Mutual Fund/ETF Research Newsletter ... "With the markets overvalued, here's what to do." Hi davidrmoran,
Thank you for making comment on my post.
At first brush, I'd trend to agree with you; but, the message in the newsletter goes beyond your comment. Here is what the newsletter has to say on how to pick a fund.
'Which Funds Should Be Considered "Undervalued?"
OK, I know what your next question is going to be. How exactly can one recognize funds that are made up of stocks that are predominantly undervalued?
First an admonition: As implied above, the term "undervalued" is a relative one and and even "experts" don't agree on how to assess it. And, the term shouldn't suggest or imply that big gains will lie immediately ahead, even when correctly assessed. (Many experts rely on a statistic called the P/E ratio, or price divided by earnings, to define abnormally high or low valuation; unfortunately, many stocks, and stock funds, with relatively low P/E's will continue to underperform, while, conversely, funds with extremely high P/E's can continue climbing even for years. Therefore, even though the statistic for any fund is readily available, such as on sites such as morningstar.com, I wouldn't recommend paying that much attention to it.)
Of course, the opposite is also true. What is "overvalued" isn't always clear either and such funds don't always immediately start to underperform (although my research suggests that when measured as I will present below, they most likely will within a year or two). In fact, I have been saying that most types of funds have been overvalued since late Oct. 2013. Since then, most of these funds have continued to move ahead, although they appear to have slowed down somewhat since the start of this year.
Thus, while the concepts of over/undervaluation are frequently debated by the experts, and there is no absolute "yardstick," I will now give you a guideline that I use to help shape my own investment decisions.
Suppose you own a fund that has returned cumulatively in excess of more than 25% of what might have expected over the past few years. More specifically, stocks, on average, tend to return 9 to 10% a year. For simplicity, let's call that a cumulative return of 50% over 5 years. So if your fund returns 25% more than that, it would return 75% over 5 years. This, then, comes out to an average return of 15% a year.
Unlike a fund, when you own an individual stock, it can literally go to the moon. Once again, take Apple stock. Over the last 5 years, it has returned about 150%, or 30% per year. But over the last 10 years, it did even better - 38% a year, or 380% cumulatively. In other words, there may be nearly no limit to how far up any one stock might go. Of course, a badly performing stock might continue underperforming, inflicting huge losses, perhaps until the company goes out of business or goes bankrupt. Enron stock, a darling of Wall Street from 1996 to 2001, fell from over $90 per share to less than $1 before becoming totally worthless.
But with a mutual fund/ETF, the ride should be smoother since the fund hopefully invests in many, many stocks, lessening the impact of any one extreme success or failure. Since we can not know the future for sure, let's just say while, on average, 50% total gains over 5 years for a fund are close to the normal, 75% gains or more are approaching rarified air. A fund with the former result might be considered to have a "fair" or appropriate valuation; one with the latter is probably "overvalued," or approaching what I would consider being overvalued in the near future.
My research has shown that using such a 15% "yardstick," stretched out over time, can be a useful marker of likely overvaluation. Once most funds surpass it based on a 5 year period, one is typically better off investing at least some portion of a portfolio elsewhere, specifically in one or more funds that instead appear "undervalued."
We might think of an "undervalued" category or specific fund as one where its stocks have performed significantly worse than an annualized return of 9-10%. In fact, if the average fund in its category is currently showing only a 5% annualized return over the last 5 years, it may be underperforming an "average" performing fund by 25% cumulatively and an overvalued fund by at least 50% cumulatively (75% minus 25%).
For the short term, the "overvalued" fund, although probably not recognized as such by most investors, might appear the wiser choice. But for the longer term, the undervalued fund would appear to have much more potential for future gains.'
Thanks again for your comment. As can be gained for reading the above, I think you'll now agree that the newsletter's message goes well beyond just picking a value fund.
I wish all ... "Good Investing."
Old_Skeet
Checking the Temperature of Columbia Thermostat Fund = COTZX If I were to purchase this fund today I'd be putting it in my income sleeve in the income area of my portfolio based upon its current allocation to fixed income. I could have some months ago when it was carrying a heavier allocation to equities placed it within the domestic hybrid sleeve within the growth & income area of my portfolio ... and, when it was seventy percent, or better, equity I may have placed it within the growth area of my portfolio, specialty sleeve.
Indeed, it is a fund with a sliding equity allocation that adjust to the valuation of the S&P 500 Index.
Although, I have watched and studied this fund in the past it is not a fund that I am currently likely to buy.
Old_Skeet
Let's see if Gundlach gets this right
Let's see if Gundlach gets this right
AAII Investor Sentiment FYI: Despite the fact that the S&P
500 and Nasdaq are right near all-time highs, individual investors are stuck in a rut and seemingly not in the mood to party. According to the American Association of Individual Investors (AAII), bullish sentiment saw a slight decline falling from 31.47% down to 30.84%. This represents the eighth straight week where bullish sentiment has been below its bull market average of 38.6
5%. The last time we saw bullish sentiment below its bull market average for this long was in August of last year.
Regards,
Ted
https://www.bespokepremium.com/think-big-blog/bullish-sentiment-still-depressed/AAII Website:
http://www.aaii.com/sentimentsurvey?a=subnavHome
Art Cashin: "Bulls Need To Recircle Wagons"
Mutual Fund/ETF Research Newsletter ... "With the markets overvalued, here's what to do." "Which Funds Should Be Considered "Undervalued?"
"OK, I know what your next question is going to be. How exactly can one recognize funds that are made up of stocks that are predominantly undervalued?"
To find out read more about this through the link below.
http://funds-newsletter.com/may15-newsletter/may15.htm"The Bottom Line"
"Don't sock away the majority of your investments within the overall U.S. market which appears overvalued (or nearly so) right now. Rather, always seek out segments within the markets that appear to be undervalued, or at least, more fairly valued. While the majority of investors may keep crowding into the overall market and therefore keep it afloat for a time, these investors, as time passes and as conditions become perceived as less than ideal, will likely realize they were banking on "dream-like" returns that cannot persist. This will likely cause the overall market to drop significantly more than undervalued categories whose investments are then likely to be re-evaluated as safer, more attractive bets."
I wish all ... Good Investing."
Old_Skeet
Top Performing Health Care Funds Bruised +11.5% ytd In Healthcare love my bruising....stk mkt +3.7%
