About Charles Lewis Sizemore, CFA

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Today on Straight Talk Money…

I joined Chase Robertson and Peggy Tuck this morning on Straight Talk Money:

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Don’t Expect Mean Reversion to Boost Your Returns

My poor groin…

As I wrote a few months ago, I managed to pull my right groin muscle playing soccer with some of the hypercompetitive South American fathers from my son’s team.

Well, with a little rest, it healed. Or so I thought.

But while skiing with the family in Breckinridge, I took a turn too fast, wiped out… and felt my poor groin pop.

I’m able to walk… with a limp. But I won’t be doing anything remotely athletic for at least a few weeks.

Maybe it’s my physical discomfort… or maybe it’s the fact that I’m sitting alone at the lodge while my wife and kids enjoy a nice day on the slopes… but something I read in this week’s Barron’s really put me in a foul mood.

Vito Racanelli writes,

There’s one number that explains a lot of things: 5.52%. Over the 20 years ended 2018, that’s been the nominal compound annual growth rate (CAGR) of the S&P 500.

It might not feel like it after a decade-long bull market, “but we are coming off 20 of the worst years for compounded returns since the Great Depression,” says Nicholas Colas, co-founder of DataTrek Research. The average trailing 20-year market CAGR since 1928 is 10.7%. Blame the two negative-35%-plus bear markets since 2000.

Ouch.

Over the past 20 years, the market has returned barely half its long-term average annual gains. And I’m willing to bet that most investors saw returns even lower than that. (Most investors tend to sell near bottoms and miss out on the most explosive early years of a bull market.)

But this is where I start to get grouchy. Colas goes on to suggest that, since we’re coming off a lousy 20-year stretch in the market, the next 20 years should be a lot better due to mean reversion.

In other words, in order for the market’s long-term returns of 10.7% to hold, we have to see annual returns well above 10.7% in order to make up for the past 20 years of just 5.52% returns.

This may be the stupidest argument I’ve ever heard. And trust me, I’ve heard some ludicrous arguments over the years.

Let’s start with valuations.

A big reason for the market’s lackluster performance over the past 20 years is that we started the period in 1998… smack dab in the middle of the largest stock bubble in U.S. history.  At the beginning of 1998, the S&P 500 traded at a P/E ratio of 24, well above the long-term average.

The returns you earn are a product of the price you pay. If you overpay, your returns are going to be lousy. Anyone buying in 1998 paid too much for their stocks and then had to accept lower returns over the next 20 years. It’s really that simple.

Now, let’s compare this to the preceding 20-year period, 1978 to 1998. Over that period, the S&P 500 returned about 14% per year, well above the long-term market average.

Why?

Again, it’s simple. In 1978, after a decade of stagflation, the market was cheap.  The S&P 500 traded at a P/E ratio of just 8. Anyone buying in 1978 was buying at a bargain-basement price and thus enjoyed a fantastic 20 years of returns.

So, where are we today?

Unfortunately, it’s looking a lot more like 1998 than 1978. The S&P 500 trades for about 20 times earnings.

Now, we can split hairs as to whether the P/E ratio is the best metric to use here. But other metrics, such as the cyclically-adjusted price/earnings ratio (“CAPE”) or the price/sales ratio tell a very similar story. Stocks are not cheap today. And thus it’s not realistic to expect returns over the next 20 years to be much better than over the last 20.

I could end my rant here, but I’m just warming up.

This is bordering on market heresy, but I also take issue with the notion that stocks “have” to return around 10.7% per year.

In 1928, the stock market was still the wild, wild west. It wasn’t really regulated, and it was essentially a casino for rich people. There were no 401ks, and the average American had no access or exposure to stocks. The market didn’t really become accessible to the average American until the 1950s, when mutual funds became popular. And even then, few Americans were investors. I’d argue that investing didn’t really go mainstream until the late 1980s.

Furthermore, up until arguably the 1940s, the United States was still an “emerging market.”

Compare that to today. Virtually every middle-class American has at least indirect exposure to the stock market via their company 401k plan or pension, and the capital markets are tightly regulated by an alphabet soup of government agencies.

All else equal, a highly-regulated and developed market should produce returns that are lower than those of a loosely regulated emerging market. The returns have to be higher in a wild emerging market in order to justify the risk.

