Category: Economics & Investing

Crowdsourcing is reshaping the way we think about the marketplace. Why? Because it simulates an open market environment very well. It allows providers to swarm into a market space and sell products and services to consumers, tailoring what they offer to consumer preferences. The swarm of consumers and providers grows, and affordability and quality improve as competition increases. All it takes is a well-designed technology platform which provides the necessary tools for products and services to be traded with reliable and sufficient information.

Peer-to-peer (p2p) solutions, enabled by web 2.0 and mobile technologies, are applying the crowdsourcing paradigm and setting the stage for a more efficient method for customer acquisition, service delivery and sourcing of funds. Some see crowdsourcing as a process of ‘disintermediation’, which is limiting reliance on sales agents, middlemen, brokers etc. and reducing transaction costs.

In the consumer lending sphere, ‘crowdfunding’ has emerged and has brought a fresh perspective on how we think about addressing some persistent issues of accessibility and affordability of financial services.

Two Bay Area based companies – Lending Club and Prosper – are the early birds. Both companies are offering crowdfunding services to borrowers and lenders, through which any individual or institution can lend to or borrow from each other, based on the borrower’s pre-assigned credit-risk rating and the lender’s preferences and risk tolerance. The uptake for the service has been strong – the two companies have reported that in 2011, monthly loan originations doubled to $30 million and tripled to $11 million through Lending Club and Prosper respectively. 24,000 new customers signed up on Lending Club and the platform originated a quarter billion dollars worth of new loans in 2011, more than doubling the previous four years combined. These loans were priced with net annualized interest rates ranging between 5.82% and 12.15%.

It is important to note that these two companies are not focusing on providing services which cater directly to the needs of underbanked consumers, who typically borrow in small amounts and have limited or no credit histories. Lending Club originates loans with an average size of $10,945 and rejects 90% of the loan applications it receives. The reason underbanked consumers are not a priority for these two companies is because of regulatory bottlenecks. The Securities and Exchange Commission regulates p2p loans like securities, with pricing based on assigned risk categories using borrower credit reports. This automatically creates a selection bias for consumers with established credit histories and eliminates most underbanked consumers from the pool of potential borrowers.

Structuring p2p lending platforms like auction markets, which allow market players to transact freely based on their preferences and risk tolerance, will help open-up the p2p lending market to underbanked consumers. As a first step, a regulatory framework for a true auction based loan products market needs to be developed and introduced.

Crowdfunding is a frontier market space, which has immense potential to be scaled to improve the availability of high-quality, low-cost credit options for underbanked consumers. Considering the high level of connectivity, visibility and traceability that p2p platforms offer, p2p lending could prove to be a promising solution, particularly for consumers with weak credit histories and limited access to affordable loans.

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The new year brings with it lots of well-intended resolutions, many of them financial. But it can be easy to procrastinate on money matters when you’re unaware of the consequences of inaction or unsure whether you’re making the right decisions.

Even for a financial planner, the process of setting and achieving financial goals can be overwhelming. This past year, although I focused on specific aspects of my finances, I didn’t take the time to identify important life goals for the year. I did not use my money to ensure that I was enriching my life.

So, like many others, I’m rededicating myself to the process as a New Year’s resolution. To organize and improve your finances in the year ahead, dedicate time each week to following these eight steps:

1. Set goals

Discuss your short- and long-term goals with your family, spouse or significant other. If you’re single, create a list for yourself. This is the most important step. Ask yourself what you want to have, to do, and to be over the next six or 12 months. Be as specific as you can and brainstorm as many items as possible. Next, prioritize these items by picking your top four or five. Assign a realistic cost to these goals to see if they are achievable within your budget.

2. Develop a new budget

Review last year’s spending and determine how it aligns with your values and your goals. Then, develop a new budget using last year’s as a benchmark. Shift your expenses where appropriate to reflect your core values while also incorporating the top four or five priorities from Step 1. Some of these goals will have a cost associated with them; others may not.

