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Asset Management

Asset Management

Investing In an Overpriced Stock Market

The U.S. stock market has come a long way from its Great Recession low. That low, when the S&P 500 bottomed out at 666 on March 9, 2009, is called “the Haines’ bottom,” named after legendary CNBC anchor Mark Haines, who called the bottom of the market’s plunge on the air.(Sadly, Mark passed away in March of 2011.)[i] [ii]

Today (May 23, 2020), that index stands at 2995, an increase of some 340% from the low, almost doubling from its previous cycle high of 1576, reached on October 12, 2007.

The U.S. economy, however, is in the worst unemployment crisis since the Great Depression. Since March, the coronavirus-induced economic slump has caused 40 million Americans to lose their jobs.[iii] At one point, the U.S. stock market was down 40%.

The number of unemployed has risen, yet the stock market has recovered two-thirds of its losses and is down only 10% for the year.

How can this be?

One explanation is that the stock market is looking past the current economic troubles to better times ahead, when either a vaccine or treatments are available. Or maybe the Federal Reserve’s pumping of three trillion dollars into financial markets has, like their other attempts to boost the economy, gone more to Wall Street than Main Street.

Or maybe with interest rates at historical lows today, a 30-year treasury bond pays only 1.37% to investors, so they have no other place to invest to generate a return.

Is the U.S. stock market overpriced today?

David Tepper, famed hedge fund manager and owner of the NFL’s Carolina Panthers, thinks it is the second most overpriced stock market he has seen, just behind the tech bubble of 1999.[iv]

According to two measures of value, the answer is yes—and dangerously so. According to the CAPE ratio, the stock market is 185% overvalued. Another measure, the q ratio, has it at 80%. It has been overpriced only twice: in September 1929, right before the Great Depression, and in March 2000, at the tail-end of the dot-com bubble.[v]

However, those latter two levels of pricing were higher than they are today. Therefore, an overpriced stock market can always go higher and become more overpriced.

What are investors supposed to do?

Let’s say you received an inheritance, or you have a lump sum sitting in the bank, you are tired of earning no interest on it, and you are frustrated to see the market go up. One strategy is to do what we call dollar-cost averaging. Instead of moving all of that money into the market today, you set up a plan to move it into the market gradually, say, over a period of 18 months.

If you have $100,000 to invest, you transfer $5,555 a month, purchasing the market at 18 prices instead of today’s one. There is no guarantee this strategy will produce a profit, and, if the market keeps going up, you might lose out on short-term gains. It would help you, though, if there were a considerable drop of, say, 57%—which happened to the market during the Great Recession.

What if you cannot wait?

If the idea of waiting 18 months is not for you, make sure you conduct a risk-tolerance test before investing that lump sum. (You should do a risk-tolerance test even if you decide to do dollar-cost averaging.)

The online risk-tolerance reports, FinaMetrica and Riskalyze, will give you a score you and your advisor can use to allocate your lump sum. That way, you will end up with a mix of stocks, bonds, and cash, which will hopefully help you reach your goals, with a level of risk you will be comfortable with.

By doing this, maybe you can create the portfolio that allows you to stay invested by limiting how much it might go down while simultaneously yielding a return if the stock market continues to rise.

Beware of TV pundits and hot markets

The yang to the quiet, unassuming Mark Haines at CNBC was Jim Cramer, who remains with the network as the host of Mad Money, a nightly show on which he uses his near-photographic memory to opine on stocks.

Before Cramer became a TV host, he ran a hedge fund. In that role, he gave a speech in February of 2000: “The Winners of the New World.” In that speech, he pontificated on the changing nature of the stock market and laid out the stocks his fund was buying, most of which were high-flying technology/dot-com stocks.[vi]

Cramer discussed the ten stocks he was buying, many of which ended up not surviving when, only a month later, the tech-heavy NASDAQ peaked, and then ground down some 78% for the next 30 months. One of the stocks that did survive, which Cramer recommended, still dropped from $1,305 to $22 per share.

[i] Pisani, Bob. “Mark Haines’ Legendary 2009 Call.” CNBC, March 9, 2015. http://www.cnbc.com/2015/03/09/pisani-remembers-haines-legendary-2009-call.html

[ii] Wells, Jane. “Five Years Later, ‘Still Traumatized’ by Market.” CNBC, March 10, 2014. http://www.cnbc.com/2014/03/10/mark-haines-bottom-call-five-years-later-still-traumatized-by-market.html

[iii] Ivanova, Irina, “More Than 4 Million Americans File for Jobless Aid, Bringing Pandemic Total Above 40 Million.” CBS News, May 21, 2020. https://www.cbsnews.com/news/4-million-file-unemployment-jobless-claims/

