Author Topic: Investing when other markets are on sale?  (Read 4869 times)

vetchling

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Investing when other markets are on sale?
« on: August 17, 2014, 01:43:04 PM »
I'm just starting to invest again after selling my old investments to buy a condo. In planning my investment strategy, I was inspired by this post: http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/. That post suggests that you can get a greater return if you invest more when the market is below its historical (e.g. trailing 10 years) average P/E. However, it's been quite a while since the US stock market has been below that level, so I was considering putting a portion of my portfolio in other markets that happen to be trading below their historical average P/E. For example, investing in European markets during the 2012 crisis, or right now perhaps investing in Russia - basically any large country or region where investors are currently fleeing, so the market is more likely to correct itself when the situation stabilizes.

What do people think of this strategy? I plan to have most of my portfolio in VTSAX as many have recommended here, but considering this as a way to have at least some returns that aren't necessarily correlated to the global market.

milesdividendmd

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Re: Investing when other markets are on sale?
« Reply #1 on: August 17, 2014, 03:27:56 PM »
You are describing a global value strategy, which is most famously promoted by Meb Faber.

He runs an ETF based on this strategy: GVAL and if you look at the countries invested in his fund you will know the current countries with the 10 lowest CAPE rations.

See here:
http://etfdb.com/etf/GVAL/#holdings

Here is a nice google talk he gave on the subject.

https://www.youtube.com/watch?v=B1RhAWzUCsc

Enjoy.

RyeWhiskey

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Re: Investing when other markets are on sale?
« Reply #2 on: August 17, 2014, 06:04:29 PM »
OP, what you are talking about is basically speculation, not investing. You may think that certain markets are undervalued and you may have one metric (P/E) to tell you so, but those are your opinions and you are but one human being. What makes you think that you know more than those who are paid thousands of dollars to do this for a living and have multiple metrics at hand at any time? And what makes you think that you know more than any of us who see the same indicators as you? And what makes you think that the markets don't reflect these facts? Best to stick to a solid investment plan as stated in your IPS and if you want to speculate do so with a portion of cash you're willing to lose (no more than 5% of your total).

For comparison, the ETF noted by the member above (GVAL) has an expense ratio of 0.69% while the Vanguard Total World Stock ETF (VT; an index ETF) has an expense ratio of 0.18%. These expense ratios aside, in the time that GVAL has been alive, it has underperformed VT by ~6%. This is likely due to the fact that it is much less diversified, a mere 95 stock holdings compared to VT's 6,290, but who's to say it won't continue?

My point being: it is first important to differentiate between investment and speculation. It is secondly important to adequately diversify one's investments. GVAL is not diversified in any real sense and your plan to capitalize upon market 'undervaluations' is fine so long as you recognize that it is not a long-term investment plan but a short-term trading plan.

rmendpara

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Re: Investing when other markets are on sale?
« Reply #3 on: August 17, 2014, 06:32:49 PM »
I'm just starting to invest again after selling my old investments to buy a condo. In planning my investment strategy, I was inspired by this post: http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/. That post suggests that you can get a greater return if you invest more when the market is below its historical (e.g. trailing 10 years) average P/E. However, it's been quite a while since the US stock market has been below that level, so I was considering putting a portion of my portfolio in other markets that happen to be trading below their historical average P/E. For example, investing in European markets during the 2012 crisis, or right now perhaps investing in Russia - basically any large country or region where investors are currently fleeing, so the market is more likely to correct itself when the situation stabilizes.

What do people think of this strategy? I plan to have most of my portfolio in VTSAX as many have recommended here, but considering this as a way to have at least some returns that aren't necessarily correlated to the global market.

Now is as good a time as any to maintain your asset allocation. I wouldn't go crazy and overweight to Russia/other internationals, but like in any market condition, it's prudent to maintain an allocation that you decided on earlier, and make changes if the allocation proves to be incorrect (or misinformed when you designed it).

In this case, Russia or wherever else can absolutely be part of your international allocation, but don't go overboard thinking you're getting stuff on sale.

