The Independent Adviser for Vanguard Investors
•
June 2014
•
3
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well-reasoned but wrong arguments on
both sides of just about any issue when
the stakes are as high as in the stock and
bond markets.
Returning
For all the talk of corrections and
bear markets (see the story on page
6 to find out how common they truly
are), stocks have put in positive returns
every month since January.
Total
Stock Market
gained 2.2% in May,
and
500 Index
was up 2.3%.
Total
International Stock
has gained 4.0%
this year, benefiting from rebounds in
Europe, where the German DAX hit
multiple all-time highs in May, and
strength in some emerging markets.
Emerging Markets Stock Index
is up
3.8%. Japan’s market is the weak kit-
ten in this year’s litter, down 10.2% as
Prime Minister Abe’s reforms have yet
to transform his economy or markets.
May also saw 500 Index absorb all
the assets in
Tax-Managed Growth
& Income
, which was finally closed,
following the lead of
Tax-Managed
International
, which was shuttered in
April.
Are stocks expensive? Well, yes and
no. On a historical basis, the U.S.
equity market is fairly valued, with
a price-earnings multiple of 19.1 on
the S&P 500 compared to an average
of 18.9 over the past 50 years. Using
another metric, the Shiller Cyclically
Adjusted PE Ratio (CAPE), the market
is definitely richly valued, with a CAPE
of 25.5 compared to an average of 19.6
over the same period.
On the other hand, one look at alter-
natives like bonds makes stocks look
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SHADOWS
FROM PAGE 1
>
pretty reasonable. A 2.46% yield on a
10-year Treasury, the benchmark for
safe and secure investing, means that
barring a nuclear holocaust, you’ll only
earn 2.46% per year over the next
10 years. Period. Yes, you’ll get your
principal back, but its real value will
be eroded by inflation. In 10 years,
$10,000 just isn’t going to buy you
what it buys today.
Last year, the stock market returned
better than 32%. Depending on the risk
you were willing to accept, our
Model
Portfolios
generated returns ranging
from 18.6% to 34.2% (though I’ll
note that the
Growth Model Portfolio
remained less risky, overall, than the
stock market with a since-inception risk
of 0.97, or 97% of the market’s risk).
The bond market lost 2.0%.
Compared to 2013, it may feel like
we’re treading water this year, but so
far, returns are on pace for a decent out-
come. Total Stock Market’s 4.3% gain
has it on pace for a 9% or 10% annual
return—about average.
While the markets may appear calm
on the surface, there are definitely some
nasty currents moving below. Investors’
continued risk-aversion is illustrated in
Treasury bonds having jumped to sit
among the top-performing assets this
year.
Long-TermTreasury
’s 12.6%gain
outpaces even
Long-Term Investment-
Grade
’s 10.9%. And although the Dow
and S&P have been hitting new highs,
small stocks have been flirting with a
10% correction. It’s only a matter of
time before large ones do, too.
Unfortunately, too many investors
are sabotaging their success through
attempts at market timing and poorly
conceived investment plans (if you can
call them that). Chuck Jaffe, who writes
for
Marketwatch.com
, recently cited an
investor survey that showed too many
people have unrealistic expectations for
the returns they’ll earn over time and
the risks they’ll take.
I’ve seen this before. Almost 20 years
ago, not long after my partners and
I started our investment management
firm, Adviser Investments, I received
a call from a potential new client who
said his objectives were fairly simple:
He wanted to match the stock market’s
return with about half the risk. Granted,
it was 1994 or 1995, and a bull market
was gathering a head of steam that
wouldn’t end for at least another five
years, but sheesh! I told the man on the
phone that if he could find someone
guaranteeing those kinds of returns, I’d
close up shop and give him my money to
manage. As you might imagine, he never
called back. (Note: Adviser Investments
is a separate company neither owned nor
operated by InvestorPlace Media, the
publisher of this newsletter.)
Just a quick update on the
October
Hot Hands
fund,
Capital Opportunity
:
Since making the selection at the end of
October, Capital Opportunity has gained
11.8% versus Total Stock Market’s
10.2% rise, which puts the
Hot Hands
fund on the right track. We’ll have to
wait to see how the next five months
play out.
And finally, the closing to Joni
Mitchell’s “Shadows and Light” is a
long and drawn-out chorus of, “Wrong
and right.” It’s worth remembering as we
round out the first half of 2014 and the
midyear predictions of what is to come
begin to flow from Wall Street to Main
Street. Some may be right, but most will
be wildly wrong. I hope you’re enjoying
the beginning of summer.
n
