Everyone is asking me about one thing these days: Should I buy Gold?
Telling people to buy gold now is like yelling "Fire!" after everyone has left the building.
I do own a small stake (5%) in the largest gold ETF in the world, GLD and I believe every investor should own some as a hedge against inflation and a hedge against overall uncertainty with global economic growth.
But I would not suggest buying gold to make a quick buck. Lately, Gold has become very closely correlated with the entire stock market. So if you want to speculate, buy stocks instead. At least there is a valuation basis to owning stock and you can earn dividend income in the meantime.
As I described in an earlier blog "Time to Put Money to Work" there is a strong valuation basis to owning the stock market today. Additionally, there is a heavy upward momentum bias driving stocks higher. TV pundits refer to this as the "Risk Trade" whereby the US dollar goes down and the stock market rises. While I'm not a firm believer in the basis for this argument, I can't deny its effect on the market. So, there you have it, valuation and momentum, you're entry signs to get heavy on equities - advice that is worth its weight in gold.
Monday, November 23, 2009
Tuesday, November 17, 2009
Tactical Asset Allocation Explained
By Dan Lowrey, CFA
Manager Woodshed Investments
If you're like most investors, you have a 401k or retirement account filled with a diversified array of mutual funds, likely selected by your financial adviser. You may also have one or two Exchange Traded Funds (ETFs) or maybe some hot stocks you are hoping to generate some "mad money."
You no doubt have suffered major investment losses since last year as your financial adviser didn't have the foresight, or better yet the incentive, to get you into cash before the market tumbled.
Face facts. Investment advisers don't get fees when your accounts are in cash. They get paid commissions to recommend mutual funds and they also get a percentage of assets invested. When was the last time a financial adviser told you: "Hey, I think we should park your assets in a low-yielding money-market account for a while" ? Moreover, the mutual fund managers making the macroeconomic decisions with you money don't have your back either. They want only to match or beat the performance of an equity or bond index. Few are willing to take decisive action to protect assets or deviate from a stated investment strategy.
Tactical asset allocation (TAA) is the wave of the future. Your adviser will tell you that it's nothing more than market timing, which studies have proven time and again cannot be done. They'll tell you strategic asset allocation and sticking with a buy and hold strategy is best. I say TAA is being done and those investment shops with the best and brightest such as Goldman Sachs are doing it quite well ($3 billion in profit last quarter).
What's driving the demand for TAA?
1. Investor discontent with their mutual fund managers'
fees and performance.
2. Investor discontent with Wall Street profitability
at taxpayers' expense
3. The proliferation of ETFs
ETFs allow for a quick and cost-efficient vehicle for tactical asset allocation. Investors don't have to worry about short-term trading penalties associated with mutual funds. There are lower trading commissions (no loads, management fees, etc.) and lower tax implications. And there is a huge and liquid market for these products. A highly diversified portfolio can be created with just these ETFs:
1. S&P 500 SPY
2. US Investment Grade Bonds AGG
3. Treasury Inflation Protected Securities TIP
4. Gold Bullion GLD
5. Europe, Asia, Far East Index EFA
6. Emerging Market Index EEM
Optimally 4% SPY, 4% AGG, 1% EFA, 35% TIP, 37% GLD, 20% EEM
However, in periods of extreme financial distress even once uncorrelated assets show high correlation. Thus, bonds offered no protection from collapsing equity markets. Everything except cash and Treasuries plummeted. Having a portfolio, or at least a portion of your portfolio invested in ETFs and committed to a tactical asset allocation strategy is your best hope to swiftly react to quick changes in the market environment.
Ask your financial adviser about tactical asset allocation and they'll probably try and sell you another "product." Next . . . Entry and Exit Signs.
Manager Woodshed Investments
If you're like most investors, you have a 401k or retirement account filled with a diversified array of mutual funds, likely selected by your financial adviser. You may also have one or two Exchange Traded Funds (ETFs) or maybe some hot stocks you are hoping to generate some "mad money."
You no doubt have suffered major investment losses since last year as your financial adviser didn't have the foresight, or better yet the incentive, to get you into cash before the market tumbled.
Face facts. Investment advisers don't get fees when your accounts are in cash. They get paid commissions to recommend mutual funds and they also get a percentage of assets invested. When was the last time a financial adviser told you: "Hey, I think we should park your assets in a low-yielding money-market account for a while" ? Moreover, the mutual fund managers making the macroeconomic decisions with you money don't have your back either. They want only to match or beat the performance of an equity or bond index. Few are willing to take decisive action to protect assets or deviate from a stated investment strategy.
Tactical asset allocation (TAA) is the wave of the future. Your adviser will tell you that it's nothing more than market timing, which studies have proven time and again cannot be done. They'll tell you strategic asset allocation and sticking with a buy and hold strategy is best. I say TAA is being done and those investment shops with the best and brightest such as Goldman Sachs are doing it quite well ($3 billion in profit last quarter).
What's driving the demand for TAA?
1. Investor discontent with their mutual fund managers'
fees and performance.
