The stock market has had a glorious run over the last six months with the broad based S&P 500 index up over 20%.  Now may be a good time to review your portfolio’s allocation and make sure your weighting to stocks isn’t too heavy relative to other asset classes.  Rebalancing may be timely now because it appears investor’s expectations may have gotten ahead of themselves.

According to Mark Hulbert at Marketwatch, “the market’s successful assault on Dow 13,000 brought a number of eager bulls out of the woodwork — so much so, in fact, that even though the Dow Jones Industrial Average has now fallen back to just above that 13,000 level, there is a lot more bullish sentiment than existed just two weeks ago.”

It also appears that economist’s high expectations of the economy have gotten overly aggressive.  According to Sober Look, The Citigroup Economic Surprise Index (shown below) appears to trending down.  This means the economy is not performing as well as the expectations of economists.

If you believe in the benefits of regularly rebalancing your portfolio, now may be a good time to do so.

You May Be Interested In

Larry Swedroe of Buckingham Asset Management writes a good article on investments to avoid which he sums up with some great advice:

• Never buy an investment product if there’s a commission attached to it.
• Only work with an advisor who offers a fiduciary standard of care.
• Only invest in a product if the seller can demonstrate that they also are investing in the same product.
• Never buy a complex product; if you can’t fully understand the nature of the risks and the costs, run as fast as you can because you can be 100 percent certain the complexity is designed to favor the issuer. In other words, you’ll be the patsy at the poker table who doesn’t know he’s the patsy.
• And if you can’t adhere to these rules, hire a fiduciary advisor. The cost of the advice will almost certainly be a small fraction of the value added, simply by making sure you only buy products that are designed in your best interests.

Pretty good video on the difference between a broker and an advisor:

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Please note: This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ.Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

We cannot predict the future.  As Voltaire teaches us: “Doubt is not a pleasant condition, but certainty is absurd.” Seeking certainty is a human design flaw.  We seek it out because being certain gives us good feelings.  We feel safe. But of course this belief of certainty leaves us the minute the world changes.  Which, when it comes to investing, is ALL the time.

Too many investors try to predict the future instead of preparing for the future.   Instead of asking, what will happen, ask yourself:

• Am I prepared mentally and financially for whatever may happen in the future?
• Will I be able to take advantage of a market decline of 20% or more? Does my portfolio, as currently positioned, allow me to take advantage of such a situation? What will I specifically do if this happens?
• Will I be able to take advantage of a market advance of 20% or more?  Does my portfolio, as currently positioned, allow me to take advantage of such a situation? What will I specifically do if this happens?

Being completely in or out of markets at various times (e.g. fully invested in stocks or all cash) means your letting your conviction override your discipline.  You may be right at times.  But what if you’re wrong? We are all wrong at times.  Humans make mistakes. How do you minimize the impact of being wrong?

Stop trying to predict what will happen.  Instead, make sure you are prepared to deal with what does happen.

You May Be Interested In

Consuelo Mack. Managing your portfolio’s risk in volatile times with “Financial Thought Leader,” MIT professor and alternative money manager Andrew Lo.  Very good video.

Steve Jobs’ Famous Speech.

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Please note: This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ.Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

2011, a forgettable year

2011 was an extremely challenging year for stock investors.  The markets displayed wild volatility yet basically finished where they started (at least for US stock investors).  Here are the year-end returns for some popular indices (according to Morningstar):

Markets certainly have been wildly volatile this year.  Dow up 300 one day, down 300 the next. I read recently that the Dow has moved over 14,000 points in the last few months and has essentially gone nowhere, which is really something (and quite exhausting!).   Year to date, US stock markets are down about 5% and most international markets are down over 15%. Certainly a tough year for investors.

Markets like this one remind us of how crucial it is to have a well-defined plan in place. It’s important for us to be prepared for bad things happening.  (Likewise, preparation for good things that happen is crucial too!) Ad hoc investment schemes simply don’t work. Investing well requires hard work and discipline.

source: behaviorgap.com

(Those who invest without a plan usually end up doing things like this!)

The Financial News Media Is Toxic…..Avoid At All Costs

At times like these, it is human nature to seek information and guidance.  Unfortunately, that sometimes comes our way via the financial news media.