[iv] Li, Yun. “David Tepper Says This Is the Second-Most Overvalued Stock Market He’s Ever Seen, Behind Only 99.” CNBC, May 13, 2020. https://www.cnbc.com/2020/05/13/david-tepper-says-this-is-the-second-most-overvalued-stock-market-hes-ever-seen-behind-only-99.html

[v] Smithers, Andrew. “US CAPE and q Chart.” Andrew Smithers, 2017. http://www.smithers.co.uk/page.php?id=34

[vi] Cramer, Jim. “The Winners of the New World.” The Street, Feb. 29, 2000. https://www.thestreet.com/story/891820/1/the-winners-of-the-new-world.html

Should You Be Concerned About Bonds in Your Portfolio
Should You Be Concerned About Bonds in Your Portfolio

Should You Be Concerned About Bonds in Your Portfolio

For the second time in three years, J.P. Morgan CEO Jamie Dimon says he would not buy bonds.

The first was in August 2017, when he said he would not buy any sovereign government debt.[i] The second time (December 8th, 2020), Dimon limited his critique to U.S. Treasury bonds, specifically the 10-year treasury, saying, “I think Treasurys at these rates, I wouldn’t touch them with a 10-foot pole.”[ii]

You would think that the CEO of the largest U.S. bank has a good grip on the direction of interest rates. Because rising rates can make for a poor environment for bonds, he must be thinking that interest rates will increase.

How Did He Do Last Time?

His 2017 recommendation turned out to be early or just flat-out wrong. The iShares U.S. Aggregate Bond Index, a proxy for the U.S. bond market, averaged a little over 5% per year from 2018 to 2020. It was up 8.5% in 2019 and 7.6% in 2020, and down just 0.13% in 2018. That’s hardly an investment not worthy of touching with a 10-foot pole.

How about his latest prediction? Well, because of COVID-19 and the Federal Reserve’s $3 trillion of additional quantitative easing (Q.E.), interest rates are lower than in 2017.

In 2017, the 10-year treasury yielded 2.05%. Today, it is yielding 1.04%, or almost a 50% drop in yield. (It got as low as 0.59% in July 2020.) That drop allowed a bond paying only, say, 2% in interest to return 7%. Remember, when interest rates fall, bond prices go up. The reverse also happens, meaning when interest rates rise, bond prices fall.

What Causes Treasury Rates to Rise?

The federal government ran a deficit of $3.1 trillion in 2020. If passed, President Biden’s $1.9 trillion COVID-19 relief proposal will pay for much of itself with bond sales. With all this debt supply, you would think that if demand does not increase, then interest rates would have to rise.

However, much of the debt is being purchased by the government’s bank, the Federal Reserve. These purchases, through quantitative easing, allow increasing debt without a corresponding increase in interest rates. We will see what the long-term implications are of the government’s bank owning significant amounts of the government’s debt.

Rising Inflation Effect on Bonds

The other thing that could happen is that inflation begins rising, and investors holding bonds paying 1% will not look so good if the cost of living increases to 3%. That discrepancy causes rates on new bond sales to rise as no investor wants to own a bond paying less interest than the cost of living, i.e., inflation.

Nobody knows what causes inflation to rise. Monetarists represented by Milton Friedman believed that increasing the money supply causes it. However, since the late 1970s—the last time inflation was terrible—the money supply has been rising, but inflation and interest rates have been falling.

Labor vs. Capital

Since the late ’70s, more of the economic pie has gone to capital, resulting in rising stock prices and falling bond yields. If labor somehow wrestles some of that pie, then the costs of goods and services (inflation) might start growing while the bubble gets let out of the stock and bond markets.

Should You Still Own Bonds?

Bonds are essential in a portfolio, so unless an investor’s risk tolerance or goals change, it is unwise to scrap or reduce their portfolio’s percentage invested in bonds. Suppose in the future, inflation does spike. In that case, investors with diversified portfolios can implement fallback strategies: adding shorter-term bonds, inflation-protected bonds, or emerging market bonds (asset allocation and diversification strategies cannot assure a profit).

Remember, the asset managers and pension plans that sold bonds to the Fed used those proceeds to purchase risk assets. Those purchases propelled those assets higher, and higher prices enticed speculators who borrowed money to buy those same risk assets. The public, frustrated by the low interest rates, also purchased those risk assets. So, in addition to excess reserves, the other side effect of Q.E. is that risk assets, such as stocks, get expensive.