Russia, or any market segment for that matter, could remain depressed for decades or could bounce back in a few years. Either way, stay invested at an amount that makes sense.

milesdividendmd

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Re: Investing when other markets are on sale?
« Reply #4 on: August 18, 2014, 02:45:58 AM »
I'm just starting to invest again after selling my old investments to buy a condo. In planning my investment strategy, I was inspired by this post: http://www.mrmoneymustache.com/2011/06/09/how-to-tell-when-the-stock-market-is-on-sale/. That post suggests that you can get a greater return if you invest more when the market is below its historical (e.g. trailing 10 years) average P/E. However, it's been quite a while since the US stock market has been below that level, so I was considering putting a portion of my portfolio in other markets that happen to be trading below their historical average P/E. For example, investing in European markets during the 2012 crisis, or right now perhaps investing in Russia - basically any large country or region where investors are currently fleeing, so the market is more likely to correct itself when the situation stabilizes.

What do people think of this strategy? I plan to have most of my portfolio in VTSAX as many have recommended here, but considering this as a way to have at least some returns that aren't necessarily correlated to the global market.

Now is as good a time as any to maintain your asset allocation. I wouldn't go crazy and overweight to Russia/other internationals, but like in any market condition, it's prudent to maintain an allocation that you decided on earlier, and make changes if the allocation proves to be incorrect (or misinformed when you designed it).

In this case, Russia or wherever else can absolutely be part of your international allocation, but don't go overboard thinking you're getting stuff on sale.

Russia, or any market segment for that matter, could remain depressed for decades or could bounce back in a few years. Either way, stay invested at an amount that makes sense.

The OP's point, and it is a good one, is that Russia and Brazil and Greece are what markets look like when they are "on sale." This is no different from MMM calling VTI cheap in 2008. Actually the difference is that Mr. Money mustache called it cheap in retrospect whereas the OP is calling it cheap in real time. Much harder to do.

There is plenty of evidence that cheap markets and stocks outperform expensive ones over time.

http://www.millennialinvest.com/blog/2014/8/6/the-putrid-portfolio

Calling such an approach "active" is accurate. Calling it "speculation" is not.  It is quite rational and data driven.

innerscorecard

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Re: Investing when other markets are on sale?
« Reply #5 on: August 18, 2014, 04:18:51 AM »
Warning to everyone about GVAL - Merrill Edge simply didn't let me buy it! I suppose because the constituent companies are harder to buy? Very upset at Merrill Edge.
« Last Edit: August 18, 2014, 08:26:33 PM by innerscorecard »

hodedofome

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Re: Investing when other markets are on sale?
« Reply #6 on: August 18, 2014, 08:26:08 AM »
You could recreate GVAL yourself with individual country ETFs and skip the management fees by subscribing to Faber's Idea Farm. He maintains the list of global CAPE ratios. Read Global Value by Faber for the description of how to run the strategy, also his white paper on the subject on SSRN.

However, you'll pay taxes when it comes time to rebalance (if done in a taxable account). Buying and holding the ETF probably won't incur any taxes until you sell it. I would figure out the portion of your portfolio you are comfortable with, and maintain that asset allocation. So if you decide 20% of your portfolio will be allocated to GVAL, and it's up 50% for the year sometime down the road while the US market is only up 15%, don't get greedy and hold onto it. Sell enough to bring it back in line with your 20% allocation. As well, if the US market is up for the year and GVAL is down, don't do the opposite and be too scared to buy more at the end of the year to maintain that 20%. Consistency in rebalancing is going to be key. If you cannot bring yourself to sell your winners and buy the losers, pay someone else to do it for you.

The strategy is dependent on diversification. Don't go in there and buy Russia with 50% of your portfolio. You have no idea if it will turn into a value trap. Owning the cheapest 5-10 countries is vital. Most likely equal weight will be your best bet, because you don't know which country will do better than the other.

hodedofome

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Re: Investing when other markets are on sale?
« Reply #7 on: August 18, 2014, 08:30:10 AM »
in the time that GVAL has been alive, it has underperformed VT by ~6%.

We can conclude absolutely nothing about a fund that's been around less than 1 year. Only after 5-10 years can we have enough data to really determine anything at all. The ones that are investing in GVAL now are the 'true believers' in a global value investing strategy.

milesdividendmd

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Re: Investing when other markets are on sale?
« Reply #8 on: August 18, 2014, 03:56:24 PM »
You could recreate GVAL yourself with individual country ETFs and skip the management fees by subscribing to Faber's Idea Farm. He maintains the list of global CAPE ratios. Read Global Value by Faber for the description of how to run the strategy, also his white paper on the subject on SSRN.

