Three Things to Remember When Markets Decline

By Jack Forehand (@practicalquant) —  “People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”  — Peter Lynch, One Up On Wall Street Market volatility is back. And with it comes a significantly elevated potential for rising emotions and the poor decision making that comes with them. For investors, now is as good a time as ever to take a step back… Read More

Diversification: The Only Free Lunch on Wall Street

The value of long term asset diversification, sometimes known as “the only free lunch on Wall Street” is discussed in a recent MarketWatch article offering “Five Steps to Beating the Market.” “Stock investors typically regard ‘the market’ as essentially the Standard and Poor’s 500 Index of large U.S. growth stocks.” The article tracks and summarizes financial performance records since 1928 for large-cap blend the (S&P 500), large-cap value, small-cap blend, small-cap value stocks and a… Read More

Curb Your Enthusiasm

Richard Turnill, BlackRock’s chief global investment strategist, advises investors to “curb their enthusiasm.”  Turnhill commented in BlackRock’s most recent weekly market commentary: “We see a global portfolio made up of 60% equities and 40% fixed income producing annual returns of just 3.3% in U.S. dollars before inflation over the next five years.” Turnhill speaks well of foreign stocks, emerging market stocks, and private equity, saying “our international equity return estimates are now above the long-term… Read More

Bogle: No Stock Pickers in What Looks Like an Expensive Market

Jack Bogle, founder of the Vanguard Group, tells CNBC that “there is no such thing as a stock picker’s market.” He goes on to say that the phrase, “a stock picker’s market is meaningless” but catches on and gets investors’ attention. Bogle, who is best known for popularizing passive, low-fee index investing, goes on to say that the stock market returns will likely be lower over the next ten years vs. what they have been… Read More

An Argument for a 100% Equity Portfolio

David Levine, formally in charge of fixed income for Sanford C. Bernstein & Company, writes in the New York Times that “the best asset allocation, nearly all the time, is 100 percent stocks.” He notes Warren Buffet’s advice to allocate 90% of assets to equities, suggesting this may be a tempering because “many investors simply cannot stomach the volatility that a 100 percent equity portfolio entails.” Levine, despite his background in fixed income, says, “even… Read More

The Battle of Stocks vs. Bonds in 21st Century – Fixed Income Winning, So Far

Writing for the Wall Street Journal, Allen S. Roth of Wealth Logic questions the continuing validity of Prof. Jeremey Siegel’s contention that stocks are less risky than bonds over time. He observes that “it hasn’t panned out so far this century.” He showed the chart below to Prof. Siegel, who responded: “the starting point is very important. In 2000, the U.S. stock market was the most overvalued in its entire history. . . . We… Read More

Bogle’s Straightforward Formula for Estimating Future Stock Price Returns

The Wall Street Journal’s Money Beat column highlights the value of simplicity in investment prediction models. Profiling work by John C. Bogle, founder of Vanguard Group, that draws on historical data, the piece highlights his three-factor formula for determining the “sources of return.” These are: Starting yield (annual dividends divided by stock price) Earnings growth Speculative return (changes in pricing by investors) The first two factors can be grouped together, according to Bogle, as “investment… Read More

John Bogle Suggests Low Returns Likely Over the Next Decade

John Bogle, founder of Vanguard Group, has a pessimistic prediction for markets over the next decade. He says that he divides his expected return forecast into two segments: investment return and speculative return. For the first, he combines 2% dividend yield with estimated earnings growth of 6% to reach a total of 8%. However, his speculative return number then incorporates predictions about the price-to-earnings ratio, which he expects to fall from an estimated 20 times… Read More

John Bogle Suggest Low Returns Likely Over the Next Decade

John Bogle, founder of Vanguard Group, has a pessimistic prediction for markets over the next decade. He says that he divides his expected return forecast into two segments: investment return and speculative return. For the first, he combines 2% dividend yield with estimated earnings growth of 6% to reach a total of 8%. However, his speculative return number then incorporates predictions about the price-to-earnings ratio, which he expects to fall from an estimated 20 times… Read More