Blue-Chip Stocks to Buy on the Next Dip

There’s an old Wall Street saying that goes, “Bulls make money, bears make money, pigs get slaughtered.” No one really knows who originally said it, but its meaning is clear. You can make money in a rising market or a falling market if you’re disciplined. But if you hunt for stocks to buy while being greedy, sloppy and impatient, things might not work out as you hope.

This is a time to be patient. We’re more than a decade into a truly epic bull market that has seen the Standard & Poor’s 500-stock index appreciate by well over 300%. While value investors might still find a few bargains out there, the market is by most reasonable metrics richly valued.

The S&P 500’s trailing price-to-earnings ratio sits at a lofty 21. The long-term historical average is around 16, and there have only been a handful of instances in history in which the collection of blue-chip stocks has breached 20. It’s expensive from a revenue standpoint, too — the index trades at a price-to-sales ratio of 2.1, meaning today’s market is priced at 1990s internet mania levels.

The beauty of being an individual investor is that you reserve the right to sit on your hands. Unlike professional money managers, you have no mandate to be 100% invested at all times. You can be patient and wait for your moment.

Here are 13 solid blue-chip stocks to buy that look interesting now, but will be downright attractive on a dip. Any of these would make a fine addition to a portfolio at the right price. And should this little bout of volatility in May snowball into a correction or proper bear market, that day might come sooner than you think.

To read the remainder of this article, see 13 Blue-Chip Stocks to Buy on the Next Dip

This article first appeared on Sizemore Insights as Blue-Chip Stocks to Buy on the Next Dip

Do the Millennials Need More Mojo?

The Centers for Disease Control and Prevention announced that the number of American live births dropped to 3,788,235 in 2018. That’s a 2% drop from 2017, and a 12% drop from the 2007 high. It puts us back at levels last seen in 1986.

But the numbers look worse when you drill down.

The population today is around 330 million. It was around 240 million in 1986. So, we’re producing the same number of babies despite having a population nearly 40% larger.

Our birth rate is now approximately 1.7 children born per woman, which is well below the replacement rate of 2.1. We still have a steady flow of immigration, and immigrants tend to be relatively young. They help balance out the workforce with lower birth rates. But unless something changes — which is difficult given that the largest cohort of Millennial women are aging out of peak childbearing years — we’re looking at a lost generation.

Why the Decline?

It’s certainly hard to start a family of your own when you still live with your parents. A Pew Research study found that 35% of Millennial men still lived with mom and dad, whereas only 28% lived with their wife or significant other.

And Millennial women aren’t much better. About 35% of Millennial women live with a partner, whereas about 29% still live with their parents.

These aren’t college kids, by the way. The largest chunk of Millennials are now in their late 20s to mid 30s.

We could blame student debt or the high cost of housing. We could blame the low starting salaries for young people, or a college educational system that produces graduates without much in the way of technical skills. We could blame smartphones, the addiction to social media, and the change in day-to-day communication and relationships.

Whatever the reason is, the result is that Millennials do have a distinct lack of mojo. Various studies have shown that Millennials have less sex and with fewer partners than Gen X or the Baby Boomers did at similar ages.

And this isn’t just an American phenomenon. Japan is essentially becoming asexual at this point. A recent study found that 70% of unmarried men and 60% of unmarried women aged 18-34 were not in a relationship, and over 40% in that age group had never had sex at all.

The world seems to be losing its animal spirits, and we’re going to feel the impacts.

Rodney Johnson wrote about this Economy & Markets, focusing on the effects it has on workforce growth and government funding. And he’s right. A social welfare system needs a steady supply of young people to support the elderly in retirement, and businesses need young workers.

But of all the consequences of a low birthrate, I’m least concerned about labor. Our economy has been replacing workers with machines for my entire lifetime.

I’m far more concerned with who’s going to be swiping the credit cards of the future.

It’s More Than Just the Loss of Labor…

Ever since the dawn of the Industrial Revolution, the economy has been an exercise in producing more goods and services for more people. Whether we’re talking about cars, houses, simple jeans or complex iPhones, the story is the same: an ever-growing population consumes a growing production of “stuff.”

