Tag Archives: philosophy

Fixed Income – Now Is Not The Time

The Seeking Alpha ETF Investing Guide I recently reviewed the Seeking Alpha Investing Guide and decided to allocate part of my portfolio to a core portfolio of ETFs, similar to that suggested by the guide. I do not intend to completely switch course from my current allocation but to set up a separate core portfolio of ETFs and to allocate a majority of my investments to this Core ETF portfolio over time. After reviewing the investing guide, I drafted a procedure for implementing the suggestions of the guide. Currently, I am reviewing each of the suggested ETFs to determine which to buy. Readers that have read the articles on the first five recommended ETFs are aware that I plan to invest in the sectors that they represent. This article focuses on the three recommended ETFs from the fixed income portion of the Core ETF portfolio: iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEARCA: LQD ) PowerShares 1-30 Laddered Treasury Portfolio ETF (NYSEARCA: PLW ) Schwab U.S. TIPS ETF (NYSEARCA: SCHP ) At this point, I am not inclined to invest in these ETFs, or the fixed income sectors these represent. I expect to keep funds I have allocated for this portion of my portfolio, invested in shorter-term bank certificates of deposit (cd’s) that offer similar interest rates with what I believe is far less risk of capital loss. Investment synopsis of the three fixed income funds The iShares iBoxx $ Investment Grade Corporate Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, investment grade corporate bonds. LQD provides exposure to a broad range of over 1000 U.S. investment grade corporate bonds. LQD can be used by investors seeking stability and income. The PowerShares 1-30 Laddered Treasury Portfolio is based on the Ryan/NASDAQ U.S. 1-30 Year Treasury Laddered Index. The Fund will normally invest at least 90% of its total assets in securities that comprise the Index. The Index measures the potential returns of the U.S. Treasury yield curve based on approximately 30 equally weighted U.S. Treasury issues with fixed coupons, scheduled to mature in a proportional, annual sequential (“laddered”) structure. The Schwab U.S. TIPS ETF goal is to track as closely as possible, before fees and expenses, the price and yield performance of the Barclays U.S. Treasury Inflation Protected Securities (( OTC:TIPS )) Index (Series L). SCHP provides a convenient, low-cost way to capture the performance of U.S. Treasury Inflation Protected Securities. SCHP provides exposure to a portfolio of treasury securities designed to offer protection from the negative impact of inflation while assuming exposure to interest rate risk. US treasury 10 year interest rate chart – 1962 to present Click to enlarge Source: Yahoo Finance (2/13/2016) The chart above shows US treasury 10 year interest rates since 1962. After peaking in 1981, interest rates have fallen steadily to their current rate of 1.75%. Interest rates were slightly lower for a short period in 2012 but other than that, they are at the lowest point over the 50 plus years shown. While I have felt the same way for some time, as interest rates have continued to fall, I would not be comfortable investing in medium or long-term bonds at current interest rates. In the past, I have found that when I make investments that I am not comfortable with, I have a very hard time holding them. Performance of LQD, PLW and SCHP compared to the S&P 500 since June 2002 Click to enlarge Source: Yahoo Finance (2/13/2016) The chart above shows the performance of the three fixed income ETFs versus the S&P 500. LQD had the longest history going back to 2002 and over this time is up 11% versus the S&P up 103%. The chart does not include interest or dividends, which would improve the relative performance of the fixed income ETFs versus the S&P 500. Performance of LQD, PLW and SCHP compared to the S&P 500 – 5 year chart Click to enlarge Source: Yahoo Finance (2/13/2016) The chart above shows the performance of the three fixed income ETFs versus the S&P 500 over the last five years. Again the S&P 500 has outperformed the 3 fixed income ETFs and again this chart does not include interest or dividends, which would improve the relative performance of the fixed income ETFs versus the S&P 500. ETFs in the US corporate bond category ETFs in the US treasury bond broad duration category ETFs in the US treasury inflation protected category Source: Seeking Alpha (as of 2/13/2016) Above are lists of the top 10 fixed income ETFs in each of the categories represented by the three recommended ETFs. Each category is listed by assets under management (AUM). As the tables show, there are a number of alternatives that interested investors can consider in each category, except the “treasury bond broad duration” category which only lists 2 ETFs on Seeking Alpha’s ETF Hub. Fund characteristics iShares iBoxx $ Investment Grade Corporate Bond ETF PowerShares 1-30 Laddered Treasury Portfolio ETF Schwab U.S. TIPS ETF Weighted average duration (years) 7.98 10.34 7.5 Weighted average maturity (years) 