I’d argue that the 5.52% returns of the past 20 years are the better example of what we should expect going forward than the 10% of decades past. This is the “new normal” for a developed market with broad participation trading at premium prices. And in order to get that 5.52% annual return, you’re going to have to stomach a lot of volatility.

I don’t know about you, but that sounds like a lousy deal to me.

I don’t want to buy, hold, and pray for 5.52% annual returns. The good news is that I don’t have to. In my Peak Income newsletter, I look for attractive income opportunities that are off the beaten path. It’s not at all uncommon for me to find stocks or closed-end funds paying 8% or more in dividends alone, not including any capital gains.


Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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What to Do Now If You’re Losing Sleep Over the Stock Market

The following is an excerpt from What to Do Now If You’re Losing Sleep Over the Stock Market, originally published by Kiplinger’s.

As discussed ad nauseam in the financial press and in mutual fund literature, stocks “always” rise over the long-term.

This may very well continue to be true. But you also should remember that you have limited amounts of capital, and your cash might be better invested elsewhere.

Stocks are not the only game in town.

Even after the recent selloff, the S&P 500 still trades at a cyclically adjusted price-to-earnings ratio (“CAPE,” which measures the average of 10 years’ worth of earnings) of 27, meaning that this is still one of the most expensive markets in history. (Other metrics, such as the price-to-sales ratio, tell a similar story.)

This doesn’t mean that we “have” to have a major bear market, and stock returns may be soundly positive in the coming years. But it’s not realistic to expect the returns over the next five to 10 years to be anywhere near as high as the returns of the previous five to 10 years, if we’re starting from today’s valuations. History suggests they’ll be flattish at best.

It’s not hard to find five-year CDs these days that pay 3.5% or better. That’s not a home run by any stretch, but it is well above the rate of inflation and it’s FDIC-insured against loss.

High-quality corporate and municipal bonds also sport healthy yields these days.

And beyond traditional stocks, bonds and CDs, you should consider diversifying your portfolio with alternative investments or strategies. Options strategies or commodities futures strategies might make sense for you. Or if you want to get really fancy, perhaps factored accounts receivable, life settlements or other alternative fixed-income strategies have a place in your portfolio. The possibilities are limitless.

Obviously, alternatives have risks of their own, and in fact might be riskier than mainstream investments like stocks or mutual funds. So you should always be prudent and never invest too much of your net worth into any single alternative strategy.

Just keep in mind that “investing” doesn’t have to mean “stocks.” And if you see solid opportunities outside of the market, don’t be afraid to pursue them.

To read the rest, please see What to Do Now If You’re Losing Sleep Over the Stock Market

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The 5 Best Investments You Can Make in 2019

The following is an excerpt from The 5 Best Investments You Can Make in 2019

Everyone is looking forward to 2019 if only because 2018 has been so ugly. But investors will have to mentally sturdy themselves: Before we can talk about the best investments to make in 2019, we have to quickly explore what has gone wrong in 2018.

The year started with a bang. The Standard & Poor’s 500-stock index returned nearly 6% that month following an epic 2017 that saw the index pop by 22%. But after that, it got rocky. Stocks stumbled in the first quarter, rallied for most of the second and third quarters, then rolled over and died again in October. It hasn’t gotten better since, and investors have had plenty to digest the whole way.

Much of the massive gain in 2017 was likely powered by investors looking forward to the profit windfall following the corporate tax cuts at the end of last year. But that’s a year in the past. Going forward, we’ll be comparing post-tax-cut profits to post-tax-cut profits as opposed to higher post-cut to lower pre-cut. Meanwhile, stock prices are still priced for perfection. At 2 times sales, the S&P 500’s price-to-sales ratio is sitting near all-time highs, and the cyclically adjusted price-to-earnings ratio, or “CAPE,” of 29.6 is priced at a level consistent with market tops.

Fortunately, the new year provides an opportunity to wipe the slate clean. So what might we expect in the new year? Today, we’ll cover five of the best investments you can make in 2019, come what may in the stock market.

Consider Alternatives

It’s difficult to beat the stock market as a long-term wealth generator. At roughly 7% annualized returns after inflation, the market has historically doubled your inflation-adjusted wealth every 10 years. No other major asset class has come close.

