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Building equity portfolios in a bull market is hard. Clients get caught up in the exuberance and reckon the more stocks they own, the better diversified they are. Protect your stock enthusiasts with a diversified portfolio built on low correlation, low-beta equities, and the appropriate number of asset classes. Your clients will thank you when their mania wanes.
Article posted on Horsesmouth.com July 10, 2014.
The stock market is reaching new highs while the economy seems to be sputtering along. This has created an environment that has led Brian Nelson, CFA of Valuentum Securities appropriately using a baseball analogy during the baseball All Star Game and Home Run Derby to say, ” If there is an environment more difficult to hit a pitch out of the ball park, I don’t think I’ve seen one.”
My take is similar. The economy is improving and I don’t fear a rise in short term interest rates from the Fed. I’m in the camp that we need modestly higher interest rates to encourage banks to lend. On the other hand, while I don’t see any reason for a market correction, we are definitely due a routine 10% – 20% correction. What I am afraid of is that conditions exist such that an innocuous 10% correction could quickly become a full blown sell off – and very quickly.
And thus we have decided to start building our “arc.” My intent is to stay fully invested within the parameters of our investment models. However, we are definitely rotating our stock holdings into quality holdings. We’ve sold some of our higher yielding but lower quality investments and have sought out low cost, dividend growing cash flow kings that have proven they can weather a storm. We have backtested our holdings against several market scenarios and feel very comfortable should we get a surprise on the down side. At the same time, if the market continues its trek up, I think we will be well rewarded for holding low priced quality stocks.
This is when being “small” works to our advantage. With slim pickings in the markets for stocks that meet our stringent criteria, I am happy to hold 15 – 25 non-correlated stocks in a portfolio and not be forced to own hundreds of issues like a mutual fund.
I recently described my portfolio building process in an article for horsesmouth.com, a subscription site for financial advisors. A copy of the full article has been posted in the Library section of this web site.
On Thursday HorsesMouth.com published an article I wrote on the market’s mixed signals. Despite most predictions to the contrary, interest rates have declined fairly substantially this year. Falling interest rates are usually a sign of (fear) of a slowing economy. The stock market however, despite a short pause in March, has pretty much marched upward in a surprisingly consistent fashion. The stock market is considered a leading indicator for the economy. Therefore a rising stock market portends an improving economy. So which is right?
In the article I reviewed the economic data for May and other indicators. There is no question the economy continues to show improvement, albeit at an unsatisfying slow pace. I believe the bond market sell off is anticipating a rise in short term interest rates IF the Fed were to put an end to their zero interest rate policy (ZIRP). Although the economy shows modest growth, the growth is seen (by the bond market) as too modest to continue if interest rates were to rise.
For investors we continue with our theme of market seasonality. While our portfolios are fully invested, we are in conservative stock holdings pretty much across the board. Focusing on large U.S. stocks and especially dividend payers. It is a strategy that is working well so for this year.
As a side note, I recently talked to a prospect who said the “competition” criticized my recommendations because I did not recommend being “diversified” by holding foreign stocks and bonds (via a mutual fund). After 28 years of doing this, I still don’t get while some people insist on putting money at risk just to be “diversified.” Europe just went to a NEGATIVE interest rate policy. This is extreme, panic type policy. China is in the midst of a slow down as the government cracks down on corruption and lending practices. My suggestion is to keep your money at home, in the U.S. for now. There will be a time to invest overseas, but I will only do so when the risks are much lower.
Past performance is no guarantee of future results. This article contains forward looking statements based solely on the author’s opinions.
Tags: investing, portfolio
I don’t usually post stock advice, but Apple, Inc. (AAPL) is not the usual stock. Their products have a cult-like following and owners will soon have an opportunity to buy shares of Apple’s stock at a somewhat reasonable price. But does that mean AAPL is a good investment?
Apple, Inc has announced that they will split their stock on June 9 for shareholders of record on June 2. For each share of AAPL owned, investors will receive 7 shares of new AAPL stock. Many times I hear novice investors naively celebrate splits, because of course, “more is good.” But the reality is that in a, strictly financial sense, a stock split is completely neutral. If the split were to happen at AAPL’s current price of about $620 a share, each share will become 7 shares but at a new lower value of $88.57 per share, or a total value of $620.
So why the excitement? In stock investing it is easier (meaning more cost effective) to transact stocks in what we call even lots of 100 shares. At the current price of $620 a share, 100 shares would be a $62,000 investment. More than most individual investors wrap up in a single stock. So in theory many investors will use the new lower price to “round up” their holdings to round lots of 100 shares, or new investors will buy into AAPL at the new lower, more affordable price. Such buying action would drive up the price of the stock.
