Happy New Year! It is time, yet again, for the monthly airing of my private financial laundry. My hope is that maintaining a journal of my savings will help provide additional motivation to save and allow me to spot trends. It will also serve as a record, so that I can look back and analyze.
All of the prior updates in this series are available on the Savings Diary page. The first, I’m Just Saving…Personal Finance Diary kind of provides the “origins story.”
Investments
In November, U.S. stocks (+2.0%) and Emerging Markets (+4.1%) bounced back pretty strongly. Foreign developed did pretty much nothing. I have some emerging markets but I am more strongly exposed to developed due to my comfort levels with the political/private property/capitalist systems.
I remain “overweight” foreign stocks. See Media Pin of the Week – More GMO, Weekly Media Pin – Grantham on Graham, Best Foreign Value Factor ETFs, Resource Roundup: More CAPE, and Foreign Value Factor ETFs Update. The relative valuation spreads are.not.helping.
I still have a relatively small portion of my portfolio that I run in a little systematic trend in cash. This was based on the rules triggering, not because I made some market call. Basically if the market is expensive and in a downtrend, I am out (with that account). So that account is still about 2/3 in cash (the foreign stocks allocation is still long because of valuation).
I do have another small account that I am experimenting with using another systematic trend + value system in and one of the signals I use is related to the yield curve. It is still long.
I also have some individual stock investments that have been sucking wind as well. I plan to do some update posts on those in the first quarter. My posting on investing will hopefully pick up but I’m a new-ish dad, so I’m a little short on free time to post right now.
December 2018
That being said, let us turn to the savings update. As of the end of November, I was up to about $185,000.
As a reminder, I only include liquid investments in these monthly figures, as I don’t think it is very helpful to start marking my real estate and other illiquid assets monthly. I am going to mark those in an upcoming post (probably this weekend). I have a deferred compensation arrangement which is essentially an annuity or pension. I will have to make some assumptions and then discount the future cash flows back to value it.
This month I ended up saving about another $3,000. Market losses, however, overwhelmed my efforts. I ended up with a balance of about $179,000.
As I’ve noted before, The Capital Speculator does a helpful summary of asset class returns on a monthly basis. In December, emerging markets stocks were down 2.7% and foreign developed stocks were down 4.9%. But that was much better than the S&P 500 which was down 9%.
For the year the S&P 500 was down 4.4% (total return), whereas emerging and foreign developed were down 14.6% and 13.8%, respectively. I’m about 50% allocated to foreign stocks (mostly index funds). So, that did not go well this year.
Valuations
U.S. stocks are still not cheap in my estimation. I am seeing lots of observations about the price of stocks relative to projected forward earnings. The academic literature I have read indicates that projected earnings are not the preferred quantitative valuation metric. They are going to be horribly wrong at the precise time when things change or mean revert (i.e., an earnings or economic recession is in the future).
There’s a reason that Professor Schiller used a cyclically adjusted trailing metric in the PE/10 which, in part, resulted in his winning the Nobel Prize. As of writing, the CAPE is still around 27 for U.S. stocks. For context, the CAPE was 30 prior to Black Tuesday in 1929 and was down to 15 in the Great Financial Crisis. Valuations also appear lofty based on the dividend yield, and multiples of S&P companies to book and revenues.
Many would argue that this is totally justified based on elevated profit margins, which are due to reduced requirements to invest capital in plant and equipment in the businesses that now comprise the S&P 500.
I think that is possible, but not probable. It seems likely to me that labor and perhaps even commodity type businesses are likely to regain some of their relative losses of the GDP pie. The political groundswell of populism world wide could be viewed as related to achieving this goal (restricting labor and other cost input arbitrage and otherwise demanding a larger slice of the economic pie). I will therefore bet accordingly, with a moderate overweight to cheaper assets (I still have a fair allocation to the S&P/Russell 3000).
Onward
To sum up, this month was another jab to the face from a returns perspective. My overweight to foreign developed basically amounts to an underweight of the FAAANG and Chinese tech stocks and has not served me well this year, despite lower valuations.
I am trying to greet the prospect of a true bear market with enthusiasm, as I intend to continue saving for a number of years in the future and expected returns are going up with each drawdown. It seems that focusing on the dividends or the number of shares owned can help out with achieving this mindset.
Like the Munger quote from last month conveyed, if we can’t handle the volatility, we will not have a chance to earn the returns.