Here’s why watching the financial news will not help you:

They are incented to scare you or make you feel euphoric.  Television marketers know that you will not watch if it is boring.  Scary markets are perfect opportunities to increase viewership.

Sound bites do not educate you.  The economy and markets are complex beasts and television is not an appropriate forum to learn about them.   There are many good books and blogs you can read that can help you become a better investor.

Their guests are there to sell, not help you. Most of the guests are selling something, also know as “talking their book”.

Most of the time there is no newsworthy reason for market movements.  From Felix Salmon:

“Market reports should not be an everyday staple of news coverage. Sometimes, occasionally, there are stories in the markets. And then those stories can be reported. But when there aren’t any stories, there’s no point in trying to invent them. And so the daily report — let alone the intra-day report — is at heart a stupid piece of journalism. Some are better than others, to be sure. But none of them are any good. “

You are drinking water from a fire hose. There is some much information out there that watching the financial news typically causes one to lose sight of the big picture.

It is short term focused.  Investing is a long term endeavor. Watching financial news may cause you to become short term focused and do the opposite of what is in your best interest.

The best thing to do in times like these is to stick to your discipline, ignore what the media is selling by turning off the TV, and try to take advantage of the situation.

You May Be Interested In

Last time I mentioned that it might be a good idea to improve your password if the ones you use are weak.  Here is a good article about bad passwords.  I hope you have good strong passwords in place.  It’s one of the best ways to protect yourself from identity theft.

Have a very special Thanksgiving!

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Please note: This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

Improve your password.  According to Fidelity, this was by far the most important step in protecting your online information.  It was noted that many hacks are caused by lazy passwords.  A lazy password would be one which is too short, includes information that relates to you (e.g. your date of birth or the name of your dog), or any one word (e.g. phoenix).

Here is a tip to make a strong password that you can easily remember.  Think of a full sentence that is unique to you that you can easily recall.  Then break it down into letters, numbers and symbols.  For example: My wife and I were married in 1982.  Your password is Mw&Iwmi1982.   Here is another one:  I like to visit my grandchildren in New Jersey.  Password: Il2vmgiNJ.   Both of these are pretty strong passwords.

Review your accounts and statements.  Check your accounts regularly. If something doesn’t look right, inquire about the discrepancy.  The sooner fraud is recognized the better.

Review your credit reports.  You can request credit reports from the three primary reporting agencies at annualcreditreport.com. The site is easy to navigate and the credit reports are free (every 12 month period).

Keep your anti-virus software up to date.

If you are subject to fraud, alert all of your financial institutions.  If someone steals your identity, then there is a good chance that person will attempt to use your information at more than one institution.  It is crucial to contact all the institutions you do business with and the major credit agencies and request a “fraud alert” be placed on your account.

Be wary of information requests.  Your bank or brokerage firm will never ask you for your account number or social security number via email. They already have this information!

Consider putting a freeze on your credit.   If you are not planning on taking out new credit for the foreseeable future, you may want to consider a credit freeze.  This is a great way to ensure no one will open a credit card in your name.  Just a small amount of money and time is required and it can be removed if and when you do want to apply for credit.  You can learn more about that here.

You May Be Interested In

The Most Powerful Force in the Universe.  Good post from the Financial Philosopher.

Back to the Future.

High Frequency Trading.  Good explanation.

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Please note: This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

Quite frankly, I do not know what the short term ramifications would be of a refusal to raise the debt ceiling (and neither does anyone else).  But I do have some opinions on the likely longer term affects.

For starters, it is important to realize we have been here before:

The United States federal government shutdown of 1995 and 1996 was the result of a conflict between Democratic President Clinton and the Republican-controlled Congress over funding for Medicare, education, the environment, and public health. It took place after Clinton vetoed the spending bill that Congress sent him. Thereupon, the federal government of the United States put non-essential government workers on furlough and suspended non-essential services from November 14 through November 19, 1995 and from December 16, 1995 to January 6, 1996. The major players were President Bill Clinton and the Speaker of the U.S. House of Representatives Newt Gingrich.