But what happens when the population stops growing? There’s not much point in building new homes or offices if there are fewer people to put in them. Where do new flat screen TVs go if there are no new walls to hang them on?

At some point, the economy starts to look like an enormous Ponzi scheme that needs a continuous flow of new people to keep it afloat.

Now, I’m not one for all the doom and gloom. And I’m not predicting any kind of zombie apocalypse. Life will go on. But it’s not going to be the kind of economy we grew up in.

It’s going to be an economy with slower growth, one with much less dynamic, and will likely resemble economies like Japan or Europe rather than a “traditional” America economy. One that will be marked by chronically low inflation and even occasional bouts of deflation.

It’ll be an economy that favors a different kind of investing. One where income strategies will thrive and growth will fail. With periods of slow inflation and low growth, a steady stream of cash is a lot more attractive than times of fast revenue and earnings.

This article first appeared on Sizemore Insights as Do the Millennials Need More Mojo?

Advice to a Young Graduate

Today is a day to remember those who have fallen in the line of duty.

For most of us though, it’s an excuse for the office to be closed and kick off the summer by lounging around the pool, or grilling up some burgers with friends and family.

There’s nothing wrong with that, of course. I like to think that fallen warriors look down in approval knowing that our way of life is made possible by their sacrifice. But we shouldn’t take it for granted.

If you have children, take a minute to explain why today is significant. They need to hear it.

And if you run into any veterans, give them a hardy pat on the back and thank them. If they look thirsty, offer them a cold beer. It would be uncivilized not to.

With the markets closed today, there’s not much to report. But I thought I would share parts of a letter I wrote to my younger cousin who just graduated from college with a degree in engineering.

I’ll refer to him as “W” to keep him anonymous. He starts his new job at Lockheed Martin next month, and we’re all really excited for him.

W,

Congratulations on finishing your degree and on getting the Lockheed job. That first job and getting your career started on the right foot is really important. And you’re getting yours starting right!

At any rate, let me give you a few parting words of advice.

  1. With your first paycheck, have fun. Treat yourself to something frivolous. Blow it. Enjoy it. And then, after that, it’s time to get serious and be an adult. But blowing the first paycheck on something stupid is a nice way to reward yourself for finishing your degree.
  2. I don’t know what your living plans are, but living with your parents for six more months will allow you to pad your savings. You should move out pretty quickly, as that’s important to being a real adult. But another 6-12 months at home won’t kill you, and it will allow you to save up enough cash to buy a car or even make a down payment on a modest house. Just make sure you actually save it and don’t just blow it all.
  3. Open two checking accounts. One will be the account your paycheck goes to and the account you use for your regular expenses. The other should be for saving. You can tell Lockheed to split your check across two accounts. They’ll do that. You can put 90% in the main account and 10% in the secondary account, or whatever makes sense. But keeping that cash separate makes it harder to spend.
  4. Put AT LEAST enough of your paycheck into your 401(k) in order to get the free employer matching. It’s literally FREE money. Ideally, you should put a lot more. You can put up to $19,000 into a 401(k) annually at your age. But at a bare minimum, put whatever you need to put to get the employer matching. It’s just stupid not to.
  5. Don’t get a credit card. Use a debit card or pay cash.
  6. Avoid debt on anything other than a house or car, and even on the car try to keep it minimal. Debt has ruined far more lives than drugs or alcohol ever have.
  7. Learn how to cook. Or, if that is a lost cause, find a girlfriend who likes to cook and treat her right and never let her go. Going out to eat all the time will bankrupt you, and it’s terrible for your health. This is a lesson best learned while you’re still young.
  8. Try to exercise at least a couple days per week. You’ll regret it when you’re 30 (and more when you’re 40) if you don’t.
  9. If your boss yells at you, don’t be a typical thin-skinned Millennial and get offended. Keep the stiff upper lip and use it as an opportunity to learn something and improve your marketability as an employee. I learned FAR more from the mean bosses than the easy-going ones. The boss who is your buddy isn’t going to get you anywhere. It’s the mean bosses that toughen you up who help you advance.
  10. Try to attach yourself to a manager that is really going somewhere in the company. If you do good work for them, they’ll take you with them. If you attach yourself to a manager who’s not really going anywhere, neither will you.

