The Digital Mailbag: Your Questions, Answered
Despite the many competing social media platforms that allow for the instantaneous public airing of opinions and grievances, the volume of letters that I get from readers is as robust as ever.
In this era of short attention spans, I appreciate the time and effort that readers make in sending me cogent letters (almost always in the form of emails). I strive to respond with forthright answers that any investor might find useful.
Let’s dive into my digital mailbag and see what’s on your minds these days. I sometimes edit letters for concision and clarity, but I do so with a light touch.
Don’t tug on Shiller’s CAPE…
Q: “Do we need to stop using the Case Shiller P/E ratio context? I believe that the P/E of 15/16 was in normal times when market forces took care of supply and demand. With the helicopter money for the last 12 years and for the foreseeable future, maybe P/E of 30+ will be a new normal till the next big decline (who knows when). Just my opinion but I would like to hear your thoughts too on this.” — Gaurav
A: As you know, the influential Professor Robert Shiller of Yale University invented the CAPE ratio (also known as the Shiller P/E) to provide a deeper context for market valuation. CAPE is the acronym for cyclically adjusted price-to-earnings ratio.
The CAPE ratio is defined as price divided by the average of 10 years of earnings (moving average), adjusted for inflation. As of this writing on Wednesday, the ratio currently stands at 35.8, which is 128% higher than the historical mean of 15.7. Global markets are frothy (see chart, courtesy of Yale Department of Economics):
Is the Fed propping up the stock market with, as you put it, “helicopter money”? Yes, but when we’re trying to get out of a severe economic slump, that’s not a bad thing.
The Fed’s bond buying strategy is sustainable because anything the Fed decides to do is sustainable. The Fed has unlimited resources and can buy every bond in the world if it wants. In this context, the CAPE ratio is still useful, but it’s only one tool. Keep several tools in your arsenal and don’t get too hung up on federal monetary policy.
The Fed plays a crucial role, of course, but instead of parsing every move from the U.S. central bank, focus instead on the underlying fundamentals of your investments.
Is inflation already here?
Regarding my November 16 video presentation about inflation, the manager of a small packaging company argues that “inflation is already here.” He notes that leading indicators of inflation (e.g., raw materials such as paper, wood, styrofoam, etc.) are jumping. My answer:
A: Across the political spectrum in Washington (which is to say, the mainstream center-right/center-left), the consensus is that the risk of overheating the economy is considerably lower than the risk of not heating it up enough. Don’t forget, last year we experienced the worst economic downturn since the Great Depression and the economy remains 10 million jobs short of its pre-pandemic levels.
Unless the government steps in with massive relief, millions of unemployed people face destitution and eviction. That’s why, as I state in my video, President Biden’s $1.9 trillion spending package is actually more of a “relief” bill.
Federal Reserve Chair Jerome Powell and his predecessor in that role, Treasury Secretary Janet Yellen, have both publicly urged the Biden administration to “go big” on stimulus/relief. Even if prices temporarily spike, the Fed has vowed to remain patient because America is trying to dig out of an enormous economic hole.
Regardless, the scaremongers who are braying right now about the threat of inflation tend to be ideologues with preconceived notions about the role of government. A temporary bounce in prices is not the same as an inflationary surge that continues month after month. Clear-eyed investors know this and it’s a major reason why stocks are rallying at the prospect of the eventual passage (probably as soon as March) of the White House’s proposed legislation.
Finding the right financial planner…
Q: “I will be 62 this year and plan to retire December 31, 2021. I have acquired a nice nest egg and decided it would be prudent to have some financial help managing my way thru retirement. How do I find a reliable fiduciary manager? Internet searches seem to just pile me on with useless ads and unwanted phone calls and emails.” — Michael W.
A: Mike, I refer you to this Certified Financial Planner search tool that can be screened to each person’s preferences: https://www.plannersearch.org/.
To find the right planner, interview at least three different prospects, taking into account the person’s credentials, experience, and demeanor.
One size doesn’t fit all…
Q: “What are your views on target date funds, as vehicles for long-term retirement planning? They seem to be all the rage.” — David B.
A: According to the financial research firm Ibbotson Associates, about a half-trillion dollars are now invested in target date funds. These funds are typically issued in five-year increments, e.g. 2025, 2030, 2035, etc.
Target date funds are simple to use. You pick the fund closest to your retirement date, invest your money, and the fund manager calibrates the mix of stocks, bonds and cash to get more conservative over time. As the target date approaches, the fund’s allocations get safer. The exposure to stocks is reduced as the allocations to bonds and cash increase.
The “target date” refers to the year you plan to retire. That’s when you’ll stop making contributions and can start withdrawing money.
Not all target date funds are the same; the specific approaches and investments depend on the fund you choose. It’s a common myth to think that with a target date fund, one size fits all.
Target date funds would seem to be the perfect solution to the challenge of asset allocation, but there are no panaceas when it comes to investing.
It’s never advisable to put your investments on automatic pilot. One problem with target date funds is that their allocations are based on past returns, without accounting for the current market environment. There’s no substitute for doing your own homework.
Editor’s Note: Our investment team has put together a new special report: “5 Red Hot Stocks to Own in 2021.” As the economic recovery strengthens, these growth stocks should outpace the broader market this year and beyond. For your copy of our report, click here.
John Persinos is the editorial director of Investing Daily. To subscribe to John’s video channel, follow this link.
PS: If you have any profitable “success stories” from following our team’s investment advice, let’s hear about them! Send your correspondence to: email@example.com.