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
Top Performing Health Care Funds Bruised
Checking the Temperature of Columbia Thermostat Fund = COTZX I do concur that a fund of funds investment, if you have one, is best started in a retirement account. I was not aware that a fund of funds cannot pass along losses to the investor. That pretty much nails using the IRA, Roth IRA or 401k.
At best, the Wiki statement that "A fund of fund ... cannot use [
capital] losses" is extremely misleading, at worst, flat out wrong.
Any registered investment company (whether fund of funds or fund of individual securities) cannot
distribute capital losses. But it is allowed to carry losses forward to later years, where it may use those losses to offset
gains. If memory serves, funds are only allowed to carry forward losses ten years, as opposed to individual taxpayers who can carry forward cap losses indefinitely.
Nothing special about fund of funds here.
In fact, the boggleheads Wiki says just this: Vanguard's Target Retirement Funds' ''rebalancing can result in the realization of
capital losses and the creation of tax loss carryforwards in the funds. The existence of loss carryforwards has historically resulted in minimal long-term
capital gains distributions."
Vanguard Target Retirement Funds (2005-2025) tax distributions (boggleheads)
So whom do you care to believe: the boggleheads' Wiki, or the boggleheads' Wiki?
David Sherman / RiverPark Strategic Income and Short-Term High Yield shareholder letter That Driehaus paper is excellent. I was interested to see what fund portfolio moves managers are making to try to accommodate reduced liquidity (in addition to or instead of what David Sherman talks about), and found this in the paper:
"Here’s what we’ve done over the past several years to address our concerns about declining market liquidity:
• We continue to hold high cash balances, typically 8% to 20% of AUM, in all of our portfolios.
• When we initiate new positions in the portfolios, we’ve reduced the percentage of a bond issue that we are willing to hold. A year or two ago, we were comfortable holding up to 15% of any bond issue. Now, we prefer not to hold more than 10% of any given issue.
• We model 2-10 points of additional downside in our bear case scenarios ....
• If a bond is a large component of a major etf, we require additional risk premium to own the bond ....
• We are quicker to recognize and hedge downside volatility when liquidity declines, as compared to prior years.
• We consider equity as an investment option in the capital structure more frequently than in the past.
• Finally, we have soft closed strategies well below fund capacities to alleviate liquidity-related stress on existing positions."
The level of perceived risk would seem to depend to some degree on the macro outlook, i.e., a rates-takeoff vs. a lower-for-longer view.
New Fund Offers Individuals Access To KKR Buyout Deals Hi guys (Mark & Scott),
I was off the board most of the weekend and with this I am sorry about the slow response.
You both make some good comments; however, the three year (19.9%) and five year (12.3%) performance for the fund (LPEFX) place it within the top ten percent of its category. During the past year, or so, many private equity firms have been under government review and with this the performance of private equity has somewhat waned.
I think LPEFX is a neat specialty fund to own and it has put some good money in my pocket over the past five years. During this time it has put about 33% of what I have investested back into my pocket plus I am currently carrying 49% in unrealized capital gains. It has indeed been a good cash cow. Plus there is no K-1.
And, although it might not be right for you … for me … it’s a keeper.
Old_Skeet
For you younger people hoping to retire comfortably - give up the dream. First this is for the younger people. Not the first half of the baby boomers ('14-55) or those older.
Give up the idea of retiring comfortably. You don't have a defined pension plan, little in 401K, social security will be pushed out further, a VAT will be instituted to help with the debt (and Obamacare).
I own my home (no mortgage), truck and travel trailer, single (no debt). I retired in '07 at 51 and since then I averaged $27,000 in spending - that includes health ins and taxes. I'm estimating I will spend an average of $38,000 (includes $30,000 for a new truck) from '16-25.
I did a line item budget for this period. After '25 I grow expenses at 4%
Even with a small pension (13,000) and social security I estimate that only 6 years will be cash flow positive (from pension & SS I'm starting it at 63) starting in '19. I do use conservative estimates for capital growth 5%.
Now the younger people will not have a defined pension and will have to take full SS later or early at a reduced rate. I doubt the workforce will have many 65 y.o. in int or even 62.
The small pension and a good amount of savings that allowed the numbers to work.
So, abandon all hope and enjoy life while you are young. It will suck when you 55+.
substituting in IRA acct @dicksonLFinding my username in your post.....not knowing your other holdings or whether your IRA(s) has access to a brokerage feature, to allow you to place your monies just about anywhere; I can only add to what msf noted with a few trinkets of thought regarding your questions.
With the following in mind; per Mr. Snowball's "statement of the obvious", that "We cannot vouch for the accuracy or appropriateness of any of it,"
This is my/our view from this house; but will not be appropriate for everyone regarding a taxable acct. or a tax sheltered acct. as noted for your 401k and IRA(s).
You noted: " Since IRA acct can go more aggressive, for tax free growth for 6 more years( a lesson I learnt only 2 years ago) before RMD kicks in, I am tweaking my portfolio, making more index based in taxable and aggressive in IRA. my 401k with ltd. choice is on s&
[email protected]%"
>>>I will presume you are stating that your IRA holdings may be invested in whatever without current concern about taxation. Aggressive, for me; has a different meaning. Aggressive could perhaps imply a portfolio of 100% in equity investments.
I agree with msf regarding the choices you noted in your taxable account; and agree that one should place whatever is most tax efficient for your choice of holdings into this area.
As for the tax sheltered accounts; one does not have to be concerned with taxation at this time; so one may "fiddle" with whatever is most appropriate for their risk/reward investment emotion. Buy and sell when you need or choose to without regard to current tax from the transactions. This, obviously; is the nice part of tax sheltered holdings. In the end, per current tax policy; we/you will pay tax on the withdrawals at an ordinary income rate at the federal/state level, yes?