And that’s it. This is the only real wisdom I’ve managed to acquire in the 20 years since I graduated.  

Good luck in the new job, and let’s get the families together for some grilling this summer!

Take care,

Charles

Happy Memorial Day, folks.

Do yourself a favor and turn off your smartphone. The office is closed, and whatever it is you were going to check can wait until tomorrow. Our fallen soldiers didn’t fight tyranny only to have you enslaved by your iPhone.

So, put the phone away and be present with the people you love.

This article first appeared on Sizemore Insights as Advice to a Young Graduate

This Time It’s Different

The late Sir John Templeton once commented that “the four most expensive words in the English language are ‘this time it’s different.’”

No truer words have ever been spoken.

It’s true for degenerate gamblers, drug addicts and serial womanizers. It’s true for politicians peddling failed policy ideas. And it’s true for ne’er-do-well employees or business partners who can never quite seem to get it together. No matter how many times they tell “this time it’s different,” it never is.

But perhaps nowhere is the quote more appropriate than in finance. This seems to be one area of human endeavor where people seem constitutionally incapable of learning from past mistakes.

Making loans to uncreditworthy borrows? Banks seem to do that about once every ten years like clockwork. In fact, they’re doing it now. Delinquent auto loans recently hit a new all-time high.

Lend money to perpetual basket cases like Turkey or Argentina? Bond holders seem to do that once per decade or so as well.

And getting caught up in the latest, greatest bubble?

Sigh…

Yes, that seems to be a rinse and repeat cycle as well.

I pondered this as I read Barron’s last Saturday, [CS1] as is my weekly ritual. I wake up and play with my kids for an hour before making an espresso and unrolling my issue of Barron’s.

Writing for Barron’s, Adam Seessel of Gravity Capital Management, commented that “reversion to the mean is dead.”

In other words, the classic value trade of buying beaten down, out-of-favor stocks and selling expensive hype stocks is over. Value investing no longer works:

As for returning to normal, does anyone really believe that is going to happen, for example, to Amazon.com or Alphabet? E-commerce and digital advertising still have only a small share of their global market, despite nearly a generation of growth. Other industries—ride-sharing, online lending, and renewable energy—are smaller still, but also show every sign of being long-term winners. How are these sectors going to somehow revert to the mean? Conversely, how will legacy sectors that lose share to these disruptors return to their normal growth trajectory?

Reversion to the Mean is Dead

Seessel isn’t some wild-eyed permabull growth investor. By disposition, he’s more of a value investor. But after a decade of underperformance by value investing as a discipline, he’s wondering if it really is different this time.

It’s a legitimate question to ask. Not all trades revert to the mean. Had you been a value investor 100 years ago, you might have seen a lot of cheap buggy-whip stocks. But they ended up getting a lot cheaper as cars replaced horse-drawn carriages.

Likewise, might banks and energy companies today be at risk today from new disruptors like green energy and peer to peer lenders? And will the winners of the new economy just continually get bigger?

Well, maybe. Stranger things have happened. But before you start digging value investing’s grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.

Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.

The following is a snippet from Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:

There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.

“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much…

I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.

The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds.

Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Tech stocks rolled over and died not long after he published this, and value stocks had a fantastic run that lasted nearly a decade.

Today, I see shades of the late 1990s. The so-called “unicorn” tech IPOs this year were Uber and Lyft. Neither of these companies turns a profit, nor is there any quick path to profitability. These are garbage stocks being sold to suckers at inflated prices.

No thanks.

I’ll stick with my value and income stocks, thank you very much. And in Peak Income, we have a portfolio full of them.

This month, I added a new pick offering a 7% tax-free yield. That’s real money, and I don’t have to worry about selling to a greater fool.

