Archive for August, 2006

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Growth Through Global Investing

Thursday, August 31st, 2006

If you look at historical returns the U.S. stock market, when compared to all markets worldwide, rarely is the leader of the pack.

From 1994-2000 the U.S. lead all markets in performance only once–1995. So by broadening your investment horizons you increase your chances of good performance. It is rare to find one single stock market that consistently performs at the top of the global markets. Because it is impossible to predict which one will be this year’s winner, you need to diversify your investments internationally in order to catch these highs.

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Global Investing 1969-2000

Wednesday, August 30th, 2006

Here will will study the hypothetical growth of investing $1 in U.S. stocks and bonds, international stocks and bonds and inflation.

While U.S. stocks ended this time period with the best returns, but for a majority of this time international stocks outstripped U.S. stocks. International bonds outperformed the U.S. bonds during this long time period as well. Because the two both perform well, but are not alike they complement one another very well. So diversifying and getting good international exposure is great for your portfolio.

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Global Stock Market Returns

Tuesday, August 29th, 2006

We will examine the historical range of 1970-2000 to see how global markets performed and the risk that went along with these results.

The US averaged a 12.9% return during these years with a peak of 37.4% and trough of -26.5. Now the general international market returned 12.2% with a 69.9% peak and -23.2% trough. Then Europe averaged a 13% gain and had a high of 79.8% and a low of -22.8%. Finally, the Pacific had an 11.9% average with a peak of 107.5% and a low of -34.3%.

This looks like the Pacific had the highest volitility while providing the highest one-year gain. Now Europe had an excellent average return, but the volitility is high as well. The U.S. had a great average with the least amount of volitility. Combining all these classes will lower the overall volitility and allows you to experience big gains.

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World Stock Market Capitalization

Monday, August 28th, 2006

If you do not invest internationally you are missing out on approximately half of the investable developed stock market opportunities worldwide. While the U.S. does make up 50% of the available investments, by ignoring countries like Japan, England and the like you can be missing some excellent investments. Also, it is important to remember that diversifying your portfolio through international stocks will lower the risk of your overall portfolio.

So look around at some mutual funds that are international types and seek one will solid performance, low expense ratio and is a no-load. Over the long-term this will help your portfolio tremendously and you will see the benefits of exposing yourself to this portion of the market.

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Why Invest Globally?

Sunday, August 27th, 2006

We are going to discuss the advantages and disadvantages of investing globally in equities.

Investment Opportunities
International markets offer a different set of investment opportunities than just inbvesting in U.S. markets.

Market History
International markets take up a large part of the world’s available stocks.

Growth Potential
Some international economies do not reflect the U.S.’s growth patterns.

Diversification
If nothing else investing internationally will lower the risk of your portfolio by diversification.

Expand Efficient Range
Expanding your options and including international investments can help your risk-and-return trade-off of your investment opportunities.

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Value Stock Premium

Saturday, August 26th, 2006

We have talked about how historically that value has outstripped growth stocks over a long time span, but why is that? What explains the value premium and will this continue?

Many academic studies have shown how the stock market and the herd over-reacts to bad news and under-reacts to good news. This may mean there is more room for value stocks to grow more, and better than growth stocks which have their poremium priced in. Value historically has more risk than growth (standard deviation). Maybe the added return from value stocks is because of this added risk.

In the 1990s large cap growth stocks performed the best, but examining the evidence you will conclude that the long-term still favors value.

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S&P Quarterly P/E History 1926-2000

Friday, August 25th, 2006

P/E is a essential way to determine if the stock market is over and under valued. Here we will examine the historical P/E for the S&P 500. You take the total market value of a company and divide it by the trailing one-year earnings to determine P/E ratios.

Historical P/Es for the S&P 500 have varied much over the years, but in late 1990s when the average peaked at about 35 is right when the tech bubble and the downturn of March 2000 began. For a majority of the time from 1926-2000 you saw P/Es between 10-20 which meant investors were willing to pay between $10 and $20 for a dollar of earnings by a company. Late in the 1990s P/Es had doubled and many saw this as a major sign the market was overpriced–and it was. The market turned in March 2000 and then was hit again when the attacks of 9/11 came. That double whammy hurt investors that got in at the top when P/Es were at 35.

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Risk versus Return for Growth and Value Stocks

Thursday, August 24th, 2006

From 1928-2000 you can examine the risk and rewards of growth and value stocks. We will look at large cap growth and large cap value as well as small cap growth and small cap value. The rule of themb is the more risk the more reward should go along with it. However, it is always necessary so we examing the numbers.

Small cap value stocks had the highest return (14%) and risk, or standard deviation (35%). However, small cap growth had a return a little over 9% and risk was measured at almost 31%. Large cap value had the second best returns at close to 13% and risk at 30%. Large cap growth stocks returned 10% and 21% risk. This does not follow how it should be according to the ideas of risk and reward, but it is interesting to see the numbers over a long time horizon.

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Growth and Value Trends by Decade

Wednesday, August 23rd, 2006

Breaking down growth and value trends through decades is another important way to determine the breakdown of how you should allocate.

Since the 1930s only that decade and the 1990s were periods growth outperfromed value. So the decades of the 1940s through 1980s value stocks were dominant. The 1990s was an anomaly because of the technology and internet-related stocks were in favor and that helped growth stocks outperfrom value. In the coming decades we will see if the 1990s was an anomaly or if it foreshadowed a change to come in behavior in the stock market.

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Growth versus Value Stocks

Tuesday, August 22nd, 2006

Different stock market conditions typically call for an emphasis placed on growth or value stocks. Examining the the annual premium of growth and value stocks in accordance to the book-to-market ratio you will see interesting results from 1928-2000. Growth stocks have low book-to-market ratios while value have high ones. When the annual premium of value stocks is positive they will outperform growth and vice versa. Often during this period there will be time spans of 2 years to seven years. This does not mean you should transfer all your investments to one or the other when premiums are in their favor, but it does mean you can weight your portfolio to take advantage of this potential trend.

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