For example, my 2021 priorities include doing some maintenance on my home, attending a Coldplay concert, taking regular art lessons, vacationing for a week with my family and good friends in Utah, and creating more balance in my life by simplifying work processes. The estimated cost for the first four items was pretty straightforward, and I added those expenses to my household budget.

Not all of your goals have to be associated with money; creating more free time in your schedule is a good example. For busy professionals, time can be more valuable than money.

3. Open multiple savings accounts

Set aside specific, separate savings accounts for some of the goals that you have established. For example, you may want to have a separate savings account for a vacation, the kids’ education, a new car purchase or a special entertainment expense.

Why separate accounts? This helps ensure that you won’t raid savings for one expenditure to use for another, making it easier for you to spend money where it matters. Also, it can be easier to part with money associated with a personal goal or expenditure if there’s an account specifically designated for that money.

4. Create a summary sheet of your net worth

This should include the value of all assets you own, such as real estate, cash, investments, the cash value of life insurance, art, jewelry and cars. Then list the amounts you owe, such as for car loans, mortgages, credit card debts and student loans. The difference between what you own and what you owe is your net worth. Ideally, your net worth is growing each year as you increase your savings for retirement and reduce your debt.

5. Summarize your insurance

Create another summary sheet for your health, life, disability, liability and long-term care insurance policies. Know when these policies expire and the basics for each one:

  • How much will you spend out of pocket in a year with your health insurance before the insurer pays in full?
  • How much would you receive in life insurance proceeds if someone in your family were to pass away?
  • How much would you receive in after-tax dollars if you were to become disabled?

You may also want to evaluate the cost of life insurance through your employer compared with the cost of an individual policy. Group life insurance plans tend to be more costly once you reach age 45.

6. Review your investments

See if your total exposure to the stock market makes sense given your risk tolerance and personality and your proximity to retirement. In general, it’s wise to reduce your risk five to seven years prior to and after retirement to avoid sharp losses during this critical time period.

7. Do an estate plan checkup

This includes checking the titling of your accounts, your beneficiary designations and your estate planning documents to see whether they still apply or whether any changes are necessary. If it’s been five or more years since your last estate-planning documents were prepared, you’ll probably need to schedule a visit with your estate-planning attorney for some revisions. If you don’t have a will, get one drafted as soon as possible. Dying without a will can create some nasty consequences for those you leave behind.

8. Organize your financial documents

Create a file for all of your financial documents, including investment accounts, wills and other estate-planning files and personal records. This should include a list of all current credit cards, your driver’s license, a list of bills and monthly debits, the location of your safe deposit box and keys, marriage and birth certificates, passports, social media and electronic passwords and accounts, and a video recording of your home contents. Any personally identifiable information should be in a secure, encrypted electronic file or in a safe deposit box.

The bottom line

Each item on this list is important, but you don’t have to everything all at once. Schedule time each week to work on your financial to-do list so it’s not so overwhelming. A certified financial planner can help you organize and optimize your financial life and work with you as your accountability partner.

Whether you work with a planner or tackle these steps on your own, it’s important to set yearly goals and do the work to simplify and improve your financial picture.

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The SEC Commission has approved rules that require institutional money market funds to implement floating share values and other restrictions, such as restricting withdrawals and imposing redemption fees of up to 2% if fund assets drop below prescribed levels.  The shares would float based on changes to NAV (changes to the underlying market value of the fund’s assets).  Currently, these funds have a fixed price of $1 per share.

The rules were crafted in response to the 2008 financial crisis, when corporate lending markets seized up in response to a lack of liquidity.  The new restrictions will hopefully help maintain capital levels and keep markets operating smoothly during times of stress.

Individual Money Market Funds Not Affected

While the new floating share rules apply to institutional funds (both prime and tax exempt), they will not impact government and retail funds that are sold to individual investors. (Note that they will apply to institutional municipal money markets.)  However, provisions for liquidity fees and redemption gates do apply to all funds, both institutional and retail.