To find out more…


 [CS1]https://www.barrons.com/articles/reversion-to-the-mean-is-dead-investors-beware-51556912141

This article first appeared on Sizemore Insights as This Time It’s Different

What Thanos Got Wrong

Note from Charles: I worked with Bill Washinski for years when I was living in Florida, and we collaborated on several research projects. In the spirit of the upcoming Avengers movie. I enjoyed his piece here on “the economics of Thanos,” and I hope you do too. –Charles

Tomorrow, April 24, Avengers: Endgame, the sequel to the $2 billion hit movie Avengers: Infinity War will be released in China, with releases in the rest of the world to quickly follow. This brings to a climax a story line that has been more than a decade in the making, starting with 2008’s Iron Man

In all of the anticipation, there has been a lot of discussion around social media and other outlets about Thanos and the merits his plan to eliminate half of the population of every planet in the universe with “The Snap”.  

To some, Thanos isn’t a villain at all. He’s a misunderstood hero doing what needs to be done to save humanity from the consequences of overpopulation and the exhaustion of resources. Indeed, throughout history many (if not most) conflicts have been fought over limited resources. And in an era in which global warming is one of the biggest and thorniest political issues, there are plenty of people out there who believe a smaller population is ideal.

It stands to reason that the Earth probably has a finite carrying capacity. There may be some upper population limit at which we’ve officially outgrown our planet.

It was 18th century demographer Thomas Malthus who first popularized the idea of the Earth reaching its carrying capacity. Mathusianism stated that “the power of population is indefinitely greater that the power in the earth to produce subsistence for man.” 

Thanos made the same point in Infinity War:  “It’s simple calculus, the universe has finite resources and if life is left unchecked, life will cease to exist.”

However, despite his omnipotent power, Thanos is lousy statistician. Had he bothered to check, he would have seen that the birth rate has been in a state of free fall since the U.N. began keeping track of it in the 1950s.  This is a product of industrialization, as children in the modern era are no longer a source of cheap labor but rather a major expense.

The birthrate was 37.2 Births per 1,000 from 1950-1955, dropping nearly in half to 19.4 Births per 1000 from 2010-2015.  This has nothing to do with declining resources as much as it does economic factors – it can cost $200,000 – $300,000 to raise a child in the United States (not including the costs of college education).  Massive improvements in infant mortality also played a role, as parents felt less needs to have “spare” children.

But not only is population growing at a slower rate; some countries are actually shrinking. Japan’s population started to decline in 2011, and the country had a record low 15 million births in 2018.  Western European nations average only 1.6 children per woman, which is not enough to replace the existing generation. So, it is only a matter of time before Europe as a whole begins to shrink.

Thanos tried to “fix” a problem that nature and economics seems to already be fixing on its own. We’ve already moved past a point of maximum growth.

Let’s look at other aspects of Mad Titan’s madness. His cutting out half the population could have drastic negative effects.  In the movie he references how another character’s home world was a paradise after he culled the population. This is a short-sighted view, that a smaller population with more resources to sustain them made it a better world, is incredibly naïve.

Imagine if Thanos came and did his snap before Henry Ford developed the assembly line for cars or before Alexander Fleming discovered penicillin? What if Bill Gates was turned to dust before he created Microsoft or Steve Jobs before he created Apple?  What kind of brilliant minds that could have made our lives more efficient and productive would have been suddenly ripped from existence before they could implement their products?

Imagine your world today before the smart phone or software that could increase your productivity and income or you were still behind a carriage on the way to work?  Thanos may have made for an interesting villain and a great movie; but his solution of eliminating population also eliminates productivity and innovation – and this writer hopes the foolish and simple-minded snap is undone this weekend by a series of heroes that have earned a lot of respect over the years by some great minds leading the way like Kevin Fiege. 

Oh no, what if Fiege was not head of Marvel Studios because he turned to dust?  Perhaps there would be no need for this article then!

