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A standard deviation diagram

Marketing the Safety Out of It

A growing theme in investing is to target and invest only in the least volatile stocks in the market. One simple example of this is take the S&P500, which is a representation of the 500 largest publicly traded stocks in the United States, and only invest in the 10% of companies with the lowest standard deviation of the 500. This would produce names such as AT&T, Coca-Cola, and Johnson & Johnson. 

This simple concept traditionally would result in an investor owning a lot more safety, blue chip, and high dividend yielding stocks. Not a bad bet in a historic context. Looking forward however, we have an accelerating concern over the price of these types of companies, which may lead to them not being as safe as one would expect.

One metric we look at to value stocks is the Price to Earnings ratio, the easiest way to describe this is what price is an investor willing to pay for every dollar a company earns in profit? A higher P/E ratio implies more expensive,  a lower one implies cheap. Comparing a stock, or an index, such as the S&P500 to its historical average P/E can give you a relative idea of whether something is expensive or cheap compared to historical  standards.
Historically, going back to 1972, the companies in the lowest 10% volatility bucket in the S&P500 (as measured by standard deviation) produce a historical median P/E ratio of roughly 13. As is stands today that same low volatility class of stocks trades between a P/E ratio of 23 to 24.

Low Vol Record PEChart provided by Ned Davis Research, Inc.

Why is this troubling? Well, when prices revert to the mean, and investors are willing to pay less for those same dollars of earnings, it spells trouble for those who hold these assets, especially those who have been chasing the stability and dividends these stocks were expected to provide.

What is causing this? Let’s take a look at the major contributors:

Fed policy. While artificially low interest rate policy is intended to push investors into riskier assets, some investors still want safer assets. Low volatility stocks have higher dividend yields, making them bond proxies.

Sector attribution. The low volatility group is concentrated in Utilities, Financials, and Consumer Staples, which have high dividend yields and P/E ratios that are above their long-term averages.

High valuations for the broad market. The median P/E for the S&P 500 is 24.0, well above its historical norm, which has pushed investors into “safer” stocks.

Secular trends. Fear is a stronger emotion than greed, so investors have flocked to “safer” assets.

Industry innovation. ETFs have enabled investors to more easily buy themes like low volatility.

The first three factors are the most likely the first ones to threaten this crowded trade. The one that has me the most troubled is the fifth factor. Industry innovation has led to specialized investment products that make it very simple for retail investors to buy into this wave of low or minimum volatility assets. We’re seeing these assets recommended in droves to competitor’s clients, with little to no consideration given to how crowded or expensive the trade may be.

These assets in the broad context of a well diversified portfolio may make sense, but from my perspective every asset has a time and a place. Currently, I would not be overpaying for safety by using these low volatility factors we’ve explored above. There are other ways. Like always, when assets deviate from a historical valuation range, it can take quite awhile to be proven right and see them correct. We’re not yelling fire in a crowded theater but would like to see investors better educated on the risks ahead.

 

Thank you for reading!

Blake Street
Written by: Blake Street, CFA®, CFP®, Chief Investment Officer

Blake Street is an Investment Advisor Representative of Warren Street Wealth Advisors, a Registered Investment Advisor. The information posted here represents his opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional.  Nothing in this commentary is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the blog and due to the static nature of content, those securities held may change over time and trades may be contrary to outdated posts.

football-chalkboard

Retirement Planning Isn’t Just For “Retirees”

Retirement Planning Isn’t Just for “Retirees”
By: Joe Occhipinti

 

When people discuss the topic of saving or planning for retirement, the picture that often comes to mind is that of an employee that has been working for the same company for 20+ years and is on the verge of retirement.

When I hear about planning and saving for retirement, I find myself thinking about those who are 20+ years away and need to make the most of one variable that cannot be replaced – time.

Time is precious, and when it comes to preparing for retirement making up for lost time is one of the most difficult things to do. One of the most basic ways we see this is employees missing out on years of 401(k) matching contributions from their employer. A match can be a 100% return on your investment, assuming you are fully vested. That’s a tough return to beat in any financial market.

Too often financial planning and saving for retirement gets thrown to the wayside as something that can be put off for another year. For some, that could be an additional 6% of their salary they are choosing to forgo in their 401(k). If you got an additional 6% of your salary per year added to your retirement account, then how much sooner do you think you’ll be able to retire? How much stronger would your retirement look?

The other key piece of a strong retirement is a financial plan. A sound financial plan should you help surface all facets of your financial picture and ultimately how each piece helps or hinders you from achieving your long term goals. This includes budgeting, savings, investing, and managing risk.

Debt is probably the most often overlooked and underestimated piece of planning. Holding on to excessive debt during your working years can really put a damper on your ability to retire, especially if you have a large amount prior to retirement. Don’t let lack of planning be the sole reason for you to not get the retirement you’ve been dreaming of.

The final thoughts I will leave you with are: 1) Do I want to retire? 2) If I begin contributing to my 401k today, then how much do my chances of a successful retirement increase? 3) Am I managing debt appropriately? 4) Have I put enough time into financial planning to build a strong retirement?

