The yield of an asset is a key component of predicting future returns. This is true for the yield on Treasury bonds as well as the dividend yield for stock indexes. The yield on aggregate bond indexes is considered a good proxy for future expected returns. The dividend yield of broad stock indexes has been shown to provide significant value in predicting future stock index returns. In both cases, low yields tend to predict high future returns, and vice versa. These arguments that yields predict returns are not without critics, especially for equities. Continue reading
The S&P500 has recently been hitting new all-time highs, which would seem to suggest that the economy is recovering and that the U.S. economy is back on track. The story does not look quite so rosy when you account for inflation, as Mark Hulbert has recently noted. The current level of the S&P500 is, in fact, still about 24% below its high in 2000 once inflation is considered. Economists and finance people would say that, measured in real terms, the S&P500 is 24% lower than it was at its 2000 peak. What this means is that the proceeds from the sale of a share of an S&P500 index fund purchases considerably less in real goods today than it did thirteen years ago. Continue reading
I have known Phil DeMuth for a number of years and I admire his common sense and views on many topics. Phil authored the recently-published book The Affluent Investor that fills a need in the crowded shelves of investment books. As a financial advisor to high-net-worth families, Phil brings valuable perspective to investors who have built substantial portfolios and seek to protect and grow their wealth effectively. Continue reading
I have been struggling to understand a problem that I am going to refer to as the ‘yield paradox.’ Yields for individual asset classes look low. The 10-year Treasury bond is yielding about 1.9%, and 30-year Treasury bonds are yielding a similarly paltry 3%. The S&P 500 is yielding 2.1%, which is very low by comparison to historical levels. Investment-grade corporate bond indexes are yielding less than 4% (see LQD, for example, at 3.8%). Given that the official rate of inflation for 2012 was 1.7%, these yields mean that investors are getting very little yield net of inflation. The very low yields on bonds and on stock indexes is a direct result of the Fed’s actions in holding interest rates at historical lows via Quantitative Easing. We have not yet gotten to the paradox. Continue reading
The price of a share of Apple (AAPL) is almost 30% below the high that it set back in September 2012—about five months ago. Even before its peak, the price of Apple shares had already made it the most valuable company in history. In those heady times, Apple shares reached $702. Today, they are at $503. Even today, however, Apple remains the largest single holding in the S&P 500 at about 3.6% of the total index. It is mind boggling to consider that the market value of the most valuable public firm in history could decline by 30% in five months, without some sort of catastrophic event. But this is the situation and there are some lessons to be drawn. Continue reading
Guest post by Contributing Editor, John Graves.
Editor’s Note: John Graves has been an independent financial advisor for 26 years. He is one of the two owners of The Renaissance Group, a Registered Investment Advisor based in Ventura, CA. John’s book, The 7% Solution: You Can Afford a Comfortable Retirement, was published in 2012. When I read this book, I was impressed with John’s approach and thinking and I recommend it as a good read. I contacted John and asked if he would consider contributing to this blog. After we bounced around some possible topics, he sent me the following piece that describes his process for designing income plans for retirees. Continue reading
In general, I ignore the spate of market predictions that experts issue at the start of each year. There are exceptions, and after reading Jason Hsu’s outlook for this year, I am pleased to recommend it to readers. Dr. Hsu is the Chief Investment Officer at global money management firm, Research Affiliates. I found his article both insightful and appropriately skeptical of all forecasts. How can you not appreciate a money manager who starts his prediction for the year ahead with John Galbraith’s quip that “the only function of economic forecasting is to make astrology look respectable”?
I am going to mention a few of the elements of Hsu’s outlooks and add some thoughts. Hsu first examines the drivers for bonds and then equities. I will follow this structure. Continue reading
One of the most-discussed issues in long-term investing is whether to focus on income generation or simply to think in term of total return (price gains plus income). The discussion of this topic often focuses on whether investors should seek out stocks that pay dividends vs. simply planning to sell a fraction of their portfolio periodically to provide income. I recently wrote a long article on this topic, which has been cited in a very interesting discussion of this theme going on at Bogleheads. One of the most active participants in the debate on the Bogleheads forum and elsewhere is Larry Swedroe, a well-known advisor and author. As I read the Bogleheads discussion thread, it strikes me that there is considerable confusion around this topic, so I thought I would add a few more thoughts. Continue reading
The stocks of companies that produce and distribute alcoholic beverages have dramatically out-performed the broader market both in recent years. There are many factors that can lead to the relative out-performance of one sector. Surprisingly, however, so-called ‘sin stocks,’ including those of companies that produce and distribute alcohol, have a long history of delivering high returns to investors. Sin stocks tend to fall into the ‘value’ category, but even after accounting for the well-known value premium, a 2005 study, titled The Price of Sin: Effects of Social Norms on Markets, found that ‘sin stocks’ provide additional returns that cannot be explained by the value premium alone. The study finds that this out-performance is both substantial and statistically significant. The Folio Investing Wine, Beer, and Spirits Folio demonstrates that this out-performance has persisted in recent years, too. Continue reading
The market rally of the past twelve months may appear somewhat baffling in light of the fact that individual investors have been pulling money out of the market. The S&P 500 is up 22.5% in the last year, while September marks the 17th consecutive month during which investors took money out of equity mutual funds. The outflows from equity mutual funds are not simply due to investors moving from mutual funds to ETFs. A recent analysis by Bianco Research demonstrates that including ETF flows does not change the results. Continue reading