For a definition of government and retail money market funds, the SEC provides this detail via a press release on their website:

Government and Retail Money Market Funds Government and retail money market funds would be allowed to continue using the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price.  A government money market fund would be defined as any money market fund that invests 99.5 percent (formerly 80 percent) or more of its total assets in cash, government securities and/or repurchase agreements that are collateralized solely by government securities or cash.  A retail money market fund would be defined as a money market fund that has policies and procedures reasonably designed to limit all beneficial owners of the money market fund to natural persons.  A municipal (or tax-exempt) fund would be required to transact at a floating NAV unless the fund meets the definition of a retail money market fund, in which case it would be allowed to use the amortized cost method and/or penny rounding method of pricing to seek to maintain a stable share price.

One way this might affect individuals, is if they invest in institutional money market funds through their 401K.  It is likely that most retirement plans will choose retail money market funds as a plan option for this reason.  This will affect small and large businesses that use these accounts as short term funding for their day to day and week to week operations.  For a related article on this subject read more here.

The new rules will not go into effect immediately.  Fund companies have two years to comply with the new restrictions.

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Many of my prospective clients come into my office either not knowing how much they are paying in investment fees or mistakenly thinking that they are receiving their investment counsel for free.  It is no wonder this occurs.  Fees are often embedded in the form of loads (either front-end when the fund is purchased or on the back end when it is sold), commissions, and expense ratios.  These hidden fees make it difficult to ascertain total investment costs for your portfolio. 

Many financial statements appear to have no fees deducted, but just because you can’t see a fee, does not mean it is not present and having an effect on your portfolio.

So how do you determine the fees you are being charged?

How much do you pay for advice? – Fee only versus Fee Based Advisors

First, if you use an advisor, you will somehow be paying for this advice.  There are many ways advisors receive compensation.

A fee “only” advisor charges a fee based on either a percentage of your total assets invested, a retainer, or per project fee based on an hourly rate.   This is the easiest and most transparent way for the client to be charged.  Furthermore, with retainers and hourly fees, large portfolios are not charged egregiously high rates just because they have higher account balances.  Note that true fee-only planners are in the minority in the financial advisory world.   Hourly, fee only advisors are even rarer.

The downside of this approach is that since the client has to write a check for the amount, behaviorally it is less palatable for him, even if the charges are far less. Ironically, this enhanced awareness of the fee, even if it is substantially lower, makes the client more resistant to paying via this method.

Fee “based” advisors are distinctly different from fee only advisors in that they can charge a certain percentage of assets AND may also receive commissions on the products or funds sold to the client.  This could be the case if your advisor who charges you 1% annually on your investment portfolio also gets commissions from the funds or positions in your portfolio or from an insurance product or annuity he or she sells you.

The ABC’s of Investment Fees

Most investors that go to a solely commissioned based brokerage are not charged a fee as a percentage of their assets. So, on the surface, it may appear that the advice they receive is “free.”   Instead, the broker will buy funds that have a built in commission.  These funds are often denoted by a capital letter after the fund.  An “A” fund has a front-end load.  Typically 4-6% of the total amount handed over to the advisor will go straight to him or her as commission.  These fees may decline at certain breakpoints, particularly if you stick within one fund family.  “B” funds have back-end commissions that normally decline over time, so it is best to hold on to these until they have expired.  C funds have level but relatively high annual expenses.  Due to these loads or commissions, load funds tend to have higher expense ratios, as well as potentially 12b-1 fees.

What are expense ratios and 12b-1 fees?

An expense ratio is the most common fee an investor will encounter.    It represents the annual operating costs of the fund.  Every mutual fund or exchange traded fund has this ratio, and, of course, you would ideally like to see these as low as possible.  For example, active funds may have expenses ratios well over 1%, whereas passive index funds may have expense ratios less than .20%.

