Friday, August 1st, 2008
What About Global Markets?
With markets in Europe and Japan seeing much of the same fate as the Unites States, global diversification almost seems to be a forgotten concept these days. For those investors who have been gathering cash and are now looking to enter the market again, history shows that a strategically diversified portfolio will outperform money market or bond investments over the long term.
It often helps to remind ourselves that, while some areas of the market may not be performing well in this downturn, other areas or regions may be offering decent returns. The idea behind diversification is to protect a portfolio from poor performance in one area by providing better performance in another.
Buying Undervalued Stocks
Since no one has a crystal ball to predict which regions will outperform, analyzing certain metrics, like price-to-book value, helps to uncover which stocks or sectors that are likely to perform well going forward because they are currently undervalued.
Price-to-book (P/B) is a popular ratio that indicates how much investors are willing to pay for a company’s assets. In general, the higher the ratio, the more expensive a stock is considered to be.
Where Are The Bargains?
The chart below (Courtesy RBC) captures the average P/B ratio for stocks in a number of different countries, which points to whether each market is over-priced or under-priced. The red line shows the mean, or average P/B value. Any circle above that line is considered an expensive market; anything below is considered to be attractively priced.
Stock markets in several countries, including the U.S., are now trading at below average P/B valuations. By contrast, Asia (ex Japan), China, Canada and Brazil are considered expensive relative to their historical mean valuations.
Charts such as these may help you understand why some investors are now overweight in equity exposure, many with a bias towards U.S. and global markets. It seems that the short term volatility in the markets has shifted investor focus off of valuations and into irrational fear. However, we know from historical statistics that not over-paying for investments is a key factor in achieving long-term success - which means it may be a great time to put some cash to work for the long term.
Posted in Investor Education | No Comments »
Wednesday, June 4th, 2008
We have all heard people harp on having a financial plan and investing for the future, but what does that mean? What happens when you develop your asset allocation, purchase your Dividend Growth Stocks and Dividend ETF’s and have saved for an emergency fund with a high interest online account like ING Direct?
We have also heard all of the “talking heads” on television talk about diversification. They are more than likely talking about diversifying within the stock market. Diversifying between stocks, sectors, and industries as well as between fixed income investments like bonds and equity investments like stocks. This is usually good advice, but what about other types of investments? Where do they fit in the picture and how can they help you to further grow and protect your wealth?
What Happens Next?
At Blueprint for Financial Prosperity, they ask what is next in your financial plan after you have successfully accomplished the following:
- Paid down all your debt until all you owe on is your mortgage.
- Maintain six months of expenses for your emergency fund in a high yield money market account.
- Fully fund your and/or your spouses 401k, 403b, 457, etc.
- Maximize your and/or your spouses Roth or Traditional IRA up to the allowable limit.
- Invest some money each month in a 529 plan (and possibly even a Coverdell “Education†IRA) for each of your children’s future educations.
- Set aside some additional money each month and at bonus time into a taxable brokerage account for such goals as that long-awaited trip to the Orient, the sunny vacation property on the water, or even retirement.
- All your investments are properly diversified by asset type according to your goals, time frame, and risk level.
The article goes on to mention investments in tangible assets such as gold coins or a stash of gasoline, although the latter is difficult to manage.
Diversify Away From The Stock Market!
I would suggest that diversification away from the stock market take into account a variety of tangible assets such as precious metals, raw land (vacation property is preferred), Real Estate, and valuable collectibles or antiques.
You should be aware that these tangible assets typically have narrow markets and can be very illiquid. However, they can be very valuable in times when the stock markets are out of favor and should comprise a small piece of one’s overall investment portfolio.
It is essential that you do your due diligence with every form of investment. Purchasing these tangible assets can be tricky if you are not well versed in the particular niche market. That said, thorough research could yield tremendous value so get out there and test the waters!
I have little in the way of antiques and coins, but I have had some success with Real Estate and I do own some semi-valuable sporting collectibles.
I am a strong believer in diversifying away from the stock market and I prefer rental Real Estate because I am adamant that cash flow is the engine that drives wealth. Real Estate is the only avenue where the average person can utilize the power of a mortgage as financial leverage to compound their wealth.
Posted in Investment News | 6 Comments »
