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Sound Advice: January 13, 2021

Why Asset Allocation is Important Although asset allocation and diversification are words that are regularly used when thinking about proper portfolio construction, more often than not lip service is not followed by actual attention to the process of putting together a grouping of investments that makes sense.   What makes sense is a collection of securities within a variety of asset classes with the objective of gaining worthwhile returns while limiting risk exposure. It's not hard to do. One traditional approach to asset allocation has been a 60/40 split between stocks and bonds, decreasing the percentage allocation to equities as investors get older.   This has not been a bad way to go, but simply thinking in terms of U.S. stocks and bonds overlooks the opportunities available by considering a wider variety of asset classes, including international stocks, real estate, and high yield (a.k.a., junk) bonds. A few years ago, I completed a study of asset class returns from 1
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Sound Advice: January 6, 2021

  Does January predict the full year? One of the well-known Wall Street tales is that whatever happens in January is likely to be a good indication of how the rest of the year will be.   In the interest of getting a better understanding of the probabilities, I studied the returns of the Standard & Poor's 500 for the last 50 years.   The results of that study give some assurance that January may point the direction for the months that follow, but the early going is by no means a guarantee of what's to come. Let's start with the reality that over extended periods of time two out of three years will show positive returns.   So when we look at the span from 1968 to 2017, we learn that (after excluding years that showed gains or losses less than 2%), exactly two out of three years registered significant gains.   That was as expected. More interesting is the fact that in the years when the January number was positive, three quarters of the time the full-year result was

Sound Advice: December 30, 2020

  Stocks NOT To Buy Now Of all the silly information regularly offered to investors, the most useless and omnipresent is typically phrased as “10 Stocks to Buy Now” . The latest to come across my desk is from Barron’s , the well-respected (in some quarters) Dow Jones financial weekly that is a sister publication of The Wall Street Journal .   The article, in the December 21 st issue, was entitled “10 Timely Stock Picks For 2021.” Just in case readers got too excited about the list of stocks provided, the article let them know the 10 picks they anointed in December 2019 returned an average of 11%.   In most years, that would be been considered an OK return, but over the same period the S&P 500 index returned 18%.   Barron’s response to the shortfall: Who could have predicted 2020?   The reality is that no one can predict the returns for any year.   Indeed, any and all efforts to forecast the short-term future for the investment markets are futile.   Here’s an excerpt fro

Sound Advice: December 23, 2020

The Stock Market’s Too High . . . and it’s going higher. Over the many years I’ve been a stock analyst and money manager, I have periodically heard the words of the song that never ends: “The stock market is too high.” The first time I heard it was back in the 1970s, when the Dow Jones Industrial Average was meandering through a 15-year channel in which the high-water mark of 1,000 seemed to be an impenetrable peak.   Then in 1982, the Dow finally managed to break through and continued to rise almost nonstop until October 19, 1987.   That was the day of the Great Crash: The averages dropped more than 22% in one day.   Even so, by the end of 1989, only a bit more than two years later, Dow had recovered all of that loss and added another 500 points, rising to 2,753.20.   As of this writing, it stands at 30,216.45, a gain of approximately 1,000% in 31 years. Are stocks undervalued, fairly valued or overvalued?   That depends on which stocks you are looking at.   Typically, the faste

Sound Advice: December 16, 2020

  SEEING THE FUTURE: Sunny, with occasional clouds Estimating earnings (the prime determinant of stock prices) can be a fascinating task, especially if there’s a substantial basis for making such estimates. Some analysts develop their numbers starting from an overall economic and industry perspective. Others build their numbers from the bottom up.  Either way, the critical factor when considering estimates of earnings is the level of confidence in the numbers. The level of confidence is indicated by the Coefficient Variance, a technical term that measures the dispersion of estimates. If, for example, the mean of all analysts’ earnings estimates is $2.00 a share, with a low of $1.00 and a high of $3.00, that’s a wide dispersion and the Coefficient Variance will be high, probably 5.00 or greater. In such a case, it seems as if everyone’s guessing, since there’s little agreement on what the number will be. In contrast, when the mean is $2.00, with a low of $1.90 and a high of $2.10, tha

Sound Advice: December 9, 2020

  Gold: Marching to a Different Drummer As a complement to traditional asset classes, it is not unusual to consider precious metals such as gold, silver, platinum, and palladium. During times of economic stress, these kinds of commitments have tended to provide a measure of emotional comfort, which may or may not be accompanied by a price counterpoint to the course followed by stocks and bonds. Gold and silver have been the more common safe harbors, rising sharply on occasion and then moving sideways for extended periods. Though most frequently viewed as raw materials for jewelry, they have additional uses. Platinum and palladium have broader application, the most important of which is in automotive catalytic converters. Given the array of investment vehicles that has become available, it is now relatively simple to add precious metals to one’s portfolio. The simplest way of doing so is by buying mutual funds or exchange-traded funds that invest directly in the metals themselves. Som

Sound Advice: December 2, 2020

  Security Analysis: Science or Art? In 1934, McGraw-Hill published the first edition of Security Analysis, a 700-page text that was to become the bible of Wall Street research. This weighty tome, often referred to as Graham & Dodd, the authors, debuted as an analytical response to the stock market debacle of 1929- 1933. Replete with a plethora of evidence supporting the authors’ contention that there is indeed a cause-and-effect for movements in stock prices, the book set a standard for stock evaluation that has remained in place for decades. When pondering the subject of security analysis, one of the key questions is whether a good company is also a good investment. There are more than a few good companies, but when recognition of these companies is widespread, valuations tend to get stretched, occasionally far beyond what might otherwise be considered defensible levels. So an ostensibly interesting situation may in fact turn out to be one that is supported by a Utopian thesi