12.28 15.84 8.3 SEC yield (%) 3.73 2.49 0.02 Expense ratio (%) 0.15 0.25 0.07 Source: iShares by BlackRock, Powershares and Schwab (as of 12/31/2015) The fund characteristics are shown in the table above. I consider these characteristics versus a bank certificate of deposit (cd). Bankrate.com currently shows a one year cd at 1.30% and a five year cd at 2.27%. I do not feel that the potential yield improvement justifies the additional risk associated with the additional time to maturity, duration and the default risk of the corporate bonds. Other investors may be in a different position and see this differently. Conclusion Readers that have read the articles reviewing the first five recommended ETFs from Seeking Alpha’s ETF Investment Guide are aware that I plan to invest in the sectors that these ETFs represent, either in the recommended ETF or a very similar ETF. I do not feel the same way about the recommended fixed income ETFs, iShares iBoxx $ Investment Grade Corporate Bond ETF, PowerShares 1-30 Laddered Treasury Portfolio ETF and Schwab U.S. TIPS ETF. After peaking in 1981, US ten year treasury bond interest rates have fallen steadily to their current rate of 1.75%. Although others may feel differently, I would not be comfortable investing in ETFs made up of medium or long-term bonds at current interest rates. In the past, I have found that when I make investments that I am not comfortable with, I have a very hard time holding them. At this point, I am not inclined to invest in the three recommended fixed income sectors or ETFs: iShares iBoxx $ Investment Grade Corporate Bond ETF PowerShares 1-30 Laddered Treasury Portfolio ETF Schwab U.S. TIPS ETF I expect to keep funds I have allocated for this portion of my core ETF portfolio, invested in shorter-term bank certificates of deposit (cd’s) that offer similar interest rates with what I believe is far less risk of capital loss. I expect to review this periodically and consider investing in these ETFs and sectors when long-term interest rates have increased from current levels. Addendum Seeking Alpha’s Investment Guide Core ETF Portfolio ETF Ticker Fund Name Fund Description Expense Ratio VOO Vanguard S&P 500 ETF Large cap US stocks 0.05% IJH iShares Core S&P Mid Cap ETF Mid cap US stocks 0.12% VTWO Vanguard Russell 2000 ETF Small cap US stocks 0.15% IEFA iShares Core MSCI EAFE ETF Multi cap foreign developed market stocks 0.12% IEMG iShares Core MSCI Emerging Markets ETF Multi cap emerging market stocks 0.18% LQD iShares iBoxx $ Investment Grade Corporate Bond ETF US investment grade corporate bonds 0.15% PLW PowerShares 1-30 Laddered Treasury Portfolio ETF US Treasuries 0.25% SCHP Schwab U.S. TIPS ETF US TIPS 0.07% VNQ Vanguard REIT Index ETF US REITs 0.10% DBC PowerShares DB Commodity Index Tracking ETF Broad commodities 0.85% Simply Investing – Philosophy Establishing a core portfolio in well-diversified, low expense ETFs, held for the long term, is a good idea for most all investors. The core of a small portfolio can start off as simple as one well diversified global ETF with a low expense ratio, like Vanguard Total World Stock ETF (NYSEARCA: VT ). Typically, as the portfolio grows, the core of the portfolio would include exposure to the ten asset classes listed above. There are four steps needed to set up an efficient investment plan. The decisions and actions required to set up the plan and purchase the ETFs can be done in about 4 hours (see the further reading section below for more details): Decide on an asset allocation plan among the ETFs in the core portfolio. Open an online brokerage account with a linked online bank account. Determine if you will invest all your investment funds at once or over a period of time. Determine which investments to buy in your taxable and tax deferred accounts. The core ETF portfolio outlined above, after tax, should significantly outperform either individual stock picking or a portfolio managed by a financial advisor. Over the typical investors time horizon of 40+ years, the expected advantage of this core ETF portfolio is staggering. Investors that enjoy the investment analysis process and are willing to spend the time to analyze and invest in individual stocks or sectors can still do this. I believe, the majority of these investors should still set up a core ETF portfolio, but can allocate a small, fixed percentage of their portfolio to “edge” positions, which offer additional risk and opportunity. Further reading ETF Investing Guide – Written by Seeking Alpha’s Founder in 2006 is a great guide for setting up a portfolio of ETFs. Set Up A Core ETF Portfolio Now – Describes the four steps required to implement the suggestions in the ETF Investing Guide. The ETF Investing Guide is made up of 54 articles and takes some time to read and assimilate the information. This article condenses the information from the guide down to four steps that can be completed to set up a core ETF portfolio in around four hours. Disclosure: I am/we are long VT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

3 Top-Rated Allianz Mutual Funds To Invest In

