how to monitor the stock market
TRANSCRIPT
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Investing 202:
How To Monitor the Market
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How To Monitor the Market• First Step: Identify
your end-game and NEVER forget it!– Retirement is your
end-game• Retirement goals
– Focus on longer term• Investment horizon
– Stick with your Basic Plan• An Investment Policy
Statement helps you remember
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How To Monitor the Market
• First, the basic “deal”:– Cash (checking account, savings, money markets, etc.): You
deposit dollars, they contractually agree to give them back, sometimes with interest
– Bonds (bond mutual funds): You purchase debt issued by some entity, they have a contractual obligation to return those dollars at some point in the future, and usually pay interest during the life of the bond
– Stocks (stock mutual funds): You purchase a right to a portion of the earnings and dividends generated by a company, but they have NO obligation to make those earnings, or pay dividends if they do.
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How To Monitor the Market
• Terms to know– GDP: The monetary value of all the finished goods and
services produced within a country's borders– Profits (Earnings): A company’s net income after adjusting
for inventory adjustments and corporate taxes– Dividends: Payments to shareholders from a company’s
net profits– P/E: The price investors are willing to pay for a company’s
stock divided by the profits that company generates– The “Market”: Aggregate of companies grouped by under
certain parameters, eg. S&P500
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• Long term Market Drivers– True value of stock
derived from dividends received
– Dividends are paid out of profits
– Profits are made from sales
How To Monitor the Market
Sales
Profits
Dividends
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• Sales are driven by the economy
• Long term market values fluctuate according to value investors place in all:– Sales– Profits– Dividends
How To Monitor the Market
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How To Monitor the Market
• Nominal GDP (Real economic growth plus inflation) has stayed below long term trends for almost twenty years now.
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How To Monitor the Market
• Dividends (brown) and earnings (blue) are the major components, and have been declining along with GDP
• P/E swings (green and red) are what cause our heartburn
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How to Monitor the Market
• How do you know if investors are correctly valuing sales, profits, dividends, etc?
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How to Monitor the Market
• 10 experts = 10 answers
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How to Monitor the Market
DIY – Do It Yourself• Use PE Ratio– Price / Earnings
• Calculate average PE Ratio for latest 10 years
• Compare with current PE Ratio of market
www.mutpl.com
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How to Monitor the Market
DIY – Do It Yourself• Use PE Ratio– Price / Earnings
• Calculate average PE Ratio for latest 10 years
• Compare with current PE Ratio of market www.multpl.com
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How to Monitor the Market
16.42 Mean÷ 22.83 Current≈ 29% higher than
long term mean
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How to Monitor the Market
Starting Points Matter!
• From today’s starting point, your “most likely” return over ten years is 2.14% plus inflation.
www.passionsaving.com
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How to Monitor the MarketStarting Points Matter!
• From the historical mean, projected ten year returns are more than 2-1/2 percentage points higher.
www.passionsaving.com
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How to Monitor the Market
What should all this mean to my investment plan?
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How to Monitor the Market
Domestic Stocks
Corp Bonds
US Treasury Bonds
Intl Stocks
Cash
Chocolate
other
Have a long term commitment to a certain asset allocation.Stocks: x% to y%
DomesticIntl
Bonds: xy% to yz%CorpGov
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How to Monitor the Market
You can then adjust according to prices• High prices =
caution• Low prices =
aggressive
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How to Monitor the MarketFrom Passionsaving.com• P/E10 value of 20 is The Red-Alert
Danger Zone. • Hedge your bets. Maintain a small stock
allocation (perhaps 30 percent) even when prices are at absurd highs.
www.mutpl.com
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How to Monitor the MarketFrom Passionsaving.com• P/E10 value of 20 is The Red-Alert
Danger Zone. • Hedge your bets. Maintain a small stock
allocation (perhaps 30 percent) even when prices are at absurd highs.
• Hold back from going with 100 percent stocks even when prices are at mouth-wateringly low levels (any P/E10 value below 12 is mouth-watering).
www.mutpl.com
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How to Monitor the MarketFrom Passionsaving.com• P/E10 value of 20 is The Red-Alert
Danger Zone. • Hedge your bets. Maintain a small stock
allocation (perhaps 30 percent) even when prices are at absurd highs.
• Hold back from going with 100 percent stocks even when prices are at mouth-wateringly low levels (any P/E10 value below 12 is mouth-watering).
• I can see making an exception when the P/E10 level goes above 30 or below 8. It’s important to keep in mind, though, that short-term price moves are unpredictable.
www.mutpl.com
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