The 12b-1 fee is also considered an operational expense and, as such, is included in a fund’s expense ratio. It ranges between 0.25-1%, but is more often closer to 0.25%.  It is primarily used as an incentive for the broker or rep to sell the fund and is paid to that broker annually.

Note that although active funds purport to “beat the market,” over two-thirds of these funds fail to beat their benchmark in any one year.   See this related article. As you can imagine, the more of these active funds you add to your portfolio, the chance of you beating the market (as represented by index funds) over many years substantially diminishes.   Thus, the increased expenses many investors pay a fund manager to “market time” or pick “winning funds” are often a waste of money.

Let’s look at an example to bring it all together:

Say I invest $100,000 in a fund with front end loads of 4.75%.  The fund also has an expense ratio of 1.13% inclusive of a 0.25% 12-b1 fee, which goes back to the broker.  At the same time, I decide to invest in a no load passive indexed fund in the same investment category.

After 5 years, assuming that the annualized rate of return for the category index is 10%, the total costs and return of the portfolio would be as follows:

 Even though the expenses for the higher cost fund were perhaps not as transparent, the ending value of the investment shows the dramatic difference.  This is why many investors scratch their head and wonder why their portfolio seems to underperform the market.

The moral of the story is costs matter, especially over long periods of time.  Over just five years, in this example, the low cost investment balance is over 10% higher.

Make sure you fully understand all of your investment costs and how you are being charged.  If future investment returns are expected to be lower than what we have historically experienced, keeping costs low is even more imperative.

If you invest in low cost funds and use a low cost fee only advisor consider yourself well-armed to defend against lower returns in the future.

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Investors are well aware that financial markets go up and down.  That is the essence of business and economic cycles.  What is difficult for individual investors to master is how to act in the face of market advances and declines.  Unfortunately, most people become very tolerant of risk and increase their exposure to the stock market when the market is advancing.  Similarly, they avoid risk and clip their exposure to stocks when markets are declining, or after a large correction.  It is human nature and “recency bias” that create this visceral response to market perturbations.  Recency bias occurs when investors believe that the most recent performance of their investment portfolios will continue indefinitely in the future.  It is just one factor that results in investors consistently underperforming the stock market.

Brad M. Barber  and Terrance Odean, in their 2011 study “The Behavior of Individual Investors,” conclude that individuals routinely underperform benchmarks through 1) selling winning investments and holding losing investments, 2) being heavy influenced by most recent past returns (repeating investment behavior that coincides with pleasure and avoiding behavior that is painful), and 3) holding undiversified portfolios.

Dalbar studies have also shown that most individual investors typically trail the market rate of return, and they typically do so by a fairly wide margin.

The message from Dalbar since its first study in 1994 is that investment results are more dependent on investor behavior than fund performance and that mutual fund investors who tend to buy and hold are more successful than those who attempt to time the market.

Investors who attempt to time the market are often acting irrationally out of fear of a potential loss.  Stocks and investment funds happen to be the only assets that people buy less of when they become less expensive. Let’s think about buying food at the supermarket, if the price of steak rose considerably, you would be more inclined to reduce your purchase of steak or buy something else, but if the supermarket suddenly reduced the price of the steak by 30%, you would stock up.  However, you do the opposite when it comes to stocks and other investments.  The stock market can foster a gambling mentality.  When you are on a roll you hate to stop, but that is exactly when you should cash some chips in.

So how does an investor counteract the tendency to time the market and invest based on most recent results?  Rebalancing is great way to fight the effects of recency bias.  Rebalancing to your target asset allocation is a mechanistic and unemotional way to fight these counterintuitive emotions.  I sometimes get an odd look from my clients when I suggest that they rebalance after a market run-up.  “Why would I want to do that, the market is hot?” might be a typical comment.  But that is exactly why rebalancing is so important.  It removes the emotions, market noise, and other extraneous factors, and reminds the investor of their original financial plan and goals.