Still, you shouldn’t put all of your money in the stock market.

To start, there is no guarantee that the future will look like the past. The stock market as an investment destination for the masses is a relatively new concept that really only goes back to the 1950s, or perhaps the 1920s if you want to be generous. You can’t credibly say that the market “always” rises with time because, frankly, we’re writing history as we go.

Bonds have a longer track record, but bonds are also priced to deliver very modest returns in the years ahead. Adjusted for inflation, the 3% yield on the 10-year Treasury looks a lot more like a 1% yield.

Investors should consider alternative strategies as a way to diversify while not sacrificing returns.

“Alternative” can mean different things to different investors, but for our purposes here we’re taking it to mean something other than traditional stocks and bonds. Alternatives could include commodities, precious metals and even cryptocurrencies like Bitcoin. But more than exotic assets, an alternative strategy can simply use existing, standard assets in a different way.

“The vast majority of options contracts expire worthless,” explains Mario Randholm, founder of Randholm & Company, a firm specializing in quantitative strategies. “So, a conservative strategy of selling out-of-the-money put and call options and profiting from the natural “theta,” or time decay, of options is a proven long-term strategy. You have to be prudent and have risk management in place, as the strategy can be risky. But if done conservatively, it is a consistent strategy with low correlation to the stock market.”

That’s a more advanced way to skin the cat. But the key is to keep your eyes open for alternatives with stock-like returns that don’t necessarily move with the stock market.

To continue reading the remaining four investments, see The 5 Best Investments You Can Make in 2019

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Ten 401k Moves to Make by New Year’s Day

I love this time of year.

It’s good that I’m not diabetic because my consumption of candy canes, gingerbread cookies, hot chocolate and virtually anything else you can think of that’s loaded with processed sugar goes through the roof.

But between shopping and Christmas parties, we still have to squeeze in a little time for end-of-year portfolio housekeeping. Because, let’s face it, life isn’t exactly going to slow down once we hit the first of the year.

It’s particularly important to take a good look at your 401(k) plan this time of year.

For the vast majority of Americans, the humble 401(k) remains the single most important piece of their retirement plan. And because they’re for long-term investments, moves you make today will have compounding effects for potentially the next 30 to 40 years.

So, with no further ado, let’s go through a quick to-do list of moves you need to make in your 401(k) plan before the end of the year.

1. Try to hit $18,500 if at all possible

This is it. You likely have only one paycheck left before the end of the year, or maybe two if you’re lucky. So, if you’re wanting to get the maximum tax break for this year, you have to act now. You can contribute to an IRA or to an Individual 401(k) up until the April 15 tax filing deadline, but regular corporate 401(k) contributions have to be made by December 31.

So, if you haven’t contributed the full $18,500 this year (or $24,500 if you’re 50 or older), this is your last chance to do it. Talk to your company HR department now and ask them to put 100% of your next paycheck into your 401(k) plan, if that is feasible for you. Every nickel you get into the plan is a nickel that is safe from the tax man, potentially for decades.

2. Revise your allocation

Market technicians may quibble on the details, but the bull market that started in 2009 is considered by many to be the longest in history. If you don’t look at your allocation all that often, you should give it a look.

After nearly a decade of stock market gains, it’s possible that you have a lot more exposure to stocks than you want or need. Take this time to rebalance your portfolio to an allocation that is appropriate for you at this age and stage of life.

In my Peak Income newsletter, I’m currently recommending that most readers keep no more than 50% of their account in stocks. To find out more about my income-generating service and get more 401(k) tips,

3. Take a good, hard look at your target date funds

Along the same lines, if your 401(k) plan is invested in a target-date fund, take a moment to look under the hood and see what it actually owns. You might think you’re invested in something appropriate for your age, but that’s not necessarily the case. Your target date fund might have much higher (or lower) exposure to stocks than you want. One fund company’s definition of an appropriate portfolio for a person retiring in 2020 might be very different than another fund company’s definition… or yours!

Checking the allocation might involve a little homework, but it’s generally something that you can do with about 10 minutes of digging around on Google. Look up the fund on the internet, and the management company’s website should give you a good idea of what it owns. There’s not necessarily a right or wrong answer. It’s just an issue of making sure the allocation you have the one you actually want.

