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Question for Investment Gurus ...........
Old 02-07-2004, 10:42 AM   #1
 
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Question for Investment Gurus ...........

A lot of people have been saying that the market is overpriced and they may or may not be correct. With this in mind, I am constructing a portfolio plan and hope to be full invested within a year.

Here is a thought that occured to me. Historically the asset class of Small Cap Value stocks have outperformed any other US asset class. It would seem to me that investing in this asset class is almost 'safe' or 'safer' than the other asset classes during a rising and expensive stock market, because of the depressed prices that exist in this asset class. To me it looks like there may be less downside risk because stocks in this class have already been 'beaten up'.

Am I somewhat correct on this line of reasoning, or would these beat up stocks take even more of a pounding during a bear market? Granted, I know that to expect a higher return there has to be more risk on average for this asset class. Anybody ever heard anything on this topic? Thanks
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 12:21 PM   #2
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Re: Question for Investment Gurus ...........

Well I'm one of the folks that thinks most asset classes are teetering right now, and I've noticed that the popular press is writing lots of articles to that effect these days.

I dont see the part where the small cap value class is beaten down. Vanguards index is up 37% in 2003 and is hovering near a 52 week high.

For the long haul, this asset class should produce excellent returns with gut wrenching volatility. To wit, a 500k investment in the vanguard small value index at its inception in mid 1998 produced:

- Lows of $375k within a few months of that investment, along with several drops to ~400k over the next few years.

- A high of 650k in early 2002 followed by a drop to 450 and a race up to 700k currently.

Its a good asset class to own, but I wouldnt own more than 6% of my total port in it. I have 3% in domestic small caps and 3% in foreign small caps in mine; this is excluding REITS which most asset allocators count as generic small cap stocks.

Can you point out the source of this class being already beaten down? Or any other asset class? I'm holding a large piece of my port in a conservative allocation fund that I expect would (and has) modestly appreciate while limiting my immediate downside risk. Staying in the game but not risking much. My plan is to wait for a downturn to slam a few asset classes and then redistribute into those.

Again, i'm not market timing, just trying to bargain shop for my entry of a large portion of cash into the right assets. I'm completely comfortable with where they are now and can live comfortably off the yields alone from my current asset mix but would like to broaden my exposure to stocks. Just not at these prices.
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 12:33 PM   #3
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Re: Question for Investment Gurus ...........

I have recently done something entirely new for me. I have sold some stocks with the intention of staying with cash without drawing any interest. I have placed limit orders to unload additional shares. I think that the market is getting dangerous, but I expect it to hold up and even increase, at least through the election.

That having been said, I bought some shares of Merck because its price was compelling. Its P/E was around 13 or 14. I know that Merck has had some bad luck with its drug pipeline, but that kind of P/E assumes that it won't ever come up with anything new. Regardless, its low enough price (along with a high enough dividend) was too tempting.

I am still increasing my net cash position.

Small capitalization-Value has been an excellent choice and it is likely to be a good choice in the future in terms of relative performance. But a downward trending market takes everything down or, at least, almost everything.

The market switches between growth and value over extend periods of time (5 to 10 years for each). That can mean a lot of waiting. A decent dividend (with solid earnings to support it) helps as you wait. It keeps you from being forced to sell shares at depressed prices. That is what kills a retirement portfolio.

Most of my holdings have been in the mid-cap region. Most of them have had good dividends. I am reluctant to buy stocks when there are no dividends, but I have done so in the past. I look at investments on a case by case basis. I favor value over growth.

I do not expect to tap into my investment holdings. My pension is more than sufficient and it increases with inflation.

Proceed cautiously.

Have fun.

John R.
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 12:37 PM   #4
 
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Re: Question for Investment Gurus ...........

Quote:
Its a good asset class to own, but I wouldnt own more than 6% of my total port in it. I have 3% in domestic small caps and 3% in foreign small caps in mine; this is excluding REITS which most asset allocators count as generic small cap stocks.

Can you point out the source of this class being already beaten down?
Just by being in this asset class it means that the P/E level is below a certain point. So an index fund is constantly (or once a year or so) reshufflling it's holdings. That is what I mean by beaten down. Eventually as a stock exceeds this level it moves into small cap growth class. And stocks that get pummeled become Small Cap Value Stocks.

Also there was a link given to me this week that showed that 50% to 75% of your stock portfolio in this asset class over all of the 30 year periods from 1928-2000 produced the highest SWR for a 30 year lifespan of portfolio.