The best value-added proposition a financial advisor provides is to set the target allocation and then monitor and adjust it based on the client’s personal goals and life events.  The asset allocation is set within the investment policy statement and the portfolio is rebalanced yearly, or as needed, after large market advances or declines.  The asset allocation is revisited periodically, at least every 3 years, and is adjusted in response to a client’s retirement goals, change in health or marital status, or market valuations.

Rebalancing in this way, will not only help the client attain rates of return closer to the respective benchmarks for his or her portfolio, it can actually be a source of additional return.  In a recent article in Financial Planning magazine, “Portfolio Rebalancing: Get It Right,” Allan Roth underscores the incremental benefit of rebalancing.  His analysis shows that “over the past 15 years, the portfolio that stuck to its allocation earned 1.54 percentage points more each year than the average portfolio that tried to time asset classes.”

Rebalancing is just one area where advisors add incremental return and why it is essential for our clients to commit to the annual review and rebalance exercise.   Emotions can be hard to control, let your re-balancing take them out of the mix, so you can maximize your long range returns.

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Studying at a certain university can help a person’s career fate. Those who graduate from elite campuses are seen as having more potential in the world of work. Not only because of their name, several universities are known to produce quality graduates, especially since they have performed well from the start until they are accepted there. It is not surprising that these students will become rich people. Which universities have made the most billionaires?

Some universities have a reputation for being known to produce businessmen, politicians and other well-known individuals. Every year, Wealth-X research firm issues a list of campuses that produce the most successful alumni. This study took data from billionaires who were known to have graduated from university. They then estimated how many millionaires had graduated from there.

Populer Universities

Courtesy : Bing

Based on research released by Wealth-X in 2019, nine out of 10 universities that make the most billionaires are located in the United States. Meanwhile, another university comes from England, namely Cambridge. Most of the successful graduates who are registered have a net worth of at least $ 30 million or around Rp.446 billion which is referred to as UHNW (Ultra High Net Worth Individual).

Several university names are familiar and often appear on the lists of the world’s best universities, such as Harvard and Stanford. There is also a university that dropped in the previous year’s list, namely Yale.

Most people probably think that all the graduates of the prestigious universities on this list have gotten rich because of their parents. However, based on research, 79% of UHNW from Harvard are billionaires who made their fortune from their own efforts. Meanwhile, 15% of billionaires achieve success because of a mixture of their own efforts and legacy. Meanwhile, only 6% became rich just because their parents gave them.

Here are 10 universities that generate the most billionaires:

1. Harvard University

2. Stanford University

3. University of Pennsylvania

4. Columbia University

5. New York University

6. Massachusetts Institute of Technology

7. University of Cambridge

8. Northwestern University

9. University of Southern California

10. University of Chicago

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Investing during a pandemic is not easy. A large risk can arise at any time. The people’s economy is weakening even though stocks are still fluctuating.

The Bill & Melinda Gates Foundation Trust investing in Apple, Amazon, Alphabet, Alibaba, and Twitter in the initial quarter was worth a total of USD 450 million (around Rp 6.3 trillion). This is known based on reports from the Securities and Exchange Commission.

The largest private foundation asset manager in the world, investments worth between USD 100 million and USD 130 million. On Twitter, they dare put a figure of around USD 7 million. Not only in the four giant technology companies, this foundation also invests in other companies.

The Risk


However, the investment must be affected because of the Corona virus pandemic. Overall, the portfolio shrank by 19% to around USD 17.4 billion (Rp2,473 trillion), as FedEx, UPS, Liberty Global, Walmart, and other holdings experienced a decline in share prices.

Why Bill Gates Still In Pandemic


Bill Gates expressed his concern for the COVID-19 outbreak because of his deep experience in fighting diseases and efforts to equalize vaccinations. He himself has warned of the possibility of a pandemic since 2015 ago.