[i] Lovelace Jr, Berkeley, “Jamie Dimon: I wouldn’t buy a 10-year bond from any country in the world right now”, CNBC, August 8, 2017, https://www.cnbc.com/2017/08/08/jamie-dimon-wont-call-it-a-bubble-but-i-wouldnt-buy-bonds-here.html

[ii] Son, Hugh, “Jamie Dimon says he wouldn’t touch Treasurys with a 10-foot pole at these rates” CNBC, Dec 8, 2020, https://www.cnbc.com/2020/12/08/jamie-dimon-says-he-wouldnt-touch-treasuries-with-a-10-foot-pole-at-these-rates.html

Asset Management Services

As a professional financial adviser for 30 years, I build custom portfolios, trusts, and retirement plans for individuals, couples, families, and groups. I can access thousands of mutual funds, exchange-traded funds (ETFs), stocks, bonds, retirement plans, life insurance programs, and annuities.

Psychologist, Daniel Kahneman was awarded the 2002 Nobel Prize in Economics for pointing out what some of us intuitively knew already: people dislike losing money more than they like making money. Aversion to financial loss is one reason I give each of my new clients a risk tolerance questionaaire to complete. For you would not want a portfolio that is 80% stocks, which might lose 30% in a bad year, when your risk score indicates you would sell everything if it dropped even 5%.

Disdain for loss can also hinder a client from wanting a portfolio at all, for fear it might not grow fast enough to reach one’s fiscal goals. As a financial adviser, I need to alert my clients to possible pratfalls and provide them with solutions: save more, take more risk, diversify more, depending on each client’s individual situation.

Investor Profile Questionnaire (PDF)

I build portfolios for IRAs and rollover IRAs. I also build portfolios for public school employees when I set up their 403b accounts, as well as small business owners when I arrange their SIMPLE and SEP plans. I was therefore excited when in 2011, the U.S. Department of Labor finalized rules allowing financial advisers to provide investment advice to employees in 401k plans.

Read More: Financial Planning Services for Retirees

Asset Management (Bigger Accounts)

The client needs a minimum of $100,000. It can include just about any account: IRAs, 403bs, joint accounts, personal brokerage accounts, etc.

  • Your account size and the complexity of your wealth management will determine fees, but it is never greater than 1%.
  • The accounts are primarily invested in mutual funds and exchange-traded funds (ETFs). All funds have passed my rigorous due diligence process.
  • I design the portfolio to meet your goals and ensure it is consistent with how much risk you are comfortable with taking.
  • After the account is set up, you receive monthly statements, and you can follow your account online with CirStatements.
  • We periodically meet to check the portfolio, discuss performance and rebalancing, and confirm you are on track to achieve your goals.
  • The custodian for the accounts will be Pershing, a Bank of New York Mellon.

If You Don’t Have $100,000 to Invest

My fee-based accounts require a minimum of $100,000; if you have less than this amount to invest, I usually charge a commission or an hourly rate.

  • However, I use the same due diligence process for building your portfolio. I use mutual funds and exchange-traded funds (ETFs) that have passed my due diligence process screening for low fees, historically competitive performance, low fund turnover, and long manager tenure.
  • I work with all types of account registrations: IRAs, Roth IRAs, 403(b)s, SEPs, SIMPLES, 529 Plans, etc. After the portfolio is set up, you will receive monthly or quarterly statements. You can follow your account online at CirStatements.
  • The custodian for the accounts will be Pershing, a Bank of New York Mellon company, or the fund family directly.
  • Periodically, we will meet to check if the portfolio is on track, monitor performance, and discuss rebalancing.

Active vs Passive Fund Investing
Asset Management

Active vs Passive Investing

With index investing, investors buy a basket of stocks or bonds. (Investors cannot directly invest in an index.) The most popular index is the Standard & Poor’s 500 (S&P 500), which tracks the 500 largest companies on the NYSE or NASDAQ.

Moreover, most stock market indexes, including the S&P 500, are market-cap weighted: the bigger the company, the more representation it gains on the index, and hence, in your investment option. Today, the largest holding represents approximately 3.7%, and the second-largest holding represents 2.6%.

And, it is not just blue-chip stocks. Virtually any asset class can be invested in with an index that includes small-cap stocks, bonds, high-yield bonds, foreign stocks, commodities, and more.

However, Jack Bogle was not a fan of exchange-traded funds (ETFs), believing Wall Street would create an index for everything and that the trading aspect of ETFs ran counter to the long-term benefit of index investing.

During the coronavirus-induced selloff, many ETFs experienced large differences between their net asset values and their market prices. The Federal Reserves, as it seemingly always does, stepped in, promising to buy ETFs, which helped bring those two prices back in alignment.

The opposite of index investing is active management, which entails a portfolio manager or managers constructing a portfolio one security at a time. By dissecting the prospects of a company’s stock or bonds, the manager hopes to create a portfolio that can outperform the market and indexes.

