bonus) this year, the choice is clear. In 2015, S&P 500 corporations put over $1 trillion into stock buybacks and dividends - economically unproductive choices - while is more than double what they'd done 10 years before.
Both of those factors explain Grantham's observation that stocks have been overpriced about 80% of the time over the past 25 years. His current estimate is that US stocks are overpriced by 50-60% right now.
Good news: that's not enough to precipitate a market crash, though "a perfectly ordinary" bear market is likely underway. Vanguard's Extended Market Index Fund (VIEIX) hit bottom on February 11th, down 25% from its June high. That matched, almost to the dollar, the decline in the emerging markets index. Both have rallied sharply over the past 10 days. Regardless, most stocks have been through a bear. Really catastrophic declines, though, rarely occur until market valuations exceed their long-term average by two standard deviations. The current translation: the S&P 500 - about 1900 as I write - at 2800 would be bad, bad, bad.
Bad news: you're still not going to make any money. GMO's model projects negative real returns on bonds (-1.4%), cash (-0.3%) and US large caps (-1.2%). Vanguard's most recent white paper on valuations, using different methods, leaves bonds at zero real return, stocks modestly positive.
Better news: the best values are in the riskier assets, which I hinted at above. US small caps are projected to make 1.5% real, emerging debt is at 2.8% and emerging equity at 4.5%.
For what that's worth,
David
Artisan Small Cap Value (ARTVX) merging into Mid Cap Value (ARTQX)
Bond fund allocation @DavidV: Thanks for the question which is very bond specific. As you suggest, with bonds there are many variables in terms of credit quality, duration, structure and place of issuance (in the case of foreign securities). I find it best to invest in broader income-focused or asset allocation funds and let an expert sort this all out. T. Rowe Price's summary and annual reports for RPSIX (available on their website) probably should be required reading. The fund is not for everyone, but its composition offers insights into how someone might structure an income based portfolio. There's many other fine funds with similar objectives but different approaches. Max mentioned some.
My take on RPSIX's current approach is that the fund is pretty much avoiding bonds further out than
10 years duration and also underweighting government bonds in favor of mid-grade and lower quality corporates. The near 50% weighting in BBB and lower is most interesting. I don't think Price is including the fund's near 20% equity stake in their credit analysis, so that needs to be taken with a grain of salt.
(I attempted to cut & paste some relevant features from their summary page. But the fund's approximately 20% stake in equities made presenting an accurate representation too difficult.)
View Summary:
http://www3.troweprice.com/fb2/fbkweb/composition.do?ticker=RPSIX
Bond fund allocation
Bond fund allocation Hi
@DavidV,
One of the newsletters that I read and I believe will be helpful, to you, and offers good information is linked below for both stock and bond allocations along with their recommended composition. See page six of the newsletter for details on the bond portfolio.
http://funds-newsletter.com/jan16-newsletter/jan16_new.htm
Ted missing the big stories ... I need to go back to work! You'll Need $2 Million to Retire! Monte Carlo is ok to get a broad overview of the probability of maintaining the lifestyle you want until you die. For many people, however, the use of Monte Carlo is not so great. The majority of folks (not on this board) have never saved for retirement, or if so, have done a bare minimum. They spend a lot more than they make. And they approach retirement with more baggage than will fit in their assigned overhead bin. I still maintain that starting retirement with no mortgage and no credit card debt is huge, something a lot of people should work to achieve. There are a lot of basic principles that people should use, but two of the most important are 1) spend less than you earn and 2) pay yourself first - meaning have a goal of maxing out your retirement plan contributions.
Osterweis I don't get the M* commentary. Nothing has changed with this fund's structure, style, process, or philosophy since it started. I have spent a lot more time than M* talking to the entire management team at Osterweis over the past 12 years. Interesting the commentary was written only about two weeks after the same analyst praised the fund and its management for its "excellent risk-adjusted" performance and as a "shelter in the current storm", and "outshining its benchmark", "relative resilience". He goes on to compliment the managers who "are better at assessing credit risk than the rating agencies", and then said the fund's volatility "has been on par with the Barclays Agg". Given that nothing changed at the fund during those two weeks, the new commentary is hard to swallow. When I first read it a few weeks ago, I tried to get a response from M*. Of course they did not respond to my inquiry about the 180-degree about face. This for me is more evidence that the written analysis of funds is often worth a lot less than digging through the numbers and fund documents themselves.
Bond fund allocation No magic recipe. Just keep the more exotic and high yield stuff small, particularly later during work and into retirement. I took a look at their recent "Bond Squad" entries in the Morningstar Discussions. There's a whole big menu, over there. At 61, I'm 43 stocks, 39 bonds. The rest is cash or "other," held in the funds. Some might say I'm too heavy in stocks. But I do believe I'm in the ballpark of what's not overly-risky. Don't over-think it. If you are high-income, use a lot of munis, but not exclusively. ...Actually, I've chosen three separate bond funds, and after that, I let the Fund Managers do the arranging. PREMX, PRSNX, DLFNX. But I have two "Balanced" funds holding both stocks and bonds, too. MAPOX and PRWCX. But PRWCX is closed right now, unless you're already into it. Look also at DODIX. MWTRX. But these are solely open-ended. Others can clue you in to closed-end funds. I even forget whether there is such a thing as a bond ETF..... There are indeed professionals here, and they can give you something "from the horse's mouth."