2. Investor discontent with Wall Street profitability
at taxpayers' expense
3. The proliferation of ETFs
ETFs allow for a quick and cost-efficient vehicle for tactical asset allocation. Investors don't have to worry about short-term trading penalties associated with mutual funds. There are lower trading commissions (no loads, management fees, etc.) and lower tax implications. And there is a huge and liquid market for these products. A highly diversified portfolio can be created with just these ETFs:
1. S&P 500 SPY
2. US Investment Grade Bonds AGG
3. Treasury Inflation Protected Securities TIP
4. Gold Bullion GLD
5. Europe, Asia, Far East Index EFA
6. Emerging Market Index EEM
Optimally 4% SPY, 4% AGG, 1% EFA, 35% TIP, 37% GLD, 20% EEM
However, in periods of extreme financial distress even once uncorrelated assets show high correlation. Thus, bonds offered no protection from collapsing equity markets. Everything except cash and Treasuries plummeted. Having a portfolio, or at least a portion of your portfolio invested in ETFs and committed to a tactical asset allocation strategy is your best hope to swiftly react to quick changes in the market environment.
Ask your financial adviser about tactical asset allocation and they'll probably try and sell you another "product." Next . . . Entry and Exit Signs.
Wednesday, November 11, 2009
Time to Put Money to Work
By Dan Lowrey, CFA
Manager Woodshed Investments
I'm still bearish on analysts' estimates for corporate earnings next year. I believe they are too high. But even still, my estimate for corporate earnings next year ~ $67 for the S&P 500, based on current labor productivity, puts the forward operating P/E ratio for the index at 16, below the historical mean of 19.
With expected additional fiscal stimulus and a very gradual reversal in the unemployment rate, I'm forecasting the S&P to be around 1270 by early next year, almost 16% higher than today. My estimate is derived based upon the current civilian labor force, which today is about the same size as it was in 2004. Baring any unforseen shocks to the market, such as higher than expected unemployment, we should have operating earnings similar to that year, in my opinion.
Driving stocks further upwards, is most directly linked to accomodative monetary policies worldwide (cheap cost of funds with rates at almost zero here in the U.S.) Retail investors are still sitting on the sidelines. But the current pop in risky asset prices is being driven by investment banks and institutional managers. I forecast another strong quarter for investment banks as they seek to borrow for almost nothing and put this money to work in higher-performing equity and bond markets, especially those dominated in outperforming foreign currencies. Additionally, institutional investors (mutual funds) are chasing performance as the year draws to a close.
I'm recommending a 10%-15% over-weighting of the market account, with an emphasis on large cap equities and the technology sector in particular. (Note: This is a tactical asset allocation recommendation and short-term in nature. Strategic asset allocation decisions should be maintained in the long-run and apply to each individual's investment objectives and constraints. Consult your financial adviser for an appropriate strategic asset allocation.)
Manager Woodshed Investments
I'm still bearish on analysts' estimates for corporate earnings next year. I believe they are too high. But even still, my estimate for corporate earnings next year ~ $67 for the S&P 500, based on current labor productivity, puts the forward operating P/E ratio for the index at 16, below the historical mean of 19.
With expected additional fiscal stimulus and a very gradual reversal in the unemployment rate, I'm forecasting the S&P to be around 1270 by early next year, almost 16% higher than today. My estimate is derived based upon the current civilian labor force, which today is about the same size as it was in 2004. Baring any unforseen shocks to the market, such as higher than expected unemployment, we should have operating earnings similar to that year, in my opinion.
Driving stocks further upwards, is most directly linked to accomodative monetary policies worldwide (cheap cost of funds with rates at almost zero here in the U.S.) Retail investors are still sitting on the sidelines. But the current pop in risky asset prices is being driven by investment banks and institutional managers. I forecast another strong quarter for investment banks as they seek to borrow for almost nothing and put this money to work in higher-performing equity and bond markets, especially those dominated in outperforming foreign currencies. Additionally, institutional investors (mutual funds) are chasing performance as the year draws to a close.
I'm recommending a 10%-15% over-weighting of the market account, with an emphasis on large cap equities and the technology sector in particular. (Note: This is a tactical asset allocation recommendation and short-term in nature. Strategic asset allocation decisions should be maintained in the long-run and apply to each individual's investment objectives and constraints. Consult your financial adviser for an appropriate strategic asset allocation.)
The Market Mattress Blog (Mission Statement and Purpose)
By Dan Lowrey, CFA
Manager Woodshed Investments
An opinionated, yet well-researched analysis of the current state of domestic economic activity and corresponding asset allocation recommendations. Or, how to best position your retirement accounts for their best risk-adjusted performance in the short-term. I suggest two basic accounts for every investor: A market account, which is invested in highly diversified mutual funds (both equity and fixed-income), and another that is invested in a highly liquid cash account.
I'm a finance professional, a CFA Charterholder and former financial journalist with Dow Jones Newswires. My motives are simply to provide free and unbiased financial advice to the general population to even the playing field with more sophisticated and better financed investors. I do this for fun and to keep a historical record of my investment analysis, recommendations and actions. I love to share with others equally passionate about investing.
Manager Woodshed Investments
An opinionated, yet well-researched analysis of the current state of domestic economic activity and corresponding asset allocation recommendations. Or, how to best position your retirement accounts for their best risk-adjusted performance in the short-term. I suggest two basic accounts for every investor: A market account, which is invested in highly diversified mutual funds (both equity and fixed-income), and another that is invested in a highly liquid cash account.
I'm a finance professional, a CFA Charterholder and former financial journalist with Dow Jones Newswires. My motives are simply to provide free and unbiased financial advice to the general population to even the playing field with more sophisticated and better financed investors. I do this for fun and to keep a historical record of my investment analysis, recommendations and actions. I love to share with others equally passionate about investing.
Subscribe to:
Posts (Atom)