In response to Clinton’s unwillingness to make the budget cuts that the Republicans wanted, Newt Gingrich threatened to refuse to raise the debt limit, which would have caused the US Treasury to suspend funding other portions of the Government to avoid putting the country in default.

source: Wikepdia

In 1995, stock markets performed well, so it is not a certainty that markets will be roiled by a refusal to increase the debt limit. (Of course, a market sell off may represent an opportunity for the prepared investor).

From a longer term perspective though, there may be other issues.  Today we are currently dealing with what’s been termed a “balance sheet recession”. Essentially, a balance sheet recession is one in which the private sector, namely households, have too much debt and weak balance sheets. Households currently want to save and pay down their debts (deleverage).  Until households are deleveraged to a point that their balance sheets are improved, the economy is likely to be very sluggish.

Our economy’s sluggishness has been borne out in the data.  It was a bad recession and the recovery has been very weak.

This relates to the debt ceiling in that if government spending is cut substantially as part of a deal to raise the ceiling, it will likely have a negative effect on the economy. Essentially if the private sector continues to reduce spending and the government cuts back, the overall economic output will be lower.  If government cuts are severe enough, we will likely be back in a recession soon.    I’m not making a comment on what the government should do or trying to make a statement on what the right role for government is.  I am saying that our representative’s decisions on the budget will have a major impact on the economy and markets.

This is the primary issue at the moment.  The debt ceiling fiasco is a side show.

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Please note: This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

A recent New York Times/CBS poll found that 39 per cent think that “the current economic downturn is part of a long-term permanent decline and the economy will never fully recover”. That was up from 28 per cent last October. Last month, a CNN poll found that 48 per cent of Americans believe another Great Depression is somewhat or very likely.

Clearly many, many Americans are struggling.  And we certainly have serious issues to work our way out of, but 39% feel the economy will never recover?  That is saying something.

Personally, I feel that there is far too much pessimism out there.  One should never forget that our economy is very robust and dynamic.  We will adjust to current circumstances and move forward.  Good things can and will happen in the future.  New products and services will make life better.

Comedian Louis CK (being interviewed by Conan O’Brien) helps put some things into perspective:

Watching this video reminds me that we Americans have enormous wealth today. In fact, one could argue that you and I are indeed wealthier than the richest American ever alive! Consider that John D. Rockefeller’s wealth was the equivalent of 1/65^th of the nation’s GDP at its peak, which is astonishing. He was born in 1839 and died in 1937.

Now, I ask you, would you trade places with him?  In other words, would you accept Rockefeller’s vast fortune if you were to live in the time and place he lived?  What was travel like for him?  Did he drive as nice a car as you did?  Did he have air conditioning?  Smartphones?  Television?  Internet, etc? Surely, he had many luxuries that we do not have (and the egotistical benefits of being the richest man alive) but it’s hard to argue he had more consumable wealth than most Americans today.

High Frequency Trading

Something I’ve been concerned about for awhile has been High Frequency Trading (HFT) and the affects it has on markets.  HFT is essentially trading done by computer programs (often referenced as tradebots).  Here is a video for the interested.

In my mind, there are more questions than answers when it comes to the tradebots.  For instance, Is this affecting true price discovery? Is the market more or less prone to panics and crashes?   Would HFT be allowed if the exchanges did not go for-profit? Are other investors harmed by their existence?  Hopefully HFT is nothing to be concerned about but it certainly bears watching.

You May Be Interested In

Sell, sell, sell: Everything must go.  The recent bailouts of Greece are a Greek Tragedy for the citizens of Greece.  One of these days the bailouts will end….

Sheila Bair’s Bank Shot.  Speaking of bailouts, this article is a must read for anyone interested in learning more about what happened during the bank bailouts in 2008 (and the choices that probably should have been made that were not).  I wish we would have let Ms. Bair make the decisions during the crisis.

Plains Milky Way on Vimeo

Please note: This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

Housing

Housing seems to be on everyone’s mind lately. This is not surprising as it seems to be the topic du jour within the media.

Recently, the Case Shiller housing index declined to new lows.  So will housing continue to decline? Has it bottomed? And so on.  Here is a chart showing the level of home prices relative to income on a national level. (click on chart to increase size)

source: Big Picture Blog

So this tells us that nationally speaking:

1. Housing is close to its historical average price of 3.5 times average income.
2. Sometimes housing has been priced below the 3.5 times level.

