All posts by Financial Independence Hub

Taylor’s golden rule of Stock Market size indices

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By Dr. Bryan Taylor, Chief Economist, Global Financial Data

Special to the Financial Independence Hub

Global Financial Data has collected extensive data on stocks from the United States and the United Kingdom covering over 400 years. With this, GFD has generated indices that cover the history of the stock market from the incorporation of the Dutch East India Company in 1602 to the current market in 2018-2019.

One question that the creation of size indices creates is how many components should be in the large-cap, mid-cap and small-cap indices. Where should large-cap, mid-cap and small-cap begin and end? Currently, each index company treats large-cap, mid-cap and small-cap indices differently. Let’s look at how different index companies treat market capitalization.

Standard and Poor’s has three size indices for the United States with 500 shares in the large cap index, 400 in the mid-cap and 600 in the small-cap. The 500-share index was introduced in 1957, the 400-share Midcap was introduced in 1981, and the Small Cap Index was introduced in 1994. The proper weights for the three size indices was not calculated when the indices were introduced, so the S&P 500 Composite represents 90% of total market capitalization, the Midcap 400 7% and the Small Cap 3%.

The idea for a small-cap index was introduced by Russell in 1987 and the data was extended back to 1978. Russell has 1000 stocks in their large cap index and 2000 in their small-cap index. However, this creates an even greater imbalance for the large cap stocks since the Russell 1000 represents about 92% of the total market cap in the United States and the Russell 2000 represents about 8%.

Morningstar and MSCI have more balanced approaches to the size categories. Morningstar refers to the top 70% of stocks as large-cap stocks, the next 20% as mid-caps and the bottom 10% as small-caps. MSCI divides the US stock market into 300 Large Cap stocks, 450 Midcap Stocks, 1750 Small Cap Stocks and the remaining stocks (around 1000) as Micro-cap stocks. By our calculations, this would give about 70% to the Large Cap 300, 16% to the Midcap 450, 13% to the Small Cap 1750 and 1% to the Micro-Cap 1000.

Taylor’s Golden Rule

The problem with creating long-term indices is that the number of stocks that listed on the exchanges and over-the-counter grew dramatically over time and the number of stocks in the large-cap, mid-cap and small-cap groups vary accordingly. During most of the 1800s, there weren’t even 500 stocks listed on all of the exchanges in the United States. So how do you determine how to allocate stocks to the large cap, midcap and small cap categories if the number of stocks in existence is constantly changing? Continue Reading…

Should you invest in pot stocks? How do you invest in the cannabis sector?

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The Fed: “March”ing out like a Lamb

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

The transformation of Federal Reserve (Fed) policy continues. What was viewed as a hawkish Federal Open Market Committee (FOMC) outcome at the December meeting has now morphed into a more dovish outlook. In fact, one could conclude the Fed is leaving March by “going out like a lamb.”

So far in 2019, Fed policy decisions have graduated to be less about an actual rate move to the question of what the blue dots are saying instead. Remember, these blue dots represent the policy makers’ own projections for the future Federal Funds Target Rate over a period of time. So, not moving the rate at an official FOMC meeting during the first half of this year is not necessarily of paramount importance, nor expected, for that matter. Instead, it has become all about their policy statement and Fed Funds forecasts.

With that in mind, the results of the March FOMC gathering were being anxiously awaited. Interestingly, fixed-income investors had become accustomed throughout 2017 and 2018 to the Fed essentially guiding the markets as to when a potential rate hike would be coming. While Fed-speak had led to expectations for no action at this latest policy gathering (the actual result on the Fed Funds Rates front), the uncertainty quotient was dialed up because investors were not as certain about the Fed’s blue dot path.

Overall, the voting members do envision some slowing in U.S. growth this year, but, to quote Chairman Powell, they still feel the economy is “in a good place.” This outlook was essentially confirmed in the March policy statement. In addition, the lack of inflation places no urgency on the Fed to contemplate a rate hike anytime soon, even though core measures are straddling the 2% threshold. Continue Reading…

How Baby Boomers can be frugal, yet still live it up

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By Gloria Martinez

Special to the Financial Independence Hub

Baby Boomers have reached the point in life where they have either retired or are quickly approaching it, and that last paycheck is causing many to become more frugal. Being financially responsible is never a bad thing, but it shouldn’t take over your life. According to Forbes, being excessively frugal can “be a bigger problem for [a Baby Boomer’s] social life, family, and friends, not to mention physical health.” It is important that you find the right balance between saving and preparing for the future while also living in the moment.

Fulfill important responsibilities first

Before you can focus on having fun, take care of your health and well-being first so that it doesn’t become a constant worry. Some of the problems Baby Boomers face include declining rates of health due to obesity, diabetes, and various other health issues. Healthcare costs are continuing to rise as well, feeding into that constant need to save.

Your health is what will carry you through your Golden Years, but it comes at a cost. Now is the time to start exploring your healthcare options, including signing up for Medicare. Research Medicare Advantage plans, such as those offered by Humana, as they offer important health benefits and coverage, including dental, vision, and hearing, along with original Medicare benefits. While on the topic of your health and well-being, go ahead and make sure you have your end-of-life documents in order, including a living will, power of attorney, life insurance, etc. This might also including pre-paying funeral expenses or looking into long-term care insurance.

Explore ways to have frugal fun

Catch the Travel bug with a Road Trip

Traveling is a common activity for retirees, but when you add up airfare, travel insurance, and the cost of luxury destinations and cruises, travel becomes a huge expense. To save and make getting to your destination part of the fun, opt for a road trip. A road trip gives you the flexibility to travel anywhere, any time, with a personalized travel plan for a day trip, weekend getaway, week-long excursion, or a cross-country trek. