I just read an interview with retired fund manager Bob Rodriguez who managed award winning FPA mutual funds in stocks and bonds. Like us, Rodriguez believes in owning cash when there is a storm on the horizon and he held significant amounts of cash (30-40%) in 2000 and 2008 in his actively managed stock mutual fund. He is now retired but he is seeing a perfect storm developing thanks to the huge shift into passive management where there are NO cash holdings. When the next downturn hits, many of those invested strictly in passive instruments will likely be hit extremely hard and their timing will be poor to hit the sell button. Here are his insights on the coming storm:
The rise of ETFs and their biggest flaw
When you go grocery shopping and walk down the cereal aisle, are you overwhelmed by the number of varieties? There are probably too many choices. Today the same situation exists in the stock market. Investors have so many choices that you literally have tens of thousands of alternatives.
In the last 10 years, there has been a dramatic shift away from mutual funds and into exchange traded funds or ETFs. The amount of mutual funds peaked around the year 2000 and has remained pretty constant around 8000 funds. In the meantime, the number of publicly traded stocks has declined steadily and the amount of ETFs has been on the rise. Today the number of funds and ETFs is almost 3x the number of stocks available on US exchanges. If you add them all up, you have roughly 13,000 potential investment options between stocks, ETFs and mutual funds.
What is Your Strategy in Volatile Markets?
World stock markets have been increasingly volatile this summer. Returns for market indices have turned negative and the S&P 500 suffered its first 10% correction since 2012. Because of this, I have received several message in my inbox that ponder what do in this environment. A couple of the titles were “”What you should do in volatile and uncertain markets”” and “”When market conditions become volatile, how will you react?”” The two main strategies that they suggest are 1) stay the course and 2) a diversified portfolio is the best way to be positioned. While this seems sensible in a bull market cycle, these two strategies do not work in a bear market cycle. Therefore, the most important question is not what to do in a volatile market, but is this a bear market?
https://www.youtube.com/watch?v=DH6V2yp4ty0
Building an Investment Portfolio That Sparks Joy
This week, I continue from where I left off in The Life-Changing Magic of Tidying Up… Your Investment Portfolio. What I like about the KonMari method is its simplicity. Keep the things that spark joy and dispose of the rest. There is also a specific order to the decluttering madness: clothes, books, papers, komono (miscellaneous), and finally mementos. Basically, you start with the low hanging fruit. I quickly reduced my collection of 100 t-shirts that no grown man needs. The idea is to work through each category, carefully honing your skills so that you're ultimately prepared to sort through your toughest opponent, keepsakes and sentimental belongings. Why stop there? I suggest that you keep going.
The Life-Changing Magic of Tidying Up… Your Investment Portfolio (Part I)
Hi. My name is Andy, and I am a hoarder. Okay, perhaps not to the extent that would get me on TV. Nevertheless, I found papers on my desk from 2009. My closet had clothes in it that hadn’t been …
Where have all the (S&P 500) earnings gone?
In the short term, many factors can influence the direction of stock prices. We discussed central planners impacting the markets just last week. However over the long term, it's earnings that drive stock prices higher or lower. This is a simple concept to understand. If a company loses money year after year, it will struggle to stay in business. Not many people will choose to invest in a losing operation so the stock price will go down. On the other hand, if a company delivers consistent high levels of growth, it will attract many investors driving the stock price higher. This concept can also be applied to the broad market indices like the S&P 500. Therefore it makes sense to look at S&P 500 earnings estimates.