This article first appeared on Sizemore Insights as What Thanos Got Wrong

Dividend Growth Portfolio 4th Quarter Letter to Investors

With one quarter left to go in 2018, there are three things on investors’ minds: the Fed, the coming mid-term elections and the ongoing trade war. Thus far, the market has mostly shrugged off these concerns, though income-focused investments such as bonds, REITs and dividend-paying stocks have had a hard time gaining traction.

Sizemore Capital’s Dividend Growth portfolio, which invests primarily in higher-yielding securities, has also had a hard time gaining traction in 2018. The portfolio returned 0.14% in the third quarter and 0.53% in the year-to-date through September 30. This compares to 7.2% in the third quarter and 9.0% year-to-date for the S&P 500 and 5.1% and 1.6% for the S&P 500 Value. [Returns data calculated from the performance of Sizemore Capital’s Dividend Growth model at Interactive Brokers; past performance is no guarantee of future results.]

Given its focus on attractively-priced stocks paying above-market dividend yields, I consider the S&P 500 Value to be a more accurate benchmark than the standard S&P 500. And frankly, it’s been a difficult market for value strategies.

Value vs. Growth

Over time, value strategies have proven to outperform.

This is not my opinion. This is empirical fact. In their landmark 1993 paper, University of Chicago professors Eugene Fama and Kenneth French found that value stocks outperform over time. More recent research by BlackRock found that in the 90 years through 2017, value has outperformed growth by a full 4.8% per year.

Figure 1: Value vs. Growth

Past performance is no guarantee of future results.

But while value trounces growth over time, 90 years is a long time to wait. And there are stretches – sometimes long stretches – where value underperforms badly. We’re in one of those stretches today.

Figure 1 illustrates this in vivid detail. The graph shows the ratio of the Russell 1000 Value index divided by the Russell 1000 Growth index. When the line is declining, growth is outperforming value. When the line is rising, value is outperforming growth.

Value massively outperformed growth from 2000 to 2007, but it has struggled ever since. This has been particularly true over the past two years as the “FAANG” stocks – Facebook, Amazon, Apple, Netflix and Google (Alphabet) – have completely dominated the investing narrative.

I would love to tell you the exact date when the market will flip and value will start to dominate again. For all I know, by the time you read this, it might have already happened. Or that day might still be years away.

That’s not something I can control. But I can stay disciplined and focus on high-quality companies that I believe to be temporarily underpriced. And because my strategy has a strong income component, we don’t necessarily need prices to rise in order for us to realize a respectable return. The average dividend yield of the stocks in the Dividend Growth portfolio is 5.65% at time of writing. [This yield will change over time as the composition of the portfolio changes.]

As we start the fourth quarter, I am particularly bullish about some of our newer additions, such as Macquarie Infrastructure Company (NYSE: MIC) and Ares Capital (Nasdaq: ARCC).

Macquarie Infrastructure lowered its dividend earlier this year, which led investors to dump it in a panic. The shares dropped by over 40%, giving us a very attractive entry point.

Ares Capital, like many BDCs, has found the past decade to be difficult. But after a long, six-year drought, the company raised its dividend in September, and I expect further dividend hikes to come. At current prices, the shares yield a whopping 9.0%.

I also continue to see value in some of our long-held energy infrastructure assets, such as Energy Transfer Equity (NYSE: ETE) and Enterprise Products Partners (NYSE: EPD). Energy Transfer, in particular, is attractive due to its planned merger with is related company Energy Transfer Partners (NYSE: ETP). I believe this could be the first step to an eventual conversion from an MLP to a traditional C-corporation, which would potentially lower ETE’s cost of capital and allow for greater ownership by mutual funds, institutional investors and retirement plans like IRAs. CEO Kelcy Warren has indicated that this is the direction he ultimately wants to go.

I see the greatest risk in the portfolio coming from our positions in automakers General Motors (NYSE: GM), Ford Motor Company (NYSE: F) and Toyota (NYSE: TM). I consider all three to be wildly attractive at current valuations, but all are also at risk to fallout from the escalating trade war. As a precaution, I lowered our exposure to the sector earlier this year by selling shares of Volkswagen. But given the potential for a rally in the shares following a favorable resolution to the trade war, I feel it makes sense to hold our remaining auto positions and potentially add new money to them on any additional pullbacks.