However, you'll pay taxes when it comes time to rebalance (if done in a taxable account). Buying and holding the ETF probably won't incur any taxes until you sell it. I would figure out the portion of your portfolio you are comfortable with, and maintain that asset allocation. So if you decide 20% of your portfolio will be allocated to GVAL, and it's up 50% for the year sometime down the road while the US market is only up 15%, don't get greedy and hold onto it. Sell enough to bring it back in line with your 20% allocation. As well, if the US market is up for the year and GVAL is down, don't do the opposite and be too scared to buy more at the end of the year to maintain that 20%. Consistency in rebalancing is going to be key. If you cannot bring yourself to sell your winners and buy the losers, pay someone else to do it for you.

The strategy is dependent on diversification. Don't go in there and buy Russia with 50% of your portfolio. You have no idea if it will turn into a value trap. Owning the cheapest 5-10 countries is vital. Most likely equal weight will be your best bet, because you don't know which country will do better than the other.


Two points about re-creating GVAL.

1.  It is not that much cheaper to buy the ETFs for the low CAPE countries.
2.  If you do this would be a slightly different strategy since GVAL buys value weighted companies within value countries.

And one question about idea farm.

Why would you pay for it when you get the exact same info by looking at the country weighting within GVAL?  faber himself claims you can rebalance as infrequently as once per 2 years with no loss of results.

ioseftavi

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Re: Investing when other markets are on sale?
« Reply #9 on: August 19, 2014, 08:16:52 AM »
OP, what you are talking about is basically speculation, not investing. You may think that certain markets are undervalued and you may have one metric (P/E) to tell you so, but those are your opinions and you are but one human being. What makes you think that you know more than those who are paid thousands of dollars to do this for a living and have multiple metrics at hand at any time? And what makes you think that you know more than any of us who see the same indicators as you? And what makes you think that the markets don't reflect these facts? Best to stick to a solid investment plan as stated in your IPS and if you want to speculate do so with a portion of cash you're willing to lose (no more than 5% of your total).

For comparison, the ETF noted by the member above (GVAL) has an expense ratio of 0.69% while the Vanguard Total World Stock ETF (VT; an index ETF) has an expense ratio of 0.18%. These expense ratios aside, in the time that GVAL has been alive, it has underperformed VT by ~6%. This is likely due to the fact that it is much less diversified, a mere 95 stock holdings compared to VT's 6,290, but who's to say it won't continue?

My point being: it is first important to differentiate between investment and speculation. It is secondly important to adequately diversify one's investments. GVAL is not diversified in any real sense and your plan to capitalize upon market 'undervaluations' is fine so long as you recognize that it is not a long-term investment plan but a short-term trading plan.

Miles dividend did a good job of arguing against this. 

I agree with his sentiments, and I think you're overstating the "against" arguments, RyeWhiskey. 

OP is talking about a tactical tweak to his portfolio, using a low-cost, low-correlation, broadly diversified investment vehicle.  I don't agree that 100 stock holdings across 10+ countries is undiversified.  I don't agree that this qualifies as speculation.  I don't think what he's doing qualifies as market timing - at least, not in the sense of people selling out their entire 401(k)s into cash because they "just have a bad feeling", etc. 

OP is saying that, based on this particular barometer (CAPE), US market levels appear to be on the high end of the range.  He's not saying a recession is imminent.  He's not saying he wants to move to cash.  He's not saying that he wants to buy an actively managed fund with a fee of 2%.  He's saying, given that US valuations appear pricier, would it make sense to cheat on his asset allocation a bit and tweak his portfolio so that he's slightly shy on US stocks, and slightly heavier on international stocks? 

OP, I think your strategy is sound, your metric of choice is reasonable (CAPE of world regions vs. CAPE of US), and the investment vehicle that we're kicking around is not a bad choice. 

