Posts tagged: investments
“It seems that everywhere you turn, the press is asking, “When is the Fed going to raise interest rates?” While that may be the question du jour, for long-term investors, the question is irrelevant to the construction of a high-quality bond portfolio.
1. Understand the role bonds play in a portfolio. When it comes to managing a bond portfolio, many investors, especially retirees, are mainly focused on generating income, but investors need to be aware of the risks taken to achieve a set amount of income in today’s low interest rate environment. For example, when interest rates are low (and bond prices are high), the income approach would cause an investor to buy more bonds, extend duration or accept lower credit quality in order to maintain a certain level of income. Likewise, if you think back to the early 1980s, when you could lock in long-term bond rates over 10%, the income approach would cause investors to own fewer bonds — even though the lower prices (higher yields) were a once-in-a-generation buying opportunity.
A better approach is to divorce the cash flow decision from the income decision. To do this, an investor needs to set a rational asset allocation, periodically rebalance to that target, and allow the total return of the entire portfolio to satisfy any income needs as opposed to viewing the interest generated by a bond portfolio as the sole source of income. Once a monthly (or some other frequency) withdrawal rate that meets an investor’s living expenses is determined, some combination of interest, dividends and proceeds from maturities and sales will provide enough cash to meet the withdrawal each month. Read more »
“Quick, before you read this post, ask yourself these questions:
1. What percentage of stocks beat their benchmark index over their lifetime?
2. What percentage of stocks have a negative return over their lifetime?
3. What percentage of stocks lose essentially all of their value?
Not sure? The answers to all three questions are below.
When most people think of the stock market they do so in terms of index results. Popular indexes include the S&P 500 and the Russell 3000. However, most people are not aware of the tremendous differences between winning and losing stocks “beneath the hood” of a diversified index. From 1983 to 2006 over 8,000 stocks (due to turnover and delisting) were at some point members of the Russell 3000. The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
- 39% of stocks had a negative lifetime total return (2 out of every 5 stocks are money losing investments)
- 18.5% of stocks lost at least 75% of their value (Nearly 1 out of every 5 stocks is a really bad investment)
- 64% of stocks underperformed the Russell 3000 during their lifetime (Most stocks can’t keep up with a diversified index)
- A small minority of stocks significantly outperformed their peers (Capitalism yields a minority of big winners that all have something in common) Read more »
Prior to the Brexit vote, there was a wide range of valuations but few cheap assets globally, as shown in the chart below. With most asset valuations still looking fair to expensive, it’s important to focus on relative valuations.
Modest economic growth, low inflation expectations and easy central bank policies have sent yield lower, intensifying flows into income-oriented assets. This partly explains extreme valuation differences between equities and government bonds. Valuations tell us little about short-term returns but can potentially shed light on medium-term returns. Starting valuations explain roughly 10% of U.S. equity market returns over the following year but 87% of returns over the next 10 years, according to the analysis back to 1988.
Facebook has defied even optimists’ projections of how big the 12-year-old firm could one day become. Today the company’s flagship social network claims 1.6 billion users, around a billion of whom log on each day. Facebook has attracted and engaged so many users by engineering features that are highly addictive and relevant to their lives, so people keep coming back for more hits (otherwise known as updates). Including the other apps it owns, such as WhatsApp, Instagram and Facebook Messenger, Americans spend 30% of their mobile internet time on Facebook, compared to around 11% on Google search and YouTube combined.
The amount of data Facebook collects on users has helped it become the world’s second-largest advertising company on mobile devices. Last year it claimed 19% of the $70 billion people spent on mobile advertising globally, compared to Twitter’s paltry 2.5%. Read more »
Robo-advisors are platforms that use algorithms to manage users’ investment platforms. And they are threatening to upend the enormous global wealth management industry. Globally, wealth managers were responsible for $74 trillion in assets under management (AUM) in 2014. BI Intelligence forecasts that robo-advisors will manage around 10% of total global assets under management (AUM) by 2020.This equates to around $8 trillion.
In its 2016 Guide to Retirement, J.P. Morgan Asset Management included a powerful illustration of how compounding returns lead to huge differences between investors who start out young and those who wait until later in their careers before seriously saving.
JPMorgan shows outcomes for four hypothetical investors who invest $10,000 a year at a 6.5% annual rate of return over different periods of their lives:
- Chloe invests for her entire working life, from 25 to 65.
- Lyla starts 10 years later, investing from 35 to 65.
- Quincy puts money away for only 10 years at the start of his career, from ages 25 to 35.
- Noah saves from 25 to 65 like Chloe, but instead of being moderately aggressive with his investments he simply holds cash at a 2.25% annual return.
Source: J.P. Morgan Asset Management Read more »
If we define the term “Earnings Recession” as two consecutive quarters during which S&P 500 earnings decline year-over-year, then the current earnings recession began in Q3 2015 and is still ongoing. We’re in the third consecutive quarter of year-over-year earnings declines.
Yes, the market is experiencing an earnings recession going on three quarters, but it’s coming from the energy and materials sectors, which are minor parts of the market on both an absolute basis and relative to history. Financial and Consumer sectors are only into their first quarter of declining y-o-y earnings and the remaining six sectors are still showing EPS growth.
More importantly, there is a history for this sort of thing that isn’t especially dour. There have been 12 earnings recessions since 1954 and 3 of them did not accompany an actual economic recession. The instance that occurred in 1985-86 for example, was caused by a sudden drop in oil prices (sound familiar?) and occurred in the midst of a period of economic expansion.
Private equity firms have enjoyed startling growth over the past few years, posting a 13.7% compound annual growth rate (CAGR) since the end of 2005. That compares to a 7.5% CAGR for hedge funds and 7.7% for other asset managers. These private equity firms now manage $3.65 trillion in global assets around the world.
The growth curve is now going to flatten, according to a report from Deloitte, which analyzed how the growth story may play out for the private equity industry in the next five years. The researchers think it’s most likely for private equity assets under management (AUM) to hit $4.6 trillion by 2020, representing a 5% compound avearage growth rate. “Private equity growth has been slowing over the past few years, a trend that may persist,” the report said. “If this happens, managing to a new normal in private equity may be next on the agenda.”
by Mitch Zacks, Senior Portfolio Manager at Zacks Investment Management
“U.S. debt has been a hotly debated topic for as long as it’s existed—which means it’salways been a hotly debated topic. The thought of knowing that our country has some$19 trillion in total debt outstanding makes many stomachs turn, especially when you consider that it’s more than our total annual GDP (estimated at $18.2 trillion through Q1 2016).
The questions on everyone’s minds are: Since when does the United States borrow more than it makes? Is this level of debt sustainable for our economy? Is it debilitating, helpful, or inconsequential?
Looking at US Debt from 19 Trillion Feet
The following charts will help put U.S. total debt in context. Let’s start with the elephant in the room, which is total public debt. There is no question that the total amount of debt outstanding has been growing at an exponential pace since the 1990’s, expanding from some $3 trillion to $19 trillion in 25 years.