how to monitor the stock market
TRANSCRIPT
Investing 202:
How To Monitor the Market
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
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.
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
• 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
• 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
How To Monitor the Market
• Nominal GDP (Real economic growth plus inflation) has stayed below long term trends for almost twenty years now.
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
How to Monitor the Market
• How do you know if investors are correctly valuing sales, profits, dividends, etc?
How to Monitor the Market
• 10 experts = 10 answers
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
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
How to Monitor the Market
16.42 Mean÷ 22.83 Current≈ 29% higher than
long term mean
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.
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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.
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How to Monitor the Market
What should all this mean to my investment plan?
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
How to Monitor the Market
You can then adjust according to prices• High prices =
caution• Low prices =
aggressive
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
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
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.
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Thank YouSchedule your personal consultation now!
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