If you want to try to tweak your asset allocation by a small amount because you're not comfortable with valuations in the US, that is not a bad impulse, but don't overdo it.  I think everyone replying here - whether they agree with your strategy or not - would suggest doing this in moderation if you do it at all.  My personal suggestions would be:
  • If you're going to do this, do it with a small percentage of your investment portfolio.  3% sounds like a lot, offhand.  5% to me seems about as high as I'd want to go in trying out this idea.
  • If you do this, factor it into your overall asset allocation.  If your portfolio is normally 50% US stocks / 25% international / 25% bonds (as an example), don't take a portion of your 'bonds' and apply that to your 'international' slice.  If you want to do this because you're concerned about US valuations, the proper thing to do would be to rebalance into this investment so your new portfolio was 47% US / 28% international / 25% bonds.  Tweak the numbers based on whatever your long term AA is, but don't take from the wrong section of your portfolio to add to this new tactical piece you're trying out.
  • Be aware that your portfolio will almost certainly be more volatile in the short-run.  International investments (particularly in distressed regions) and value investments tend to be bumpy rides.  Don't get scared out and mentally prepare yourself for your 'international' portfolio to potentially have some lumpy years.
  • Have some concrete metrics for when you'll rebalance back to a "neutral" asset allocation where the US is back to a CAPE that you feel offers better long-term values.  Keep in mind your strategy is using a very long-term metric (CAPE, over 10 years), so you should be prepared for this to be a longer-term tweak, if you do it.  You're probably looking at several years before equity markets make any kind of a major shift where you think, "Ah, now the US markets are more attractive than international", so don't go making this tweak and then expecting results to show up in a few months.
  • Be prepared for this to potentially work out worse than a simple static allocation with periodic rebalancing.  Just because you've picked a solid long-term metric and executed your strategy well, doesn't mean that this is a guarantee it will work.  You're taking a calculated risk, but it is just that - a risk.  So be aware of that.
Keep us posted if you do this - I'd be curious to hear how it works out.  Best of luck.
« Last Edit: August 19, 2014, 08:19:01 AM by ioseftavi »

RyeWhiskey

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Re: Investing when other markets are on sale?
« Reply #10 on: August 19, 2014, 11:02:12 AM »
Given that all active funds use some sort of metric to try and beat the market, and given that almost all active funds underperform index funds over the long run, this 'strategy' (using CAPE) is almost assuredly a losing one.

Furthermore, OP is not clear on what percentage of their portfolio they want to dedicate to this, nor about what countries/regions even, only that they have some metric which they think will earn them more money when in all likelihood, it won't. If there was a fund whereby investors put in 0.5%+ of their assets each time they thought they had the right metric to produce outperformance, wait, that's active management....

milesdividendmd

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Re: Investing when other markets are on sale?
« Reply #11 on: August 19, 2014, 06:43:58 PM »
Given that all active funds use some sort of metric to try and beat the market, and given that almost all active funds underperform index funds over the long run, this 'strategy' (using CAPE) is almost assuredly a losing one.

Furthermore, OP is not clear on what percentage of their portfolio they want to dedicate to this, nor about what countries/regions even, only that they have some metric which they think will earn them more money when in all likelihood, it won't. If there was a fund whereby investors put in 0.5%+ of their assets each time they thought they had the right metric to produce outperformance, wait, that's active management....

By your definition of active (ie non cap weighted) your conclusion is incorrect. The equal weighted S&P has outperformed the S&P over time because it tilts small.  A micro cap value fund will outperform VTI over time because it tilts small and value.

This is not to argue that a simple cap weighted approach isn't great. It is. But to label very approach that doesn't line up yours "speculation" reveals nothing but the limits of your own understanding.

vetchling

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Re: Investing when other markets are on sale?
« Reply #12 on: August 19, 2014, 09:07:31 PM »
Thanks everyone for the replies. I think I will invest about 5% in GVAL or a similar fund. The expense ratio scared me off from doing any more than that. Just to be clear, I didn't mean to suggest that this strategy could beat the market over the long term, especially during a bull market period such as the present. It just seems like a way to potentially have a decent return while offsetting the risk of starting my investments near the peak. If I had invested either of the last two times when the market was near this level, it would have taken 6-8 years to get back - a situation I'd prefer to avoid even if 100% US stock will deliver better returns over the long run.

"What makes you think that you know more than any of us who see the same indicators as you?" RyeWhiskey makes  an interesting point with that, but couldn't the same point be made to justify getting out of the US market in 2008? After all, many other investors were doing that. Depressed countries such as Russia and Greece, like the US, have been around for a long time and aren't likely to go anywhere - so I guess that long term perspective and being willing to brave a falling market is what differentiates me from the other investors who are getting out.