The Market Gives What the Market Gives

by JR Robinson on November 6, 2013

Why performance promises and goals are worthless

The other day, I met with a prospective client who told me of a meeting she recently had with a competing advisor at a well-known brokerage firm who suggested that he could consistently generate returns for her on the order of 12% per year. Unfortunately, such shameless hyperbole is still common practice in the financial planning profession, but few things irk me more than misrepresentations about one’s abilities to generate future returns.

Separately, an existing client recently asked me if we could set a return objective of 5% per year for his conservatively invested (50% cash,10% bonds, 40% stocks) portfolio. Although this more modest performance objective would seem to lend itself better to assurances, the purpose of this piece is to make the case that specific return benchmarks – even modest ones – have no place in the advisor-client dialogue.

As the title of this piece suggests, at the heart of the issue is the simple, well established fact that financial advisors have no control over capital markets returns. This point is effectively illustrated in the following table*:


Two obvious conclusions from this table are (1) that there is a wide range of returns across all time periods, and (2) that negative annual returns have occurred for periods as long as ten years. The fact that the 10 year period ending February 2009 produced average losses of 3% per year should be ample fodder to question any advisor who claims the ability to consistently produce double digit returns.

But what about more modest promises, such as the 5% annual return my dear client is seeking? Surely, with a balanced allocation of stocks, bonds, and cash, such a return is well within range of reasonable expectations, yes? Actually, no. In the current investment environment in which cash pays nearly 0% and interest rates on bonds are near historic lows, such a promise from me would be nearly as irresponsible as that made by the less-than-forthright fellow who promised 12% per year. Think about it – with 60% of my client’s portfolio in low-yielding, cash and fixed income investments, the 40% that is invested in equities would need to generate on the order of 12% per year to bring the portfolio average to 5%.

The bottom line is that both investors and their financial advisors have no control over either interest rates or stock market returns. While we can deploy asset allocation strategies and diversification to temper volatility, promising or setting absolute performance measures is a pointless endeavor. The markets will give what the markets give.


Unloved and Undervalued

by JR Robinson on October 30, 2013

Unloved and Undervalued- Are the tech growth giants of yesteryear a contrarian income/value play?

To be sure, this is no easy time to be investing. With interest rates hovering near historic lows, investor cash earns next to nothing and income- oriented investors face paltry yields and unprecedented risk in the bond market. At the same time, the U.S. stock market is trading near its all-time high. For the past couple of years, dividend stocks have filled the role of comfort food for many yield-starved investors. These days, however, with traditional rising dividend favorites, such as Johnson & Johnson, Coca-Cola, Kimberly Clark, and 3M, trading at around 20x earnings (i.e., at the high end of their traditional valuation levels) it is hard to make a compelling case that even these stalwart companies represent a good value.

So where can people who want/need more than a 0% return on cash turn to get their money working harder without doing anything too crazy or without “buying high”? One counter intuitive area that may merit consideration is the technology sector. While one does not typically think of tech stocks as being either conservative or income- oriented, a review of the financials of some of the largest and best-known tech names suggests that investors might do well to rethink their perceptions. For instance, companies such as Microsoft, Intel, IBM, and Cisco, all of which were leaders among the seemingly invincible high flying tech stocks of the 1990s (much like Google (GOOG) is today), have largely fallen out of favor since the tech bubble burst at the turn of the millennium. Because they are no longer able to grow their earnings at 20-30%+ per year, they have come to be viewed in the marketplace more as plodding behemoths than as sexy growth stocks. As a result, with the exception of IBM, the share prices of most of these companies have not gone up much over the past decade.

Being unloved is, in my opinion, part of what makes them attractive today. One point that seems to have been lost with respect to these companies is that slowing earnings growth rates are not the same as negative growth rates or losses. Despite their loss of stock market cachet, earnings at each of these four companies have continued to grow. Further, as they have matured, instead of plowing all of their earnings back into the company to fuel future growth, all four of these companies now pay out a portion of their earnings as dividends each year. In fact, all four appear to have established policies of raising their dividends each year and of raising them at a rate is much higher than the general rate of inflation. With all four sporting relatively low payout ratios (dividend/earnings per share), there appears to be ample room for future dividend increases as well.

In a word, these four companies seem cheap. While much of the large cap stock market is trading at close to 20x trailing earnings, at just 12-14x earnings, these for latter-day growth stocks are trading more like stodgy utility stocks. From a contrarian perspective, all four companies offer attractive current dividend yields, good prospects for dividend growth, and share prices that are reasonable relative to the rest of the stock market. In an environment where good values are hard to come by, I believe such unloved and undervalued companies may represent an oasis of opportunity in an otherwise barren investment landscape.


*All data above has been obtained from Market Pulse as of 10/18/2013. While this data is believed to be reliable, its accuracy cannot be guaranteed.



How Interest Rate Changes Affect the Price of Bonds

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JR’s Thoughts on Governmental Nonsense

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Tactical Allocation – Where to invest when no place seems safe…

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Two prolonged 50% peak-to-trough market declines since 2000 and a host of lingering global macro-economic worries have left legions of investors understandably jittery.  A consequence, however, is that jitters lead people to pull their investments out of long term investments in favor of cash whenever there is a hiccup in the markets.  Such market timing […]

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A Rebuttal to: “An Adage Adjustment for Investors at Retirement” [NY Times]

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Retirement Calculator Wisdom from Nest Egg Guru

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A Surprise to No One…

September 3, 2013

The slide in the Dow over the past few weeks, which, at this point, adds up to around a 4-5% decline from its peak, should not come as a great surprise to anyone. Sure, the cause of the decline is being attributed to concerns about the strength of consumer spending, fears of rising interest rates, […]

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Friends Don’t Let Friends Buy Bond Funds

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To be clear, there is absolutely never a time when the investment markets are predictable. That said, if there has been one relative constant for the first 13 years of the new millennium, it has been that interest rates have been falling and have remained low for several years. This low rate environment has been […]

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