Tuesday, October 4, 2016

An Unpleasant Investment Environment

An Unpleasant Investment Environment


The investment environment is very bad right now.   Everything is overpriced.   Also, please remember that your investment advisor is not your friend.  Before I present some numbers I would like to tell two stories.

I noticed that Vanguard opened a new account for me, which automatically receives all funds from my trades.   The new account has an interest rate of 0.2%.  My previous money market account that has the bulk of my liquid funds has an interest rate of 0.5%.   I was told on the phone that the reason for the new account was that the old account was subject to fees due to a new SEC regulation.  Problem is I was told that if I want to buy something I would have to transfer funds and wait a day.  So if another Brexit causes a short- term crash I may not be able to take advantage of the opening.

So maybe the story that the account change was needed because of SEC regulation is true but 0.2%, really, this ticks me off.   Vanguard is however a good firm and I need to not sweat the small stuff.

I was looking at market numbers (will discuss in a second) when a broker from Fidelity called.   He wanted me to buy.   When I pointed out that virtually all funds were pretty close to their all-time highs and that dividend yields were really low he took the typical Street line and said that people needed to fully invest for the long term and the market timing was inappropriate.   I told him that I had no problem with continuous purchases but in my view there should be some automatic adjustments in the type of assets that was purchased based on the price.   I also pointed out that when the market is really high as it was in 2007 and 2008 that the only people who fared well were people with liquidity.

I asked the broker to call me if there was a market correction of 10% or so.  He said he couldn’t do that because he was busy those days but would put me down for a call in three months.

This reminds me of the post where I modeled the investment process as geometrically distributed.   The broker keeps calling until the patsy invests.   The probability of the patsy investing on a call is p.   Outcome of each call is independent and the wait until the first investment occurs.

The Myopic Investment Process Post:


Now here are the long promised numbers on six low-cost Vanguard ETFs.   All of these six well-managed funds have a cost percentage less than or equal to 0.1%.






State of Vanguard Funds 9/30/2016
Fund
Symbol
Inception Date
Top 10 %
Number of Holdings
Dividend Yield
All Time High
Current Price
Current as a Percent of High
Vanguard Dividend Appreciation
VIG
4/21/06
30.80%
185
2.08%
86.1
83.9
97.4%
Vanguard Consumer Fund
VDC
1/26/04
58.40%
100
2.46%
143.0
136.9
95.7%
Vanguard Growth Fund
VUG
1/26/04
27.30%
330
1.43%
113.5
112.3
98.9%
Vanguard Large Cap Fund
VV
1/26/04
18.10%
611
2.07%
100.4
99.1
98.7%
Vanguard Small Cap Fund
VB
1/26/04
3.00%
1456
1.61%
123.6
122.2
98.9%
Vanguard Total Stock Market Fund
VTI
5/24/01
15.20%
3620
1.83%
112.2
111.3
99.2%


Observations:  


Yields range from1.43% to 2.46%.

The median yield is lower than 2.0%

The current price as a percent of the all-time high ranges from 95.7% to 99.2% for the six funds

The median of the current price as a percent of the all-time high is 98.8%.


Concluding Remarks:  Vanguard and Fidelity are probably the two best financial firms out there and they both offer great products.   But choosing a great product at the wrong time is not a recipe for success.   In life being at the right place at the right time is really important.  The expansion has lasted around 7 years.  Interest rates really can’t get much lower, even if there is a major recession.  The Fed is out of bullets if a recession happens.   The most likely direction for interest rates is up.  

Many of the conservative funds highlighted in the table above will fall in value when interest rates rise.   It is frustrating being offered 0.2% on my savings but this is not the time to chase yield.    For many paying off the mortgage is a better choice than the investments being offered.

Not surprisingly, many financial advisors argue for keeping a mortgage even in retirement. 

Mortgage debt and 401(k) assets in retirement:



The advise that one should keep a mortgage in retirement is more closely aligned with the needs of the financial advisor than the client.

1 comment:

  1. I was looking for something like this ,Thank you for posting the great content……I found it quiet interesting, hopefully you will keep posting such blogs…

    Intraday Tips

    ReplyDelete