Monday, February 3, 2020

Secular Top
Investment Report
[Let’s Party its 1929!] 

Image result for shiller pe chart pictures
As of 2/3/20
30.84

From High to Low - Since Year 2000

+446.6% Gold
+254.9% Transports
+231.1% Utilities
+145.8% Dow
+124.9% Nasdaq
+119.5S&P 500
+101.4% Oil 
+  69.0% 30yr Treasury Bonds
+  64.0% Swiss Franc's

December 1999 Shiller PE10 was 44.19               
August 2000 S&P 500 dividend yield was 1.11% 


DYI:
The Federal Reserve has once again turned on the money supply pumping up to market to new highs.  Since the secular top in the year 2000 the NASDAQ has moved up two notches outperforming the S&P 500.  Interest sensitive stocks moved up in performance from last month [didn’t change places in the overall performance derby] especially utilities with a nice pop to the upside highlighting the fact that the Fed’s want to keep on partying like its 1929! 
    
This Will Not End Well

For those holding or purchasing stocks today going to sleep like Rip Van Winkle waking 10 years from now will expect an estimated average annual return of – drum roll please - +0.13!  Yep that’s it for all of your toil and troubles as a buy and hold type of guy or gal!

Let’s not confuse dollar cost averaging as that return will be an average return over many years.  Dollar cost averaging [DCA] is nothing less than cleverly disguised small lump sums generally twice monthly for those with 401k type plans.  Depending upon the valuation level of the market and the size of the deposit at that time will determine your overall averaged return. 

When the 401k provider arrive entertaining you their dog and pony show they will always say it’s not timing the market [DYI are not speculators] but time in the market.  Back to Money Chimp and now plug in 20 years – drum roll please – 3.41%!  Wow a 2,523% increase in rate of return!  That is based on a relative basis between those two numbers however on an absolute basis a 3.41% return will only have you eating Alpo dog food in retirement!  So yes longer the time in the stock market greater your return.

Of course how long is the question? 

Just for fun going out 40 years – drum roll please – 5.09% an increase of 49%.  That’s an improvement moving your retirement years from having to eat Alpo dog food to chuck roast.  This is also an example of the law of diminishing returns when you go out 80 years [5.94%] the relative increase is now only 17%.  160 years??  Average annual return 6.37% or a relative increase from 80 years holding to 160 years of 7%!  So yes time in the market increases performance but relative to what and how long is always the question.

Active Asset Allocation

Four Uncorrelated Assets
1.)  Stocks
2.)  Long Term High Grade Corporate/Government Bonds
3.)  Short Term Notes (Cash)
4.)  Gold – Precious Metals Mining Companies

Four Assets Correlated to Four Economic Conditions
1.)  Prosperity
2.)  Deflation
3.)  Recession

4.)  Inflation

1.)  Prosperity: Stocks become a clear winner during conditions of increasing employment, rising wages tied to increasing productivity along with rising profits.  Junk bonds (they trade like stocks) are also winners in this environment despite their low quality; the economy is so good interest and principal payments are made – defaults are minimum – and a positive climate for refinancing.  High quality corporate/ government bonds are secondary winners as prosperity is noted for stable or slowly declining rates.  Gold is generally a loser in prosperity as inflation is minimized and investors seek higher returns in more traditional investments.


2.)  Deflation:  Deflation is the decease in the general price level of goods and services.  The Great Depression is a standout example of deflation.  The general cause is when excess debt is built up in the private sector that can no longer be increased and/or maintained resulting in massive bankruptcies.  This creates an environment of panic as businesses scramble to become profitable by firing employees and cutting hours of remaining workers.  In this deflationary episode interest rates decline, prices decline, and the almighty buck rises in value against softer currencies.

Long term high quality corporate bonds and long term U.S. government bonds are winners in this type of economy.  Stocks, gold, and junk bonds generally will fall in price along with interest rates on short term notes.

3.)  Recession:  For DYI's purposes recessions are a period of increasing interest rates engineered by the Federal Reserve in order to quell inflation by slowing down an over heating economy.  This condition is temporary as the economy will either adjust to the new economic environment bringing back prosperity or a deflationary period will begin.

High quality corporate/government bonds, stocks, gold, and junk bonds are all losers in this scenario. Short term notes and money market funds are clear winner as their principal value remains steady plus the interest income improves with increasing interest rates.

4.)  Inflation:  Too much money chasing too few goods.  When Federal government liabilities become onerous from financing of war(s) and/or social programs that are too great to be paid by taxation governments will resort to money creation to pay the remaining costs.  After WWII, Korea, Vietnam and the war on Poverty inflation began slowly prices increased relentlessly (despite high taxes) as government liabilities expanded.  When President Richard Nixon closed the gold window (1971) the last vestige of inflationary controls were removed with inflation peaking in the high teens only until Paul Volker was appointed as Fed Chairman (August 79) who crushed inflation with high interest rates.

Stocks, high quality long term corporate/government bonds, junk bonds are all losers as inflation soars along with interest rate increases (despite the Fed's efforts to suppress them).  Cash (money market funds) or short term notes are neutral or slightly lag inflation rolling up to the higher interest rate quickly.

Gold is a winner when inflation breaks above 5%.  When inflation goes double digit gold is marked up in price to reflect the debasement of the currency.  Gold will also rise in price based upon fear of massive defaults as gold has no counter party risk.

 VALUATIONS DO MATTER

This investment approach is an offshoot of Harry Browne's Permanent Portfolio that maintains a fixed 25% invested in the above four asset categories listed above.  Harry's uncorrelated assets at that time was ground breaking.  Today it is taken for granted.  As much as I was impressed with Harry's work it always made me uncomfortable to always own 25% in each asset. When valuations are at extreme lows a greater percentage is called for and conversely at historical nose bleed levels significantly less (or none).

DYI’s approach working through our four assets and determining with a measure of accuracy the percentage invested depending upon long term valuations.  This is done by calculating our averaging formula for each asset.

If all three assets - gold, stocks, long term bonds, cash is our default position - are at fair or average value then each of the categories will be at 25% of the portfolio just like Browne's Permanent Portfolio.  However as prices move up or down from their respective mean our averaging portfolio will make the adjustment enhancing the overall return. 

Will DYI outperform the market??

Our primary goal is to outperform the Permanent Portfolio first.  Outperform the market?  Maybe? DYI's intentions is a 6% real return - as opposed to Browne's 4% - into your pocket with low volatility as opposed to our fully invested stock market investor.  In closing each of these assets stocks, long term bonds, gold and cash, all have their moment of fame or shame.  Value players reduce or eliminate the overvalued assets and increase the undervalued; simple as that!  

 Updated Monthly

AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 2/1/20

Active Allocation Bands (excluding cash) 0% to 50%
50% - Cash -Short Term Bond Index - VBIRX
50% -Gold- Global Capital Cycles Fund - VGPMX **
 0% -Lt. Bonds- Long Term Bond Index - VBLTX
 0% -Stocks- Total Stock Market Index - VTSAX
[See Disclaimer]
** Vanguard's Global Capital Cycles Fund maintains 25%+ in precious metal equities the remainder are companies they believe will perform well during times of world wide stress or economic declines.  

 This blog site is not a registered financial advisor, broker or securities dealer and The Dividend Yield Investor is not responsible for what you do with your money.
This site strives for the highest standards of accuracy; however ERRORS AND OMISSIONS ARE ACCEPTED!
The Dividend Yield Investor is a blog site for entertainment and educational purposes ONLY.
The Dividend Yield Investor shall not be held liable for any loss and/or damages from the information herein.
Use this site at your own risk.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
   DYI

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