The philanthropist also said his foundation paid full attention to the COVID-19 pandemic, and had spent a lot of money developing vaccines. As quoted from Business Insider.

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Americans strive to do “better than the Jones’” by earning enough money (and accumulating debt) to buy fancy McMansions, nice cars, and family vacations. But the never-ending pursuit of the trappings of wealth can get in the way of the truly important things in life such as relationships, job satisfaction, and extracurricular pursuits. Debt accumulation is often the end result of aspiring to acquire “stuff and things” so we can impress others and make ourselves feel like we have succeeded. Acquiring material possessions rarely leads to happiness. In addition to increased debt, it impairs our ability to provide adequate savings for retirement. In fact, research shows that the average American has very little saved for retirement.

According to research from the 2014 Retirement Confidence Survey (RCS) conducted by the Employee Benefit Research Institute, 58 percent of workers and 44 percent of retirees report having a problem with their level of debt, and a sizable percentage of workers have virtually no money in savings and investments. Among the workers that responded to the RCS, 60 percent report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. Only roughly 22% had savings over $100,000.

Mr. Anthony’s article offers some advice to live debt free and counterbalance the materialistic slant of today’s world.

First, he mentions a tip his father taught him– that he should always try to live on only half of what he earns each year.

Most Americans will need to save far more than they anticipated for retirement. Whereas a 10% savings rate was appropriate in the past when workers had robust pensions and could count on receiving Social Security, a retirement savings rate of at least 15% is now more appropriate. If you include additional annual saving for an auto reserve, future college expenses for your kids, and six months of cash for an emergency reserve, a number closer to at least 25% might be more practical. His father’s point was that you should try to live way below your means so that there would be a cushion of safety as well as turbo charged savings for future goals like retirement. If we live a frugal lifestyle, we won’t get too addicted to a cushy lifestyle.

Second, it is essential that we relax about what our “position” is in life and not fall prey to the belief that “we are what we own.”

The key concept here is that true happiness is “wanting what you have.” As we get older and start to reflect on our lives, we realize that health, relationships, and experiences are far more valuable than all of the physical things that were once so imperative for us to acquire. In fact, we have learned by experience, that just because we bought that truck or went on our dream vacation, it did not fundamentally change our lives. Learning to love exactly where you are in your life at any one point in time is a concept that will result in great joy, peace, and satisfaction. Mr. Anthony writes, “life does not consist of the abundance of things, but of the abundance of enjoying where we are and who we are with.”

Finally, Mr. Anthony suggests that we should not place an unrealistic burden on ourselves regarding where we “should be” at certain ages or stages of our lives.

You should live the life that YOU want, not the life you think your parents, friends, or colleagues think you should live. You have the power to write the script of your life.

Our life goals, and especially our retirement goals are very important, as they help define our lifestyle and determine how much money we need to achieve our heartfelt desires. If we can live by the principles that Mitch Anthony outlines, we can have control over our money as opposed to our money and debt having control over us.

If you want to read more about goal setting for retirement, I suggest that you read Mitch Anthony’s book The New Retirementality. It will inspire you to be more intentional about planning for that next phase of your life. The book also provides valuable exercises to help you determine how you will spend your time and money to live a purposeful retirement. The Millionaire Next Door is also a great read to inspire you to downscale your life. The book, written by Tom Stanley and William Danko, presents research on the habits and lifestyle of wealthy Americans and how they accumulated millions by not flaunting their wealth, but instead by living a practical life.

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Many people are loathe to increase their cash reserves when the rate of return on cash accounts is miniscule. Yet cash may be the exact asset to bolster when markets are frothy and the economy is sputtering. Here are some recent articles that underscore the importance of having a stash of some cash.

Having at least 6 months of living expenses is very important to protect you and your family from an unexpected event like a job loss, disability, medical emergency or even divorce. Although money market and checking accounts are yielding close to nothing, you can research on line savings accounts. Current yields are roughly 0.9% (9-14). You can compare rates, restrictions, bank ratings and other factors at bankrate.com.