It’s important to know that typically after the bursting of an asset bubble, the asset tends to fall below average levels.  If this happens with average housing prices, then perhaps another 10% lower is about right.  I don’t know.

It’s also important to note that this information is based on national figures.  Your local market is different.  Some markets are still overpriced but many others are where they probably should be.  Others still are bargains.

One thing that is fascinating is the entire attitude shift taken place and continuing to take place regarding housing.  Five years ago, a house was considered a great investment.  Housing never went down.  No one ever lost money in real estate.  A big luxurious house was a sign that you have arrived!

Now, a house is shelter.  It is a place to live.  It is much more utilitarian.  My guess is this attitude will prevail for at least the next several years.

Inflation

People seem very worried about inflation. It makes sense to conclude that all this government debt and deficit spending will lead to very high inflation.  While this may indeed be the case eventually, it is not likely to be an issue for at least several years.  Why?  Simply put, the private sector is still highly indebted and is looking to reduce total debt levels. Until household balance sheets are repaired, inflation is likely to be very low.

Looking at the chart below, we see that total private sector debt doubled from 2002 to 2008.  It has been declining since.  If household debt continues to decline, which is likely for at least a few more years, inflation will not be an issue.  Less debt equals less money equals less inflation.

Stock Market

I’ve been asked a lot about why the stock market has done so well given a still weak recovery/economy.  Here are just a few things to consider:

1. The stock market is not the same thing as the economy.  At times, the market does well when the economy is weak and vice versa.
2. Perhaps the economy will enter in to a prolonged period of strength and investors are anticipating that.
3. The Fed has driven down short term interest rates to basically zero. There is an incentive to do something (anything!) with your money.
4. The Fed has created a speculative fervor through the implementation of QE2 (quantitative easing).
5. Or perhaps the machines are in charge.  Essentially, computers now trade vast amounts of securities within seconds/milliseconds.  This has created a market where long term value means little (to nothing) for a substantial majority of today’s stock holders.  You can learn more about trade bots here and here.

The bottom line is that trying to figure out the short term moves in any market is very hard to do. Fortunately, if you have a disciplined investment program in place you do not need to.

You May Be Interested In

SmartMoney came out with their annual broker poll.  Fidelity Investments claimed the top spot.

Howard Marks at Oaktree Capital recently had an excellent commentary.  Also, his book, The Most Important Thing is highly recommended.

The Many Hats of Great Investors. Good.

UCLA legends remember John Wooden

Please Note:  This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

But first please understand that the following is for informational use only and this is not a recommendation to buy or sell any security. Nothing written here is a guarantee of future performance. Please reference applicable investment prospectuses to understand all risks and seek qualified advice before investing.  I and/or my clients own the securities referenced below.

High Quality Looks Good

High quality companies are defined typically as those with high return on equity, consistent earnings, low debt, and strong brand names. Some well-known examples are Coca Cola and Johnson and Johnson.  Historically, high quality stocks have traded at a premium to the broader market, meaning investors would pay higher prices for companies of quality relative to the overall market.

Today high quality stocks are trading at a discount to the broader market.  This is somewhat unusual, and when this has happened in the past excess returns have been garnered relative to the overall market.  (See the chart below and click on it to enlarge.)

There are many funds that focus on higher quality companies. One option is through the Vanguard Dividend Appreciation exchange traded fund (VIG).

If interested, here is more from Wells Fargo making the case for quality.

An Out of Favor Fund Priced Attractively

The Alliance Bernstein Income Fund (ACG) is a closed end fund that owns high quality bonds. The fund is currently trading at a 13% discount to its net asset value (NAV), meaning you can buy the fund’s holdings at 87 cents on the dollar.

The discount ACG is trading at is wide relative to its history. I believe this is the case mainly because high quality bonds are currently out of favor.  The wide discount represents an opportunity to investors as at some point in the future it is likely to trade closer to historical averages.

The fund has a solid track record and low expenses. At today’s price I feel a patient investor can earn average annual returns of 6-7% over the next few years.

Want to learn more about closed end funds? Here is a good article.

You May Be Interested In

Montier Seven Immutable Laws of Investing.  Excellent advice.

