Growth Just Part Of The Investment Story

May 20, 2015

 

Other Important Investment Factors

We would not support the myopic view that global investment-allocation decisions should be based primarily on relative economic strength of countries. We would instead support a well-thought-out and multifaceted investment plan that takes into account other important investment factors, including but not limited to:

 

  • Valuations
  • Dividends
  • Earnings levels and growth rates
  • Interest Rates

 

The Best Returns Are Typically Outside of Your Comfort Zone

Guidebooks for success will often highlight the importance of leaving your comfort zone. I once heard the following phrase: “Successful people live uncomfortable lives.” Like most short quotes, it doesn’t fit every situation.

 

However, we believe investors are generally rewarded over time for taking modestly higher risk. As risk is generally uncomfortable, it would hold that investors would generally seek a comfortable investment with high expected return. Likewise, investors should generally be rewarded for leaving their comfort zone.

 

We’re concerned some investors may be overweighting comfortable U.S. stocks in their allocations due to a combination of recent relative strength in both the U.S. stock market and economy. We note the stock market is part of the Leading Economic Indicators, published by The Conference Board, not the other way around.

 

US Facing ‘Good Problems’

 

To some degree, it can be said that U.S. stocks are currently dealing with “good problems.” Due importantly to the relative strength of the U.S. economy over the last few years, U.S. stocks have risen strongly, and valuations now lie beyond historical averages. Janet Yellen, head of the U.S. Federal Reserve, said recently at a financial forum in Washington, “I would highlight that equity-market valuations at this point generally are quite high.”

 

While the low-interest-rate environment in the U.S. has been highlighted by many as a rationale for higher valuations, U.S. companies have the tough task of continuing to outperform in order to support the elevated stock price levels.

 

While many factors are supporting the case for continued strength of the U.S. economy and U.S. companies in the intermediate term, each battles head winds; namely, the impact of the significant strengthening in the U.S. dollar over the last 18 months.

 

Intermediate-Term Opportunity In Int’l Markets

 

Citing a combination of attractive valuations, improving economic factors and relative dividend yields and earnings levels, we continue to believe that return expectations for many international markets are higher than in the U.S. in the intermediate term.

 

We would expect many investors to be familiar with the longer-term economic issues that Europe and Japan face. However, both currently have an environment of low domestic currencies, low oil prices, low interest rates, relatively low valuations and a relatively strong economy for their U.S. trading partner.

 

We feel the combination of a positive environment and relatively low valuations has led to the returns we have recently experienced so far in 2015.

 

Disciplined Asset Allocation

Without professional training and experience, many investors struggle in their asset allocation decisions as they rely upon their intuition and various news pieces to make investment decisions. They avoid allocating assets to areas of the world that have been exhibiting lower growth and/or lower recent stock market returns.

 

We would encourage investors to instead remain disciplined in their asset allocation, focusing on multiple factors and regular rebalancing.

 

We reiterate our earlier advice to focus on the climate and not the weather when making investment decisions. The longer-term trends captured by climate measurements are more likely to lead to long-term success than trying to guess tomorrow’s, or next week’s or next month’s weather. 


At the time of writing, ValMark held shares of VWO in several TOPS Portfolios. ValMark Advisers Inc. is the manager of the TOPS Portfolios of ETFs. ValMark started managing "TOPS" separately managed accounts of ETFs in 2002. The firm manages more than $5.1 billion in ETFs for retail and institutional clients in multiple investment products. Email:[email protected] Phone: 800-765-5201. For a complete list of relevant disclosures, please click here.

 

 

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