4. Bump your contributions higher for 2019

With a new year comes a new opportunity to stick it to the tax man. In 2019, the maximum you can contribute (not including employer matching) increases from $18,500 to $19,000. And if you’re 50 or older, it gets bumped from $24,500 to $25,000.

$19,000 is a lot of money, of course. It amounts to almost $1,600 per month. But I’m betting that if you make it a priority, you can make it happen. And when you see the reduction in your tax bill, you’ll be glad you did.

5. Roll over any older employer plans

If you’re like most Americans, your retirement plans are probably a disorganized mess. In addition to your current employer’s plan, you might a half dozen older plans from previous jobs.

The more plans you have, the harder it is to keep track of them all. Do yourself a favor and consolidate them. I will likely take no more than 10 minutes on the phone with your old employer’s 401(k) administrator to make it happen. This isn’t something you necessarily have to do by year end, but if you’re already doing a little portfolio housekeeping, why not do it?

The fewer plans you have to keep track of, the less likely you are to get overwhelmed and neglect them altogether. So make this a priority.

6. Revise your beneficiary designations

I’ve been married for 10 years and have two children. Yet I discovered in horror two years ago that I still had my sister listed as my primary beneficiary on one of my larger retirement accounts. Had I gotten hit by a bus, that would have been a very awkward mess for my poor wife and sister to sort out.

So, be smart and check your 401(k) beneficiary designations, particularly if you’ve had any major changes such as a marriage, birth of a child or a divorce. You really don’t want your ex-wife to inherit your life savings rather than your children or current spouse.

7. Don’t forget contingent beneficiaries

Along the same lines, don’t forget to specify a contingent beneficiary. If you were to go down in a fiery plane crash along with your primary beneficiary (likely your spouse), you’d want to make sure the funds transferred to the next in line, which would generally be your children.

If you have no living beneficiary on record, your 401(k) plan will get dumped into your estate, where it will have to go through probate. Having a proper beneficiary on file bypasses probate and gets the funds to your heirs faster. So, do them a favor and make your contingent beneficiary designations are in order.

8. Consider a reverse rollover… maybe

As a general rule, I prefer Rollover IRAs to 401(k) plans because you have more investment options and, often, lower costs. But there is one major exception where it absolutely makes more sense to keep your assets in an employer plan rather than an IRA.

Active 401(k) plans (a plan you are actively contributing to) are not subject to required minimum distributions (RMDs).

So, if you are 70 or older and still working and contributing to your company’s 401(k) plan, you can eliminate your RMDs on any outside IRAs by doing a “reverse rollover” and moving the funds to your 401(k) account.

This can be a little tricky, however, so if this sounds like something you’d like to do, I recommend you first have a chat with a good CPA.

9. Ask your employer about deferred comp plans

Let’s say that you’re a diligent saver and that you’re able to max out your 401(k) every year and still have ample savings left over.

You might be able to stuff some of those excess savings into a tax-deferred, non-qualified retirement plan called a deferred compensation or “deferred comp” plan.

This is exactly what it sounds like. In these plans, your employer sets aside part of your pay into a tax-deferred account that is similar in look and feel to a traditional 401(k) plan. These are particularly good options if you tend to get large bonuses. You may be able to dump all or part of that bonus into the deferred comp plan and supersize your retirement savings.

Not all companies offer deferred comp plans, and you should be aware that these plans do not have the same legal protections as 401(k) plans. If your employer were to go bankrupt, your deferred comp savings could go up in smoke.

But, if you’re looking for additional tax-free savings, a deferred comp plan might be a fantastic idea.

10. Keep perspective

Finally, don’t forget why you contribute to your 401(k) in the first place. We save money today so that our families have security when we’re too old to work.

So, take a moment to give thanks for your loved ones, and try to do something special for them not specifically related to money. Spend some time with them without the distraction of your smartphone, and really listen when they talk rather than just waiting for your turn to speak.

Ultimately, that’s going to make all of you a lot happier than a couple extra bucks in the retirement account.

A very merry Christmas to you all, and a happy new year!

This article first appeared on The Rich Investor.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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