Allianz Global Investors – a segment of Allianz SE ( OTCQX:ALIZF ) ( OTCQX:AZSEY ) – seeks to provide financial services throughout the globe, including the U.S., Europe and Asia-Pacific, by following their philosophy: Understand. Act. According to Morningstar, the company currently has $29.7 billion of assets under management (excluding money market assets) invested in a wide range of mutual fund categories, including equity and fixed-income funds. The company offers financial services to both institutional and retail clients. Meanwhile, founded in 1890, the parent company of Allianz Global Investors, Allianz SE, currently has a nearly $73 billion market capitalization. Below we share with you 3 top-rated Allianz mutual funds. Each has earned a Zacks Mutual Fund Rank #1 (Strong Buy) and is expected to outperform its peers in the future. To view the Zacks Rank and past performance of all Allianz mutual funds, investors can click here to see the complete list of Allianz mutual funds . AllianzGI International Small-Cap Fund A (MUTF: AOPAX ) seeks capital growth over the long run. AOPAX primarily invests in securities of companies having market capitalizations similar to those included in the MSCI World Small-Cap Index. AOPAX is expected to have a weighted-average market capitalization of 50-200% of the same index. The AllianzGI International Small-Cap A fund returned 12.7% in the past one-year period. AOPAX has an expense ratio of 1.45% compared to the category average of 1.53%. AllianzGI Structured Return Fund A (MUTF: AZIAX ) uses an in-the-money short call overlay strategy to gain long equity exposure. AZIAX primarily invests in ETFs that have significant exposure to securities included in the S&P 500 Index. AZIAX may also invest in ETFs with exposure to real estate investment trusts (REITs). The AllianzGI Structured Return Fund A returned 5.6% in the past one-year period. Greg P. Tournant is one of the fund managers of AZIAX since 2012. AllianzGI International Managed Volatility Fund A (MUTF: PNIAX ) seeks to maximize growth of capital over the long term. PNIAX invests a lion’s share of its assets in securities of companies located in foreign lands. PNIAX invests not more than half of its assets issued in any particular country. PNIAX invests in securities of companies from a wide range of countries, including those from the MSCI EAFE Index. PNIAX seeks to manage overall portfolio volatility by investing in these securities. Though PNIAX focuses on acquiring securities issued in developed nations, the fund may also invest in emerging market securities. The AllianzGI International Managed Volatility Fund A returned 3.2% in the past one-year period. As of October 2015, PNIAX held 153 issues, with 3.06% of its assets invested in Lawson Inc. ( OTC:LWSOF ). Original Post

Peter Lynch Drops The Bomb: Don’t Just ‘Invest In What You Know’

Summary The idea of “invest in what you know” is misunderstood. Using the products of a company doesn’t preclude you from doing more work. The financial implications must be understood before you can say that you “understand” the company. If you are an expert in an industry, use this knowledge as an edge to help you spot opportunities earlier than anyone else. Invest in what you know, but only if you truly “know”. I recently came across an article on Peter Lynch on WSJ where he clarified what he really meant by his trade mark saying of “invest in what you know.” If you are not familiar with Peter Lynch, here’s a brief introduction. He was the iconic manager of Fidelity’s Magellan Fund between 1977 and 1990. Turing his tenure, he averaged an annual return of 29.2% . Keep in mind that the Magellan Fund was not a special hedge fund of some sorts, it was a plain vanilla mutual fund. So despite a lack of more sophisticated financial instruments at his disposal, Peter Lynch was still able to churn out extremely impressive returns. What was his secret? His investing philosophy is commonly (mis)quoted as “invest in what you know.” Don’t Just Invest In What You Know Peter Lynch’s investment philosophy was lauded by the investment industry and his influence even extended to small-time investors. Speaking from personal experience (some of which I’m sure you can relate to as well), amateur investors often believe in their stock picks because they “know what they are buying.” But do they really understand the company? For example, how many of your friends own Facebook (NASDAQ: FB ) but have no idea how to read a balance sheet or an income statement? How many people buy Exxon (NYSE: XOM ) just because they use its gasoline? During the interview, Peter Lynch stated: “I’ve never said, ‘If you go to a mall, see a Starbucks (NASDAQ: SBUX ) and say it’s good coffee, you should call Fidelity brokerage and buy the stock.'” Similarly, just because you enjoy using Twitter (NYSE: TWTR ) or Facebook, it doesn’t mean that those are good stocks to buy. During the post-recession bull market, those who bought into the popular stocks made a lot of money, further perpetuating this false idea that “invest in what you know” is