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If you have planning to invest your money in the stock market, you need to read this carefully. It cannot be denied that every investment has its own risk. Today’s article gives an overview of the situation in the stock market today and the prediction about what will happen in the future.

Client meetings over the past year have been quite sanguine. Investments and assets are up. People seem to feel better about job security. The housing market is slowly recovering, and retirement projections look rosier. Strong stock market performance is good, in that it gets us closer to our goals; however, it can also breed a false sense of complacency.

Valuations are high and reaching points not seen since 2007, 1929, and by some metrics, even 2000.

Overvalued Stock Market

Courtesy:www.insideinvest.com.sg

Stock markets become overvalued when stock prices rise at a much faster rate than earnings, which is what has occurred for the past several years due to the belief that the Federal Reserve’s quantitative easing policies will continue to force investors into stocks in order to get a decent return on their money; low-interest rates punish savers and cause them to seek yield by investing in increasingly speculative investments. But even members of the Federal Reserve are warning about frothy segments of the market as they tiptoe toward shutting off the quantitative easing spigot.

debt is increasingly being purchased on the basis of yield rather than the careful evaluation of repayment prospects. John Hussman Hussman Funds

The Cycles In Financial Markets

Courtesy:encrypted-tbn0.gstatic.com

It is important to remember that financial markets move in cycles, and just because this multiyear stock market advance has been rewarding, it does not mean that it can continue indefinitely. In fact, the longer it persists, the greater the chance of a severe correction.

One way to evaluate whether or not the market is expensive is to look at the current PE10 or CAPE ratio. This valuation method was developed by Robert Shiller from Yale, and it historically has been helpful in forecasting market crashes as well as future rates of return.

This article in the WSJ “Yes, Virginia, You Can Time the Market” explains that, although no one can time the market with precision, using the Shiller PE as a method to modify your stock exposure by overweighting or underweighting by up to 30 percentage points has resulted in stellar returns since 1926.

The Prediction of Bubbles

Courtesy:www.nasdaq.com

It is a strategy, however, that requires patience. A high CAPE ratio can persist for years. It tends to have a better success rate for predicting 10-year future returns and is less accurate in predicting returns less than 5 years out. In fact, in 2000 it was over five years early in diagnosing an overvalued market. The article acknowledges that extreme market timing by moving all of your assets in and out of the market based on certain parameters is very difficult and not a recommended strategy. Using Shiller’s ratio, though, can provide some guidance in dialing down equities when markets are overvalued and dialing up exposure when markets are undervalued, thus protecting investors from large corrections and enhancing long-range returns.  See the chart to the left.

John Hussman has been warning about stock valuations for years as the Shiller PE, as well as his additional proprietary methods, indicate that returns over the next decade will be roughly 2%, before inflation. His weekly commentaries are a must-read.

He makes this powerful assertion in, Yes, This Is An Equity Bubble:

Make no mistake – this is an equity bubble, and a highly advanced one. On the most historically reliable measures, it is easily beyond 1972 and 1987, beyond 1929 and 2007, and is now within about 15% of the 2000 extreme. The main difference between the current episode and that of 2000 is that the 2000 bubble was strikingly obvious in technology, whereas the present one is diffused across all sectors in a way that makes valuations for most stocks actually worse than in 2000.

The question a rational and prudent investor should as himself is this, “ is it prudent for me to take additional risk in the stock market at this juncture, given such dismal future returns?” This is a particularly important consideration for those people who are looking to retire in the next 7-10 years, as well as those how have recently retired.

For more information on the Shiller PE and market valuations you may want to read the following:

Market Valuation Overview- Yet More Expensive

The Mystery of Lofty Market Valuations by Robert Shiller

Is the CAPE Ratio Good at Predicting Future Returns? (Yes) Is it Perfect? (No)

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