Take the necessary steps to put you on track for retirement, whether that’s 2 or 20 years away.

 

 

warrenstreetadvisors006

Joe Occhipinti
Wealth Advisor
Joe@Warrenstreetwealth.com
714.823.3328

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor.
The information posted here represents opinions and is not means as personal or actionable advice to any individual, corporation, or other entity, Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this presentation is a solicitation to buy, or sell, any securities, or an attempt to furnish personal investment advice. We may hold securities referenced in the presentation and due to the static nature of content, those securities help may change over time and trade may be contrary to outdated posts.

The Value of Double-Checking Your Retirement Strategy

the value of double checking your retirement strategyAs you approach your “third act,” does it need to be adjusted?

Provided by: Warren Street Wealth Advisors

 

Motivational speaker Denis Waitley once remarked, “You must stick to your conviction, but be ready to abandon your assumptions.” That statement certainly applies to retirement planning. Your effort must not waver, yet you must also examine it from time to time.1

 

For example, the level of risk you chose to tolerate at 35 or 40 may not be worth tolerating at 55 or 60. Additionally, you may realize that you will need more retirement income than previously assumed. With those factors and others in mind, here are some signs that you may need to double-check your retirement strategy.

 

Your portfolio lacks significant diversification. Many baby boomers are approaching retirement with portfolios heavily weighted in equities. As many of them will have long retirements and a sustained need for growth investing, you could argue that this is entirely appropriate. If your retirement is near at hand, however, you might want to consider the length of this bull market and the possibility of irrational exuberance.

 

The current bull has lasted about twice as long as the average one and brought appreciation in excess of 200%. It could rise higher: as InvesTech Research notes, two-thirds of the bull markets since 1955 have gained 20% or more in their final phase. Few analysts think a “megabear” will follow this historic rally, but even a typical bear market brings a reality check. The lesser bear markets since 1929 have brought an average 27.5% reversal for the S&P 500 and lasted an average of 12 months.2

 

A poor quarter makes you anxious. You start watching the market like a hawk and check up on your investments more frequently than you once did. Some of this vigilance is only natural as you near retirement; after all, you have far more at stake than a millennial investor. Even so, this is a sign that you may be uncomfortable with the amount of risk in your portfolio. A portfolio review with a financial professional could be in order. A semi-annual or annual review is reasonable. One bad quarter should not tempt you to abandon a strategy that has worked for years, only to examine it in the face of sudden headwinds.

 

You find yourself listening to friends & pundits. Your tennis partner has an opinion about when you should claim Social Security. So does your dentist. So does a noted radio personality or columnist. Their viewpoints may be well-informed, but they are likely expressing what they would do as they share what they feel you should do. If you seem increasingly interested in the financial opinions of friends, acquaintances and even total strangers, or the latest “hot tip” on the market, this hints at anxiety or restlessness about your financial strategy. Perhaps it is warranted, perhaps not. It may be time to reexamine some assumptions.

 

You wonder about the demands your lifestyle may make on your finances. You want to travel, golf, and have fun when you retire, and those potential lifestyle expenses now seem larger than they once were. Here is another instance where you may want to double-check your retirement savings and income strategy.

 

You see what were once “what-ifs” becoming probabilities. You sense that you or your spouse might face a serious health issue in the not-so-distant future. It looks as if you may end up raising one of your grandchildren. It seems likely that you will provide eldercare for a sibling who may move in with you. These life events (and others) may prompt a new look at your financial assumptions.

 

You think you will retire to another state. Say you retire to Florida. There is no state income tax in Florida. So your retirement tax burden may decrease with such a move (though some states have higher property taxes to offset the lack of state taxes). To what degree will geographic considerations affect your retirement income, or need for income? Such geographic factors are worth considering.3

 

You wonder how deeply inflation will impact your retirement income. A recent Morningstar analysis of retiree spending data compiled by the federal government noticed something interesting: for the typical retiree, spending declines in inflation-adjusted terms between age 65 and age 90. So the assumption that retirees increase household spending over time in light of inflation may be flawed. Of course, inflation has been mild for the past several years. If inflation spikes, however, that assumption might prove wholly valid.3

 

Looking at your retirement strategy anew has merit. As the years go by, priorities change and needs arise. New questions call for appraisals of old assumptions. Reviewing your approach to investing and saving at mid-life is only rational, for your retirement strategy must suit the objectives you now have before you rather than those you set in your past.

 

Warren Street Wealth Advisors

190 S. Glassell St., Suite 209

Orange, CA 92866

714-876-6200 – office

714-876-6202 – fax

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

Citations.

1 – quotes.lifehack.org/quote/denis-waitley/you-must-stick-to-your-conviction-but/ [4/16/15]

2 – fortune.com/2015/04/16/taming-the-bear-market/ [4/16/15]

3 – tinyurl.com/odyle9s [12/25/13]