all that is needed to be a great stock picker. Unfortunately, just because you “know” the company, it doesn’t mean that you don’t have to do the hard work. For every stock that I own in the V20 Portfolio (which you can learn more about here ), I do thorough research before investing even a penny. With the market awash in “easy money” these days, particularly with the surge of FANG [Facebook, Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ), Google (NASDAQ: GOOG ) (NASDAQ: GOOGL )] investing, getting rich quickly has never been more simple. While those who rode the gravy train have made a lot of money (at least on paper), the end result does not necessarily indicate that they made the right decision initially. Stocks can only go up or down, much like how a ball can only land on red or black in a fair game of roulette. I think we can all agree that gamblers who claim that they “beat the system” by winning at the game of roulette are certainly delusional. Yet the success of FANG investing is celebrated. In Peter Lynch’s words, “People buy a stock and they know nothing about it. That’s gambling and it’s not good.” What he means by “know nothing” is that investors use the products and services, but know nothing about their financial impact. Next time ask your friend what Facebook’s ARPU is, or what Starbucks is earning on a cup of coffee, and more likely than not, their look of bewilderment will betray their “knowledge” about the company. And this is a dangerous thing. What Peter Lynch Really Meant To Say Was… … That you should use your specialized knowledge of a certain industry to augment your analysis. If you operate oil rigs, you understand the core operations of the industry better than anyone outside of the industry , and this gives you a unique edge. But this doesn’t preclude you from doing actual work. Can the company pay off its debt in time? How profitable is the backlog? Is the management selling off assets just before the industry swings back to a boom phase? These are all questions that you likely cannot gain from your typical work without you putting in extra effort. With metal prices reaching multi-year lows, Peter Lynch gave a specific example. He said, “If you’re in the steel industry and it ever turns around, you’ll see it before I do.” That person can then use this knowledge to predict the company’s revenue, earnings, cash flows, etc., and spot an opportunity before anyone else. How I Apply Peter Lynch’s Philosophy Funnily enough, Peter Lynch doesn’t specialize in any specific industry. Where he lacks in real industry experience, he makes up for it with intense research. Similarly, I am not what you call an aviation expert (or even a fan), and I am invested in Spirit Airlines (NASDAQ: SAVE ). I’m not a subprime borrower and I’m invested in Conn’s (NASDAQ: CONN ). I don’t use VoIP phones (in fact I use Skype) and I’m invested in MagicJack (NASDAQ: CALL ). I have confidence in these stocks not because I particularly enjoy their products (for the above cases I’m not even a user), but because after thorough research, I concluded that these stocks were attractive enough at the prices that I bought them at. Ironically, I don’t invest in a lot of things that I do use every day. I’m the owner of multiple HP products yet I don’t own any HP shares. I use Google all the time and I never bought a single share. I don’t own these stocks because I know that just because I’m a user, it doesn’t make me anymore “in the know” than Joe across the street. In addition, the prices that these stocks were trading at were simply not very attractive to me. Notice how this is the polar opposite of “invest in what you know at any price” kind of mentality that is so prevalent in today’s markets. Takeaway It may be quite shocking to hear that “invest in what you know” isn’t all that you need to be a good investor, but I hope that this article clarifies what Peter Lynch really meant to say. Now one thing I want to make clear is that I don’t mean to discourage you from investing in what you know, it’s just that the threshold of “knowing” is a lot higher than what everyone thinks it is. Thankfully, Seeking Alpha has a wealth of information available for you to discover. From small caps all the way to mega caps, there is an expert covering virtually any stock that you can think off. I encourage everyone to read some of the analysis on their favorite stocks, and I’m sure that you will discover something new. From “not knowing,” you can slowly build up your knowledge, and be confident enough to say that you truly “invest in what you know”. Why Follow Me I personally invest a ton of time researching every single company that is in the V20 Portfolio (+43% YTD). It’s not a model portfolio, it’s a real money portfolio where you can see the real impact of portfolio decisions and their long-term consequences . Investing is straight forward (though not easy) if you know where to look. If you are looking for a place to find some ideas that could complement your own portfolio, you can click the ” follow ” button and be updated with my latest insights.