Ted missing the big stories ... I need to go back to work! You'll Need $2 Million to Retire! @Dex @MikeM @MJGAs noted by Dex.....these first four
- know how to budget
- track your spending
- pay yourself first
- spend less then you earn
>>>If the person can not be involved with or control any of these, there will be no need for anything related to the Monte Carol machine.
Probably more so today than with my generation, there is a high likelihood that a college graduate today, or anyone employed has not a clue as to where they will find their arse on retirement day.
But, one thing is written; in that if the 4 items in the list above can not be properly controlled, the retirement roadmap will not exist to any value.
I know from 20
15 the same type of budget information I know from
1970; as to how much and where monies travel in the broad budget categories. Tis not difficult to track.
Catch
Ted missing the big stories ... I need to go back to work! You'll Need $2 Million to Retire!
Simple heuristics (rules-of-thumb) are fine when making common everyday decisions like buying a hamburger or not, but are totally inadequate when making complex, significant decisions like those about retirement.
If there is one thing that rules of thumb work best - it is retirement planning especially when you are young:
- know how to budget
- track your spending
- pay yourself first
- spend less then you earn
- invest
100 (or
110) - age to stocks, rest to bonds
- understand cash flow thrown off by your investments and your retirement needs
Those simple rules of thumb and maybe a few others are the foundation for financial retirement planning.
While those calculators are interesting ( I've experimented) with them, they are useless without the basics.
Financial planners and stock salesmen like those calculators because they make retirement planning complicated and retirement a nearly impossible goal.
The Closing Bell: Dow Industrials Leap 229 Points As Oil Soars: All 11 S&P Sectors In Green
SilverPepper Cmdty Strats Glb Macro Adv (SPCAX) @sligo & MFO Members: Fund opened on
11/
1/
13 @$
10.00 and closed last Friday @$8.58, 74%, in cash, and a ER of 2.33%, just say no to Renee !
Regards,
Ted
Renee Haugerud:
SilverPepper Cmdty Strats Glb Macro Adv (SPCAX) This fund was being recommended to a Mutual Fund Store client which surprised me a little as I thought they were generally against esoteric funds. The SilverPepper website certainly contains a lot of narrative, however with an E/R of 2.23% and 146% turnover their promotion of a hedge fund for "the little people" (my words) might be a little rich for the short history of the mutual version. Wondered if anyone had any thoughts on such a product.
Ted missing the big stories ... I need to go back to work! You'll Need $2 Million to Retire! Using a 4-5% withdrawal rate, the 100-age allocation could be very problematic, as it always has been. Unless there is simply more savings/investments than will ever be used, folks could find they are eating up principal much faster than their longevity will allow. Of course, not having a mortgage when retiring is a game changer, as is receiving a public pension. No mortgage AND a pension are huge. There is no 'rule of thumb' that should be applied here. It is very individualistic, and each household should spend a good amount of time planning just what 'retirement' looks like, both in terms of cash flow and life activity.
Anything to back that up or is it from your life experience?
Investors Pile Into Treasury Bond Funds For 10th Straight Week Look out below! The average weighted price of bonds in Vanguard's Long-Term Treasury VUSTX is $110.58. If that is not a recipe for disaster somewhere down the road, I don't know what is. The average coupon is 3.67%. The actual 30-day yield is 2.29%. It doesn't take a rocket scientist to see the potential problems here. Just moving to intermediate-range bonds in VFIUX brings the average price down to $100.41, but there is still some disconnect with the average coupon at 2.97% vs. a yield of 1.29%. Still much safer than long-term treasuries.
Ted missing the big stories ... I need to go back to work! You'll Need $2 Million to Retire! Using a 4-5% withdrawal rate, the 100-age allocation could be very problematic, as it always has been. Unless there is simply more savings/investments than will ever be used, folks could find they are eating up principal much faster than their longevity will allow. Of course, not having a mortgage when retiring is a game changer, as is receiving a public pension. No mortgage AND a pension are huge. There is no 'rule of thumb' that should be applied here. It is very individualistic, and each household should spend a good amount of time planning just what 'retirement' looks like, both in terms of cash flow and life activity.
Tax ? TurboTax Delux is available for $50 at Costco. The last of 1099-Div and 1099-B arrived this week and our 2015 return is now completed.
Ted missing the big stories ... I need to go back to work! You'll Need $2 Million to Retire! With the lack and disappearance of "steady" job prospects, ( compared to the boomer generation ) innovation in alpha producing investments, and lack of planning help available to young investor, they will have to be more DYI going forward. Robo advisors, buy and hold index investing, and 60 / 40 "glidepath" funds won't help in the accumulation of the millions of dollars needed for survival either.
One of the best steps that a young investor can take, is the opening and funding a ROTH IRA, and then investing in small cap value * . Applying a quantitative tactical model to a portfolio of small cap value, long bond fund and cash equivalents has taken a smaller investment stake and produced risk alpha above the buy and hold of small cap value **.
True dat!
As to small cap value info. Is it saying
100% into SCV? If so I would lean more to the old allocation of
100-age = stocks and remainder into bonds.