All Eyes On the Fed

The Federal Reserve raised rates again in September, which was widely expected. But it was a subtle change to their statement that raised some eyebrows. They dropped the language saying that its policy “remained accommodative.” Does this mean that the Fed believes easy money is already over and that they’re not much more tightening to be done? Or does it mean that they’re about to get even more hawkish?

The statement was ambiguous. But it is noteworthy that the Fed is still forecasting another hike before the end of the year and three more in 2019. And Powell’s statements following the official statement suggest that he’s eager to continue draining liquidity out of the market.

There are limits to how aggressive the Fed can be here. If they follow through with raising rates as aggressively as they plan, they will push short-term rates above longer-term rates, inverting the yield curve. I don’t see the Fed risking that, as an inverted yield curve is generally viewed as a prelude to a recession.

Figure 2: 10-Year Treasury Yield

Past performance is no guarantee of future results.

Meanwhile, bond yields have finally pushed through the long trading range of the past six years. The 10-year Treasury yield broke above 3.2%, a level it hasn’t seen since 2011.

I do not expect yields to rise much above current levels, as I do not see such a move justified by current inflation rates or growth expectations. But this is something I am watching, because the Dividend Growth portfolio, given its yield-focused strategy, is sensitive to changes in bond yields.

Looking forward to a strong finish to the year,

Charles Lewis Sizemore, CFA

Why You Shouldn’t Put ALL Your Money into an Index Fund

Cliff Asness doesn’t have the name recognition of a Warren Buffett or a Carl Icahn. But among “quant” investors, his words carry a lot more weight.

Asness is the billionaire co-founder of AQR Capital Management and a pioneer in liquid alternatives. For all of us looking to build that proverbial better mouse trap, Asness is our guru. My own Peak Profits strategy, which combines value and momentum investing, was inspired by some of Asness’ early work.

Unfortunately, he’s been getting his butt kicked lately. His hedge funds have had a rough 2018, which prompted him to write a really insightful and introspective client letter earlier this month titled “Liquid Alt Ragnarok.”

“This is one of those notes,” Asness starts with his characteristic bluntness. “You know, from an investment manager who has recently been doing crappy.”

Rather make excuses for a lousy quarter (Asness is above that), he uses his bad streak to get back to the basics of why he invests the way he does.

As I mentioned, Asness specializes in liquid alternatives. In plain English, he builds portfolios that aren’t tightly correlated to the S&P 500. They’re designed to generate respectable returns whether the market goes up, down or sideways.

You don’t have to be bearish on stocks to see the value of alts. As Asness explains,

You do not want a liquid alt because you’re bearish on stocks or, more generally, traditional assets. That kind of timing is difficult to do well. Plus, if you’re convinced traditional assets are going to plummet, you want to be short, not “alternative.” In other words, liquid alts are a “diversifier” not a “hedge.”

You should invest [in a liquid alt] because you believe that it has a positive expected return and provides diversification versus everything else you’re doing. It’s the same reason an all-stock investor can build a better portfolio by adding some bonds, and an all-bond investor can build a better portfolio by adding some stocks.

I love this, so you’re going to have to forgive me if I “geek out” a little bit here. My professors pretty well beat this stuff into my head when I was working on my master’s degree at the London School of Economics.

When you invest in multiple strategies that aren’t tightly correlated with each other, your risk and returns are not the average risk and return of the individual strategies. The sum is actually greater than the parts. You get more return for a given level of risk or less risk for a given level of return.

Take a look at the graph. This is a hypothetical scenario, so don’t get fixated on the precise numbers. But know that it really does work like this in the real world.

Strategy A is a relative low risk, low return strategy. Strategy B is higher return, higher risk.

