I have written about target date funds before, when Vanguard extended their longest target date year out to 2060. These are excellent for individuals with small retirement accounts.
Target date funds are essentially a balanced fund that gets more conservative as you near retirement. This all happens without you having to do anything at all! Many of the funds are too conservative for my taste though. As people live and work longer, and have assets to draw outside of retirement funds, it makes sense to increase risk tolerance given income and assets outside of any single account. The easy way to do this is just to add 5-10 years to your expected retirement year and selecting that fund.
Target date funds are also available in the ETF wrapper, which may save money on taxes if you are using a non-retirement account to save for retirement (hey, not a terrible idea!). It is important to remember that each fund provider will have a different mix of asset classes and different strategies for the "glide path". Large fund families will likely use their own funds, while some may generously use other companies funds. Look carefully at the fees, particularly "acquired fund expenses" which are expenses of the underlying funds that may be hidden from the advertised expense.
Independent, Fee-Only Financial Advisor
Wednesday, November 14, 2012
Friday, November 09, 2012
cheaper in china?
I had the opportunity to listen to a "hard asset" hedge fund manager the other day. "Hard asset" managers typically have a focus on inflation as a benchmark to beat, and spend a lot of time thinking about the when, where, why and how much aspects of inflation. One interesting point she made was about wage inflation in China.
High wages in the US have "sent American jobs overseas" to cheaper countries. In 2001, the average manufacturing wage in China was $0.58/hour. Making things there kept it cheap for Americans to buy things, even considering the cost of transport (low with today's efficient freighters). The hedge fund manager said that wages are nearing $5/hour. While I couldn't find a number that high, most sources cite 15-20% annual growth in wages, and hourly wages around $4 currently.
Some of the jobs in China will go to countries that are cheaper still, Cambodia and Mexico are two beneficiaries of this trend. America is still the worlds largest consumer, however, and plenty of businesses are choosing to keep factories open, or open up new ones here, so long as they can find willing and able labor.
High wages in the US have "sent American jobs overseas" to cheaper countries. In 2001, the average manufacturing wage in China was $0.58/hour. Making things there kept it cheap for Americans to buy things, even considering the cost of transport (low with today's efficient freighters). The hedge fund manager said that wages are nearing $5/hour. While I couldn't find a number that high, most sources cite 15-20% annual growth in wages, and hourly wages around $4 currently.
Some of the jobs in China will go to countries that are cheaper still, Cambodia and Mexico are two beneficiaries of this trend. America is still the worlds largest consumer, however, and plenty of businesses are choosing to keep factories open, or open up new ones here, so long as they can find willing and able labor.
Thursday, November 08, 2012
bad apple
I am a constant evangelist for Apple stock (AAPL). Ever since my family got a Revision B iMac (remember those colorful desktops that looked like pears?) I have salivated over every product announced and watched the stock on a sometimes hourly basis. For the most part, my eyes were rewarded with more beautiful products and a constantly rising stock price (from a split adjusted, say, $6, to an all time high over $700. Lately, however, my eyes have strained as it vanished.
Don't get me wrong, the products are more beautiful than ever! I dream of hooking up a Thunderbolt display to a retina MacBook Pro as I type this from a 13 inch MacBook Air. I spent a total of 13 seconds (if that) in the Apple store the other day and had my mind blown after simply touching the iPhone 5 (the white one is gorgeous, y'all, go give it a feel). The stock, however, is doing terribly.
When you see a stock down 20% from recent highs you wonder if the company has anything going for it. I'm not going to try to make excuses so let's look at the worst.
Looking at the fundamentals, you still have a fantastic company. Profit margins are high and have been rising for years. The net profit margin is over 26%, however the free cash flow (after capex and dividend) is down from last year to 25.6% (even pre dividend, that number is about .6% down from last year). The quick and current ratios are steadily slipping. This isn't a huge worry as they are 1 and 1.5 respectively, and one year's worth of cash flow covers just about all of their liabilities, but deterioration is never a happy prospect. Besides, leverage is decreasing and they have $29B in cash and short term securities and another $92B in longer term securities, mostly corporate bonds and treasuries. They can cover any liabilities twice over with this money.
But it is their fantastic historical growth that had people in awe of the company. From 2008 until now, sales grew 33%, 31%, 49%, 63% and 43%. Of course they can't grow forever (unless QE4 is just a massive iPhone purchase?) and we are already seeing evidence of that. Disappointing sales numbers for the iPhone 5 and a smaller iPad that will have to share a market with the old iPad don't look like they can sustain previous growth. On top of that, they have admitted that margins are tighter on newer products, further depressing expected earnings growth. Competitors are catching up to their products and it shows.
So what do we have? The balance sheet reveals that the company isn't going to disappear anytime soon and a $2.65/quarter dividend pays you a modest 2% yield at todays price. Even if growth drops drastically the stock is a fine value. With little growth, they could afford a higher dividend (they already can) and more aggressive share repurchases. If their cash flow was cut in half (I'm not going to bother with a precise prediction, just go for a ridiculous scenario) they could still comfortably maintain a dividend five times as high as it is today. If their yield valued them the same as other tech heavies (MSFT, CSCO, INTC) they could be a $1,325 stock with a 4% yield. That is the no-growth scenario which still adds cash to the balance sheet for when they do decide to market the next big thing.
Disclosure: long $AAPL.
Don't get me wrong, the products are more beautiful than ever! I dream of hooking up a Thunderbolt display to a retina MacBook Pro as I type this from a 13 inch MacBook Air. I spent a total of 13 seconds (if that) in the Apple store the other day and had my mind blown after simply touching the iPhone 5 (the white one is gorgeous, y'all, go give it a feel). The stock, however, is doing terribly.
