Stocks *and* Bonds are Over-Priced


H

Harry

hello,

i keep hearing that the bond markets are over-priced. the 10-year
prior to the rate-cut was priced yielding 3.26% (today, it's 3.51%).

moreover, the stock markets are *way* over-valued. the average p/e
ratio now is 33, and this is more than the p/e in march '00 when it
was 31.

here is my question to you: what are good investments knowing that
the stock and bond markets are over-valued for people with a low
tolerance for risk?

my ideas is still this, but i would still like your insight and
opinions:
1. value stocks paying a dividend
2. TIPS funds like PIMCO's real return (although they are bonds will
hedge inflation).
 
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D

darkness

[[email protected] (Harry)] wrote:
[ 19 lines in misc.invest.financial-plan ]
===================
here is my question to you: what are good investments knowing that
the stock and bond markets are over-valued for people with a low
tolerance for risk?
This is a very tough question. I share your view that both the stock and
bond markets are risky right now. The same thing applies to real estate.
my ideas is still this, but i would still like your insight and
opinions:
1. value stocks paying a dividend
Vanguard has an equity income fund (VEIPX?). Which has a decent
record and relatively low costs.

Vanguard has a real return bond fund which (probably) has lower costs.
There is not much 'skill' in managing a real return bond portfolio,
so you have to go for low costs.

US TIPS have done phenomenally well of late, and will be caught if
long term interest rates rise. Great asset class, but I am not sure
this is the right moment to buy.
Real return bonds are safe investments, but probably yield little. I
personally have a 20% cash position, 10% short-term bond position, 10%
index fund, and 60% stocks. The stocks are mostly of the "value stocks
paying a dividend"-type, and have gotten me great returns.

My reasoning the last few years have been the following: The stock market,
taken as a whole, has been overvalued by all historical parameters.
However, there is a big distinction between the hyped growth stocks and the
quiet value stocks -- during 2000-present, growth stocks have been priced
as if the recovery is just behind the corner, and the days of massive,
double-digit growth numbers will soon be here again. Meanwhile, value
stocks have been pessimistically priced, saying "things are bad and will
get worse". These two views were/are inconsistent.
Good call. But 2002, value, having held up quite nicely until then,
tracked the markets down quite badly: value funds I hold went down c.
30%. You are still way ahead v. growth funds over last 3 years, but
not by as much as you were.

In a deflationary environment, it might be growth stocks (ie which can
maintain pricing power due to brand or other factors) which
outperform. This is more or less what happened through much of the
1990s.

On balance, I think (covered) dividend yield is the way to go, but I
am broadly a pessimist on stock markets.
Therefore, in my view investments in value stocks was the most wise thing
to do, and probably still is. I live in Sweden, so I don't monitor the NYSE
or the Nasdaq, but I'd be surprised if the same kind of "bargains" weren't
available there. Many value stocks yield 5-10% (or more), and show few or
no signs of decreasing their dividends.
I think, at least in Anglo Saxon markets, companies are much more
willing to cut their dividends than historically was the case. It is
no longer the case that cutting the dividend meant automatic sacking
of management. The trick is to find well-covered dividends, and the
call is often low PEs (because low PE can mean good cover ie D/P X P/E
= 1/div cover ).

I note Warren Buffet does not think stocks are cheap, but is buying
*lots* of utility assets.


Although sensitive to, for
instance, price changes, these stocks will hold up quite well to
disappointments in the rest of the economy, compared to the tech giants.
The tech stocks are just fundamentally still quite expensive: the
market is assuming margins hold and/ or sales growth returns to
historic levels. Neither is likely. Nor has the expensing of options
situation been fully resolved.

More problematic are stocks like health care, pharmaceuticals, where
the PEs seem much more justified by fundamentals.

Media stocks are interesting, because of their gearing to any recovery
in advertising.
 
B

BreadWithSpam

US TIPS have done phenomenally well of late, and will be caught if
long term interest rates rise. Great asset class, but I am not sure
this is the right moment to buy.
If you're not talking about a huge amount of money and
are okay with _zero_ liquidity for a full year, US Treasury
I-Bonds might be a better bet. They have a couple of
advantages over TIPS.
 
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H

Harry

Joakim Persson,

in my honest opinion, one of two situations will arise in the future:
1. the markets are going to be in a long-term secular bear market
like the one from '64-'82.
2. deflation will affect america since, i was told, we are
demographically 10 years behind japan.

do you know what the best investments were during our '64-'82 bear
market?
 

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