Manuel De Los Santos

Please Note:  This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.

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Recently Ben Inker of global investment firm GMO gave a speech at Babson College asserting that the US stock market will earn only 2.5% annually over the next several years. While seemingly dire, GMO should certainly be taken seriously as their track record for forecasting long term asset class returns is superb.  Why would GMO state that the probable returns for stocks will be very low when the historical average returns have been much better? Simply put, GMO’s assessment is that the market is overvalued. And, quite frankly, it is hard to disagree.  Here are a few charts that illustrate vividly the current condition (click on chart to see larger view):

Essentially, these two charts are telling us that the stock market is selling for levels that are historically high relative to earnings and the country’s’ output (GDP). Based on historical norms, stocks are roughly 30% more expensive than the past.  (It is interesting to note that since the late 90’s, stocks have been perpetually overpriced.  It is no coincidence that the stock market has had dismal returns for over a decade!)

Of course, simply because the market is currently overpriced does not mean it will drop immediately. In fact, it can continue to go higher in the short run for a variety of reasons.  Indeed, there may be many good opportunities for skilled traders and speculators here. But for a longer term investor, it is a difficult environment, one with low expected returns and high risks. Here are some strategies investors may wish to consider in today’s overvalued market:

• Raise or increase your allocation to cash and wait for better opportunities.  In late 2008 and early 2009, the S&P 500 fell substantially.  Were you able to take advantage of that situation and invest when stocks were undervalued?  If you were fully invested like so many were, the answer is no. Today’s opportunities for investment are slim but without question, the market will present better opportunities in the future.  Count on it.

• If the market climbs further, continue to rebalance out of stocks and add to cash or bonds.  Rebalancing a portfolio is a tried and true tenet of wise investment management, and something that most people don’t do!

• Consider alternatives.  There are investments that are priced to earn better returns than the US stock market.

• For the allocation you have invested in stocks, consider areas of relative value such as high quality US and Japan.

If you are interested in vastly increasing your knowledge, you may want to check out GMO’s site. Registration is required but it is free. While GMO probably uses a much more sophisticated analysis, here is a simple, back of the envelope method that you can use to estimate future long term returns of asset classes:

• Step 1. Obtain the current income from the investment. Regarding the S&P 500, the current yield is 1.7%.

• Step 2. Make a reasonable assumption on longer term growth of the investment.  For US stocks, about 6% is reasonable to use. This is roughly the historical average growth of the economy and earnings should grow at about the same rate as the economy in general.

• Step 3. Add the two together and you get 7.7%.

• Step 4.  Estimate the gain or loss based on reversion to historical valuations. Always assume that the market will return to average historical valuations at some point.  It ALWAYS does. As stated earlier, based on the two charts above US stocks are overvalued roughly 30%.

• Step 5.  Sum it all together for a total return:  7.7% annually for seven years = 54%.  Adjusting that for the overvaluation by reducing 30% gets you 24% over 7 years, or roughly 3.4% annually.

Based on this admittedly simplified model, it is highly likely that the broad US stock market will average roughly 3.5% annually over the next several years.  Higher than GMO’s forecast, but still not a great outlook. Keep lots of dry powder.

You May Be Interested In

The Biggest Urban Legend In Finance.  Recommended article by Rob Arnott.

Welcome to Mississauga.  This really made my day.

Please Note:  This commentary is for informational use only.  It is not recommended as investment advice.  Seek the advice of a qualified investment advisor before making any investment.

Michael McGinley, CFP® is principal of McGinley Financial Advisory, LLC.  Comments and questions are welcome.

McGinley Financial Advisory, LLC (“MFA”) is a registered investment adviser located in Peoria, AZ. Access to this website is provided for informational purposes only and without any warranties, expressed or implied, regarding the accuracy, completeness, timeliness, or results obtained from any information presented. Past performance is never a guarantee of future results and information contained in this newsletter is not meant to predict future performance.

For Clients: Please contact McGinley Financial Advisory, LLC if there are any changes in your financial situation or investment objectives or if you wish to add or to modify any reasonable restrictions to the management of your account. Our current disclosure statement, as set forth on Part II of ADV, is available for review upon your request.