The other day, I explained to a friend how I had made a generous return on the market simply by buying a US index fund when the P/E on the whole was below the historic average while bond yields were still low. I am hesitant to give the same advice today. There's always been a constant debate among pundits about the appropriate balance. But what if both asset classes aren't particularly attractive right now? The market is arguably appropriately valued with P/E's hovering around its long-term average. Bond yields are still at their historic lows. Throw in inflation, and you've got a negative return for fixed income.
According to Bill Gross and an article in WSJ:
Attracting considerable attention have been particularly gloomy arguments from famed bond-fund manager Bill Gross, of Pacific Investment Management (Pimco). Mr. Gross believes bond returns will likely drop to 2% a year on average and stocks will gain only 3% to 4% a year.
According to Fidelity by WSJ:
Fidelity's asset-allocation group, which sets the investments for the firm's target-date retirement mutual funds, believes that over the next five to 10 years, U.S. stocks can generate average to slightly-below-average returns—roughly in the neighborhood of 6% a year.
According to Jack Bogle, from BI, from Fox Business:
Despite those economic conditions, confidence is at a really high level. You look at a 1% government bond, the 5-year note. You've got a 3% corporate bond. Those yields don't get much lower. That's a vote of confidence. Look at the stock market, sell around 17 times earnings. That's not exuberant; that's just about where it ought to be. So it suggests a good level of confidence at a level that's short of speculation."
So if nothing is really cheap, which asset class has the best prospects? How would you advise someone who isn't financially illiterate on their money today? Probably not active investing. Most money managers have difficulty beating the market, let alone a simpleton. I, myself, isn't brave enough to jump into the deep end of derivatives yet. Commodities maybe, if you know what you're doing. Emerging markets have their own problems, and real estate is beginning its long and treacherous climb to recovery. Perhaps MIST looks attractive at the moment.
Personally, I like to adhere to Warren Buffett's timeless advice. He (including S. Klarman) has iterated many times that you don't need to always be investing. Building up cash until fear paralyzes the market may present you with much more favorable opportunities and returns.
According to Alice Schroeder, author of Buffett's Biography, The Snowball:
“He thinks of cash differently than conventional investors,” Ms. Schroeder says. “This is one of the most important things I learned from him: the optionality of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.”
What do you think? Is it the right time to buy, hold, sell? What asset class should be given more attention? Is this the time to be in cash/short-term liquid securities? Am I preaching to the choir?
First of all, I have to agree with Buffett that it's never a bad idea to build up your cash and indulging a bias toward always being invested will get expensive at times.
That said, I've had what I consider great success over the past several years in alternative investments, and that's where I would point someone savvy today. I write about P2P lending a bit here on the site (just search for WSO CDO), and my NAR on that portfolio at the moment is 13.97%.
Also, crowdfunding startups is coming online in January and, while I expect a bumpy ride at first, when things settle down I think that has the potential to return multiples on an investment.
In short, get away from anything that Wall Street has a hand in (because the game is now so rigged that double digit returns will be more luck than anything else). Invest where Wall Street is basically excluded. P2P is a prime example, because the size just isn't there yet to make it attractive to Wall Street. Once the bankers show up with their HFT and other gimmicks, GTFO.
Have you calculated your IRR or cash-on-cash returns at LC? My actual returns are about 90bps lower than what the NAR shows.
However, I have read many instances of NAR over-inflating actual annualized returns by 2-3x. I'd be interested to know what your cash is actually earning you (including the effects of unallocated cash that sits waiting to be invested and fees on every interest payment you receive)
Just because the market as a whole does not have a very positive future outlook, that does not mean there are no attractive investments within it.
some ideas--- Tabacco stocks (altria 5% yield... safe as can be on the income stream there as far as i'm concerned), timber (via REIT), MLPs (talk to someone who knows these assets first)
Direct Real Estate net-lease credit tenant properties for decent low risk yields. Multi-tenant properties - less job-growth dependent property classes for greater yields/upside
i'd throw in REITS/RE ETFs as well though they're more correlated to other financial stocks
Thanks so much for sharing that Eddie. Definitely going to look more into P2P.
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