EasyBlog

I’m a huge fan of P90X fitness programs, but 17X is not about fitness.  It’s about the U.S. stock market.

The stock market is a forward-looking barometer and reflects the future expectations of the economy.

One of the oldest and commonly used metrics to value individual stocks and the stock market is the price-to-earnings ratio (P/E ratio).  The P/E ratio is defined and calculated as market price per share divided by annual earnings per share.

Many years ago, one of my clients inherited a large sum of callable out of state muni bonds (munis) in an account at a large, brand-name brokerage firm.  As a resident of California, this client received none of the income tax benefits for the munis and wanted to know what to do.

After analyzing the clients situation, I determined that a diversified bond portfolio designed specifically for conservative investors and those funding near-term liabilities would be more appropriate.  The portfolio has the following three characteristics:

Diversification is a fundamental concept of investing that was introduced to us through the groundbreaking, Nobel Prize-winning research of Harry Markowitz in the 1950s.

Most investors think of diversification from the traditional perspective, which means investing in different types of stocks and bonds in an effort to increase portfolio returns while mitigating risk.

Now, thanks to 60 years of empirically-validated financial science, we can expand our concept of diversification and consider it within the context of "factor investing.” Factors are simply sources of expected returns that are well documented in markets around the world and across different periods.

Just like many food companies are now advertising their products as gluten free, mutual funds companies are also marketing smart.

They understand that it is not in their best interest to show poor-performing mutual funds. Have you ever seen an ad for a mutual fund that lost 40%, 20% or even 5%?

During extended bull markets (e.g., 1987-2000 and 2009-date), money managers appear to make money hand over fist.  Even average “do-it-yourself” investors can do well.  These types of bull markets support the adage that a rising tide lifts all boats.

However, as Warren Buffet wrote in 2001, ”…you only find out who is swimming naked when the tide goes out.”