When you see a stock down 20% from recent highs you wonder if the company has anything going for it. I'm not going to try to make excuses so let's look at the worst.
Looking at the fundamentals, you still have a fantastic company. Profit margins are high and have been rising for years. The net profit margin is over 26%, however the free cash flow (after capex and dividend) is down from last year to 25.6% (even pre dividend, that number is about .6% down from last year). The quick and current ratios are steadily slipping. This isn't a huge worry as they are 1 and 1.5 respectively, and one year's worth of cash flow covers just about all of their liabilities, but deterioration is never a happy prospect. Besides, leverage is decreasing and they have $29B in cash and short term securities and another $92B in longer term securities, mostly corporate bonds and treasuries. They can cover any liabilities twice over with this money.
But it is their fantastic historical growth that had people in awe of the company. From 2008 until now, sales grew 33%, 31%, 49%, 63% and 43%. Of course they can't grow forever (unless QE4 is just a massive iPhone purchase?) and we are already seeing evidence of that. Disappointing sales numbers for the iPhone 5 and a smaller iPad that will have to share a market with the old iPad don't look like they can sustain previous growth. On top of that, they have admitted that margins are tighter on newer products, further depressing expected earnings growth. Competitors are catching up to their products and it shows.
So what do we have? The balance sheet reveals that the company isn't going to disappear anytime soon and a $2.65/quarter dividend pays you a modest 2% yield at todays price. Even if growth drops drastically the stock is a fine value. With little growth, they could afford a higher dividend (they already can) and more aggressive share repurchases. If their cash flow was cut in half (I'm not going to bother with a precise prediction, just go for a ridiculous scenario) they could still comfortably maintain a dividend five times as high as it is today. If their yield valued them the same as other tech heavies (MSFT, CSCO, INTC) they could be a $1,325 stock with a 4% yield. That is the no-growth scenario which still adds cash to the balance sheet for when they do decide to market the next big thing.
Disclosure: long $AAPL.
Tuesday, September 18, 2012
being the first
Whenever the market is rallying, there is always someone trying to call the top. There is a bit of pride in saying "I was the first to call the top" or "I told you it was going down."
The latest such prophet of doom is Mark Hulbert. Citing work by former ValueLine research director Sam Eisenstadt, he notes that there is no more upside in the market. Eisenstadt did indeed predict that the S&P would reach 1460, and it has! That does not mean it cannot go higher (nor, when he made the prediction, did it mean that it would hit 1460). While Eisenstadt does anticipate a slight pullback (which happen, literally, all of the time) the aim of Hulbert appears to be cheered for being the first to call the top over.
SPY is only about a percent off its highs (two days ago) and is 39% up from its 52 week lows. I don't care to call the short term direction or destination of the market, so I will just keep this as one to watch.
As Mark Twain once said "The report of my death was an exaggeration."
The latest such prophet of doom is Mark Hulbert. Citing work by former ValueLine research director Sam Eisenstadt, he notes that there is no more upside in the market. Eisenstadt did indeed predict that the S&P would reach 1460, and it has! That does not mean it cannot go higher (nor, when he made the prediction, did it mean that it would hit 1460). While Eisenstadt does anticipate a slight pullback (which happen, literally, all of the time) the aim of Hulbert appears to be cheered for being the first to call the top over.
SPY is only about a percent off its highs (two days ago) and is 39% up from its 52 week lows. I don't care to call the short term direction or destination of the market, so I will just keep this as one to watch.
As Mark Twain once said "The report of my death was an exaggeration."
fixed income ETFs
BlackRock CEO Larry Fink is super positive about fixed income Exchange Traded Funds. The cynic in me says of course he is - he sells them. ETFs have done a lot to transform the way people invest in stocks, and hopefully will have some interesting effects on fixed income as well.
The fixed income market can be very opaque. While the stock exchange exists to bring together everyones offers to buy and sell a stock, bonds are often sold dealer to dealer - you have to search around for a good offer. While the US treasury market is the most liquid in the world, there are plenty of lower quality corporates that don't trade frequently.
ETFs can be traded quickly and frequently. This may help bring some liquidity to the underlying markets, especially where they can open up new exposure. Stock funds allow easy access to all sorts of stocks - foreign and emerging stocks, small cap stocks - that can be hard to reach individually. Fixed income funds are similarly opening up more areas for investors (local currency denominated emerging high yield corporates, anyone?). Bringing money and light to these areas should be positive for the markets, improving liquidity, pricing and transparency.
While we do make much use of fixed income ETFs here at New Perspectives, we are monitoring the space for potential, while using active, open ended funds right now.
Disclosure - author is long PCY, ELD, JNK.
The fixed income market can be very opaque. While the stock exchange exists to bring together everyones offers to buy and sell a stock, bonds are often sold dealer to dealer - you have to search around for a good offer. While the US treasury market is the most liquid in the world, there are plenty of lower quality corporates that don't trade frequently.
ETFs can be traded quickly and frequently. This may help bring some liquidity to the underlying markets, especially where they can open up new exposure. Stock funds allow easy access to all sorts of stocks - foreign and emerging stocks, small cap stocks - that can be hard to reach individually. Fixed income funds are similarly opening up more areas for investors (local currency denominated emerging high yield corporates, anyone?). Bringing money and light to these areas should be positive for the markets, improving liquidity, pricing and transparency.
While we do make much use of fixed income ETFs here at New Perspectives, we are monitoring the space for potential, while using active, open ended funds right now.
Disclosure - author is long PCY, ELD, JNK.
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