Over the last ten years, however, $1 trillion of investors’ money has moved from active management to index investing. A big reason for this is that, during that same period, most active managers underperformed lower cost-index options.

Read More: Diversification and Rebalancing: A Retirement Saver’s Best Friend

Worse yet, during the Great Recession, when one hoped active management could reduce a portfolio’s losses (even though the S&P 500 Index lost approximately 50%), active managers did not perform a whole lot better, suffering losses similar or, in some cases, worse.

The significant long-term advantage of index investing is lower costs, as the fees charged to investors are significantly less than those in active management. This is because index investing has no managers to pay; no one is researching and picking the securities.

However, what Buffett and Bogle fail to recognize—or, at the very least, acknowledge—is that those active managers trying to beat the market are what makes the market efficient: because of them, most individual securities get priced correctly. Thus, with no bargains for active managers to grab, investors might as well buy a lower-cost index.

Plus, with the Federal Reserve buying assets during market downturns, prices never get cheap enough for active managers to buy. Even Buffet, during this latest downturn, stepped back from buying after the Fed stabilized the markets. Buffet believed the Fed was doing the right thing.

So, while Buffett praises Bogle and indexing, he minimizes the importance of active management to the outperformance of indexing. Plus, if more investors switch to index investing, less research and active management will get done. This could create more bargains and set the stage for the investing world to flip back to benefitting from the security selection once highlighted by Buffett’s mentors, Benjamin Graham and David Dodd, in their famous 1934 book, Securities Analysis.

Investing In International Stocks and Bonds
Asset Management

Investing In International Stocks and Bonds

Because different countries have different currencies, overseas travel is usually more complicated than domestic travel. Likewise, overseas investing is more complicated than domestic investing. However, just as foreign travel adds diversity to your travel experiences, so foreign assets add diversification to your portfolio.

With a gross domestic product (GDP) of over $20 trillion, the United States has, by far, the world’s largest economy. (China has the second-largest, with a GDP of $13 trillion.) Moreover, 54% of the world’s stocks and 39% of the world’s bonds are based in the U.S.

Also, the correlations between the U.S. and non-U.S. stock markets have more than doubled over the last 25 years, meaning fewer benefits from diversification, as these markets now tend to move in tandem.

Therefore, it is understandable why individuals living in the world’s most dominant country prefer to invest here, given their allegiance to the so-called home team. This bias, however, may prevent individuals from realizing the benefits international stocks and bonds would provide to their portfolios.

According to a 2014 study by Vanguard, the average investor’s portfolio contains 27% foreign stocks.[i] If the foreign stock percentage seems high, remember that the U.S. holds only half of the world’s total stock market value. This means that 50% of the world’s stock market value resides outside of the U.S.

A second 2014 Vanguard study, this one focusing on bonds, confirmed what I see in my practice: most U.S. investors have very little exposure to international bonds[ii]—even though 60% of all world bonds now reside outside of the U.S.[iii]

When individuals invest in overseas stocks or bonds, they rub up against the world’s largest market: the currency market. According to the Bank for International Settlements, foreign-exchange trading volume averages $6.6 trillion per day, while the entire U.S stock market trades about $191 billion per day.[iv]

Some investors hedge their currency risk by locking in times and prices at which they sell or purchase a currency. But hedging costs money. An investor must pay a fee to a counter-party—an institutional investor, corporation, government, bank, or currency speculator—for the right to buy currency from them or sell a currency.

Investors who enjoy owning individual stocks but want the added diversification of foreign stocks can incorporate American Depositary Receipts (ADRs) into their portfolios. ADRs are international stocks that U.S. investors purchase with dollars and from which they receive their dividends in dollars. However, currency changes affect the performance of ADRs.

More than 2,000 ADRs from more than 70 countries now trade in the U.S.,[v] including ADRs from such well-known international companies as Toyota, Nestle, GlaxoSmithKline, Deutsche Bank, and Sanofi.[vi]

There are many ways for individual investors to get exposure to foreign stocks or bonds—and, if you believe the Vanguard studies, the average investor has done an excellent job diversifying into international stocks. However, those same investors have not done the same with foreign bonds.

Of course, there is no such thing as an average investor, and everyone’s asset allocation and diversification depend on that individual’s specific goals and risk tolerance. However, most investors would benefit by having a percentage of their portfolio allocated to overseas stocks and bonds.

With 40% of the profits of the firms listed in the S&P 500 stock index now coming from overseas sales, some financial professionals believe that investors get plenty of diversification by owning stocks of U.S. multinationals. However, this theory fails to explain why bond investors have most of their portfolios in U.S. bonds.

These are the opinions of Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only and should not be construed or acted upon as individualized investment advice.

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