A brief overview would be that you may choose to be aggressive with your investments in both types of account holdings; leaning towards the most tax efficient for the taxable account, eh? Two choices were noted in your post and in msf's reply about tax efficiency. I do not have a direct opinion of either of your choices. You noted replacing one with another. Perhaps you may decide to keep the original fund, but move some of this money to the other fund, too. I have not looked at the funds, so I don't know how similar they may be regarding the investment style/holdings.
The majority of our holdings are within tax sheltered accounts; so we have not been concerned about tax efficient holdings. Our main goal has always been captial preservation (money to live for another day, to take advantage of the long term compounding effect) and
capital appreciation in whatever form it may arrive, be it income/yield or price appreciation. This goal, of course; is regulated with our own value of risk and reward from the investments.
Currently, we are about 65% equity within the broad U.S. and Europe areas. In June of 2008 we were at 90% investment grade bonds. Our portfolio is ever changing and may be slightly aggressive for some near or in retirement; and will remain in place, until we feel the investments are no longer working/happy.
Only my 2 cents worth.
Take care,
Catch
Gundlach Buys $20 Million Of Junk-Rated Puerto Rico Bonds It will get even worse for PR as Cuba opens up. Cuba will suck up a lot of tourist $, tourist capital investment, and Cuba will provide, cheap, educated, hard working workers for companies looking for it.
The Closing Bell: Nasdaq, S&P 500 Close At New Highs
How the stock market destroyed the middle class; From retain-and reinvest to downsize-and-distribute @Tampabay
Tampabay
10:18AM Flag
I think its more of a matter of having too much Cash on hand for profitable companies, and innovative ways to make money with the cash, Why not find ways to give back to Company Owners, the share holders, Bay backs are one (easy) way to do this...
One of my takeaways from the paper's arguments is that the corporate mentality that has driven a significant portion of the buybacks has been too short term in its nature. Investments in labor (including additional technical training and other education for existing workers) and
capital may take many years to fully provide a payback....particularly when the economy is struggling. But, if that part of the equation gets short changed in order to goose the stock price in the current quarter, the overall economy including the wages of its workers suffers in the long run. I am inclined to think some of that has been going on in recent years.
Gundlach Buys $20 Million Of Junk-Rated Puerto Rico Bonds I'm still 100% in HY Muni bonds paying me about 5.1% - only state tax. Munis haven't seen capital appreciation this year. My guess it is the possible Fed increase later in the year holding them back.
My current plan is to stop the re-investment of dividends in Jan of 2016 and put that $ into other places, maybe high yield international bonds. Time will tell.
I am 100% in open end corporate junk. Many of the corporate junk funds are up around 4% YTD. But a friend of mine recently made a move into where the real action has been the past many weeks and that is emerging market debt. May move some there. Bank loan funds have also showed some life in 2015.
Gundlach Buys $20 Million Of Junk-Rated Puerto Rico Bonds I'm still 100% in HY Muni bonds paying me about 5.1% - only state tax. Munis haven't seen capital appreciation this year. My guess it is the possible Fed increase later in the year holding them back.
My current plan is to stop the re-investment of dividends in Jan of 2016 and put that $ into other places, maybe high yield international bonds. Time will tell.
Gundlach Buys $20 Million Of Junk-Rated Puerto Rico Bonds FYI: DoubleLine
Capital’s Jeffrey Gundlach bought $20 million of junk-rated Puerto Rico bonds this year as the commonwealth struggled with its fiscal crisis.
DoubleLine’s $2.26 billion Income Solutions Fund held $20 million of Puerto Rico general obligations as of Feb. 27, data compiled by Bloomberg show. The fund didn’t hold any commonwealth debt at the end of 2014. The bonds, which were issued in March 2014, traded Wednesday at record-low prices.
Regards,
Ted
http://www.bloomberg.com/news/articles/2015-04-22/gundlach-s-fund-buys-20-million-of-junk-rated-puerto-rico-bonds
Bill Gross's 'Short Of A Lifetime' Would Mean Armageddon: Video Presentation FYI: The trade that George Soros and Stanley Druckenmiller pulled off in 1992 by betting a
gainst the British pound -- and making $1 billion in the process -- has gained legendary status. So when Bill Gross, the world's best-known bond investor, tweeted yesterday from his current employer Janus
Capital that betting a
gainst German government debt is the trade of a "lifetime," he reached for that bit of history to benchmark the current opportunity.
Regards,
Ted
http://finance.yahoo.com/news/bill-grosss-short-lifetime-mean-120622905.html
This New-Old Boutique Is In The 8th Or 9th Inning Of Its Reboot: R Squared Capital Management
The Closing Bell: S&P 500, Dow Erase Gains After Barrage Of Earnings Mylan Soars On Teva Buyout
Biotech Has More Room To Run
Invested in or considering investing in India funds, taxation policy change...Sensex update India plans to raise about $6.5 billion (Dh24bn) by taxing foreign firms for capital gains they made in previous years."
Don't think that move would encourage foreign investment.
Invested in or considering investing in India funds, taxation policy change...Sensex update The India related funds have been weak for the past several weeks; somewhat, perhaps related to profit taking from the previous run in prices.
A note from the article:
"India plans to raise about $6.5 billion (Dh24bn) by taxing foreign firms for capital gains they made in previous years."This article relates some new information relative to taxation of investments towards some organizations, which may of value for your investment decisions.
Regards,
Catch
Corzine to Start Hedge Fund. Corzine was Gov. of New Jersey, too. Another illustration of politicians in bed with Big Money. I'm in Massachusetts. The previous Governor, Deval Patrick, is joining Bain Capital. (Uncle Mittens Romney. Is he still there? Maybe not...) Makes me puke.