In a world where Strategies A and B are perfectly correlated (they move up and down together), any combination of the two strategies would be a simple average. If A returned 2% with 8% volatility and B returned 16% with 11% volatility, a portfolio invested 50/50 between the two would have returns of 9% with 9.5% volatility. That is what you see with the straight line connecting A and B. Any combination of the two portfolios would fall along that line (assuming perfect correlation).

But if they are not perfectly correlated (they move at least somewhat independently), you get a curve. And the less correlation, the further the curve gets pushed out.

Look at the dot on the curve that shows an expected return of about 8% and risk (or volatility) of 10%. On the straight line, that 8% curve would have volatility of about 14%, not 10%. And accepting 10% volatility would only get you a return of about 4% on the straight line.

This is why you diversify among strategies. Running multiple good strategies at the same time lowers your overall risk and boosts your returns. The key is finding good strategies that are independent. Running the basic strategy five slightly different ways isn’t real diversification, and neither is owning five different index funds in your 401k plan. Diversification is useless if all of your assets end up rising and falling together.

This article first appeared on Sizemore Insights as Why You Shouldn’t Put ALL Your Money into an Index Fund

Best ETFs for 2018: This Isn’t the Year for Emerging Markets (DVYE)

The following is an excerpt from Best ETFs for 2018: This Isn’t the Year for Emerging Markets (DVYE).

Well, I should probably start this by mentioning that I no longer personally own the ETF I recommended in InvestorPlace’s Best ETFs for 2018 contest.

I recently sold my shares of the iShares Emerging Markets Dividend ETF (DVYE). While I still believe that emerging markets are likely to be one of the best-performing asset classes of the next ten years, it’s a minefield in the short-term. As I write this, the shares are down 4% on the year. That’s not a disaster by any stretch, but it is a disappointment.

There are a couple reasons for the recent underperformance in emerging markets. To start, the U.S. market remains the casino of choice for most investors right now. Adding to this is dollar strength. While dollar strength is good for countries that sell manufactured products to the United States, it’s bad for commodities producers, as a more expensive dollar by definition means cheaper commodities.

President Donald Trump’s trade war isn’t helping either. While it’s hard to argue that anyone truly “wins” a trade war, Trump isn’t incorrect when it says that our trading partners need us more than we need them. In a war of attrition like this, you “win” by losing less.

Of course, these conditions are not new, and virtually all of them were in place when I made the initial recommendation of DVYE. None of these factors would be enough for me to punt on emerging markets just yet. No, the problem is a greater risk that has only recently popped up: the twin meltdowns in Argentina and Turkey.

To continue reading, please see Best ETFs for 2018: This Isn’t the Year for Emerging Markets (DVYE).

This article first appeared on Sizemore Insights as Best ETFs for 2018: This Isn’t the Year for Emerging Markets (DVYE)

Best Stocks for 2018: Enterprise Products Is a Keeper

The following is an excerpt from Best Stocks for 2018: Enterprise Products Is a Keeper.

A 14% return is nothing to be ashamed of in a year where the S&P 500 is up only 8%. Yet it looks awfully meager when my competition in the Best Stocks contest is up 144%.

As I write, my submission in InvestorPlace’s Best Stocks for 2018 contest — blue-chip natural gas and natural gas liquids pipeline operator Enterprise Products Partners (EPD)  — is up 14%, including dividends, as of today. Yet Tracey Ryniec’s Etsy (ETSY) is up a whopping 144%. Chipotle Mexican Grill (CMG) and Amazon.com (AMZN) take the second and third slots with returns to date of 71% and 68%, respectively.

So, barring something truly unexpected happening, it’s looking like victory may be out of sight this time around.

Can’t win ‘em all.

While Enterprise Products may finish the contest as a middling contender, I still consider it one of the absolute best stocks to own over the next two to three years. Growth stocks have dominated value stocks  since 2009, but that trend will not last forever. Value and income stocks will enjoy a nice run of outperformance — and when they do, Enterprise Products will be a major beneficiary.

To continue reading, please see Best Stocks for 2018: Enterprise Products Is a Keeper.

This article first appeared on Sizemore Insights as Best Stocks for 2018: Enterprise Products Is a Keeper