The question is then, “Should you buy or sell AAPL now before the split”? Regardless of the price of a share of stock its value is determined by such things as revenues, sales, profits, assets, etc. Remember the value of each share of stock is relative to its financials and is identical before and after the split. So you should only make an investment decision based on those financials, not on whether or not the stock splits. In the case of AAPL, we have a fair value of about $700 a share pre-split, which would be $100 post split. In other words AAPL has room to move up about 12% to be fairly valued. Too me that is a good reason to hold onto AAPL if you are long or own the stock now. A trader can probably make a quick profit, as I do think the stock will benefit from increased demand. A long term investor can get off to a good start with a quick gain, pocket a 2.14% dividend and wait for Apple’s new products to boost long term earnings. But a better strategy might be to avoid the hype, be patient and see if AAPL settles back down in price after an initial run, post split.
410 Advisor, LLC does own shares of Apple, Inc. in our clients’ portfolios. There is no guarantee of future results. Comments made are forward looking and as such opinions can change on a daily basis based on new material facts as they are presented.
The N Y Federal Reserve released the information in the chart below this week.
- 1. Overall consumer debt is rising, but still below record highs set in 2008. Presumably this is a good sign as consumers theoretically only borrow when they feel confident about the future. Wall Street analysts apparently don’t understand the concept of borrowing because there is no other money available to buy stuff…like food.
- 2. Student loan debt is at absurd and unsustainable levels. Trouble is most recent college grads don’t have a lot of money to invest, so Wall Street likes to ignore this stat too.
But if you look at the numbers, student loan debt is 125% of all auto loan debt. Considering that most Americans own a car, and only 33% of Americans age 25 to 29 have a college degree the debt per college grad is crippling, considering that cars and thus car loans, aren’t cheap.
What to watch for:
Before we talk bailouts and defaults watch for Wall Street to start bundling and selling pools of student loans to investors. The Government will say what a good idea this is, and investors will feel patriotic as their investments will help fuel more lending and more debt to unsuspecting future college grads. Then wait for the defaults and the billions of dollars retirees will lose out of their retirement accounts. Won’t happen? Just substitute “mortgage” for “student loan”. History really does repeat. (And just as a warning – student loans are already being bundled for secondary market, )
Are you just starting out? Saddled with debt? Trying to save, pay off debt and live a little all at the same time? If you need help, give me a call and we can get you started with a lifetime financial plan.
Tags: golf, non profits, support
With good weather finally here golfers’ throughout the Miami Valley are breaking out their golf clubs for a little exercise and fresh air. What could be better? Golfing, exercise, fresh air…and doing it for a great cause!
I’m involved with two organizations that have organized golf outing fund raisers in the next few weeks. If you would like to participate I’ve included sign-up information, or just drop me an email or call me at the office. If you’d like to golf, but don’t have a foursome just let me know. I still have a spot to fill in my foursome for both events.
First up is an outing on June 2 at Heatherwoode Golf Club in Springboro sponsored by Homefull. Homefull is a local non-profit organization that provides housing and community support for the homeless in Dayton. I am on their Board and a member of the finance committee. Homeful is a very cost effective organization that stresses personal responsibility. For more information you can go to http://www.Homefull.org or give me a call.
Next up is the Centerville Lacrosse Boys Lacrosse Team Classic. The Classic is also held at Heatherwoode on June 22. The proceeds will go to the Centerville High School Boys Lacrosse Team. With school budgets being slashed, parents are being asked to pay more and more in pay to play fees and in additional fundraisers to support their teams. By raising additional money we can keep the player fees down so that all boys who want to participate can, and no one is left out for financial reasons. My son’s been a two year Captain for the High School team and will continue to play in college at DePauw University. Unfortunately he is a much better lacrosse player than golfer! But if you’d like to come out and play we would appreciate the support. For more information or to sign up you can go to http://www.elkslacrosse.com and click on the Centerville Lacrosse Classic link.
With interest rates at near all time lows, many investors are questioning whether they should own any bonds at all. Most financial advisors recommend a portion of an individual’s portfolio be allocated to bonds, and not just for retirees but for younger, more aggressive investors as well. This seems counter intuitive to younger investors who generally feel that they have time to weather investment volatility and should maintain allocations that maximize long term returns.
However in investing timing is always important. While we don’t know when a market correction will come, we know one is inevitable. Think of investments in bonds, not as “safe low earning money” but as “opportunity” cash. I can’t tell you how many times I’ve heard investors say that they wish they had had cash available at some point in their investing lives to make an investment at a specific time. Professionally careers are made by a single investment made at a market bottom.
For more opinions, here is a link to an article I was quoted in on whether a bond allocation makes sense for younger investors.
As of noon today our “Growth” portfolios will be 80% in cash.
I anticipated that the market would be a little volatile as we head into earnings season, but selling sentiment seems to have been unusually strong over the past week.
Hopefully markets will rebound with earnings announcements, but if sell off is related more to China and Europe, than this could be more than just a 10% “correction.”