BTW- If everyone and the press thinks the market is set to tank, the contrarion approach would be to buy stocks. Wierd huh?
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 12:39 PM   #5
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Re: Question for Investment Gurus ...........

As a related aside, I did this little asset evaluation sheet to determine my portfolio expected return vs risk analysis. I have more columns in my full sheet that include % of my port, dollars, and projections from these amounts.

Clearly you can freely change the risk and return values to ones you are more comfortable with, but this allowed me to tweak asset class exposure far better than any commercial s/w or web site could. It did require that I x-ray each asset I owned for content and I did that with the most recent prospectus for the funds. Took me about 3 hours
Type Return Asset Risk Risk vs Return Correlation
Emerging 10% 25 0.00400 2
SmallC 10% 20 0.00500 1
Largec 8% 17 0.00471 1
ForStock 8% 17 0.00471 3
RE 8% 15 0.00533 4
Oilgas 8% 15 0.00533 4
CorpB 5% 10 0.00500 1
ForB 5% 10 0.00500 3
Treas 4% 5 0.00800 5
Muni Bonds 3%
Money Markets 1%
T-Bills 1%
Gold 3%

The "correlation" bucket is my best effort to align asset classes into groups that tend to move together, at least historically. By plugging in the amount of each you have you can bucket your correlation, risk and return.

One takeaway (which is the binding tie to this question regarding small caps) is that the best return-for-the-risk assets by these numbers are treasuries (due to their low risk), REITS, and oil & gas pumpers (aka "energy") stocks. Small caps, corporate and foreign bonds are next and large cap domestic and foreign and emerging markets carry the highest risk to reward ratio.

From that, my eye is toward the high risk-reward asset classes taking "a beating" and migrating some low risk money (from treasuries) into those classes.
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 12:47 PM   #6
 
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Re: Question for Investment Gurus ...........

Hello John R! (always think of the road in Detroit
when I see you post).

I am sitting on a pile of cash right now, which obviously will not end up in stocks. I have been able to get
from 2.5% and 3% continuously for a very long time by
shopping for promo rates on the Internet and by phone.
I keep moving from bank to bank, stay for the length
of time required and then move again. This has been quite successful. My last 3% rate expired yesterday.
I quickly found 2 banks (2.5% and 3%) both good for 4 months.

John Galt
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 12:59 PM   #7
 
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Re: Question for Investment Gurus ...........

Why not TIPS John they are paying around 2% plus inflation (which I'm guessing is around 2%)?
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 01:05 PM   #8
 
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Re: Question for Investment Gurus ...........

Hi Cut-throat! The money needs to be completely liquid for now. Anyway, I'm getting 2% (as of today) but will be moving the money on Monday. We're talking over 100K so that .5% or 1% difference can really add up.

John Galt
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Re: Question for Investment Gurus ...........
Old 02-07-2004, 03:42 PM   #9
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Re: Question for Investment Gurus ...........

Cut-Throat asked:

Quote:
To me it looks like there may be less downside risk because stocks in this class have already been 'beaten up'.
SCV is cheaper than large caps, but not cheap. More long term return generally means more risk (volatility). Check out a 10 year chart for DFSVX (Dimensional Fund Advisor's SCV index).

http://bigcharts.marketwatch.com/qui...freq=2&time=20
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Re: Question for Investment Gurus ...........
Old 02-08-2004, 08:03 AM   #10
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Re: Question for Investment Gurus ...........

I have about 2% Vanguard Small Cap Index - thinking about Roth conversion and giving it a minimum 15 yr time span.

If someone planned to follow a disciplined asset allocation/regular rebalancing strategy - this requires selling into rising markets and buying into falling markets. Given my track record - best left to the computers for the bulk (80%) of my portfolio.

However 2% put into Roth and a valient attempt to ignore the high SD and 28% portfolio turnover for 15-20 yrs might be worth it - still thinking.
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Re: Question for Investment Gurus ...........
Old 02-09-2004, 09:16 AM   #11
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Re: Question for Investment Gurus ...........

Hi GDER:

Thanks for your info on PenFed. Kiplinger mag. usually provides a pretty reliable rate table monthly, but apparantly, they don't do credit unions.

I went to their rate page, and although I was in the Marine Corps. for 4 years, (tail end of Korean War), couldnt figure how to become eligable. I called them and for a one time $25 charge could qualify. Their rates about a point and a half better than Kiplingers highest rate makes them pretty darn compelling.
Once again, this web site has been helpful.
Their toll free number is 800 2475626.
Regards, Jarhead
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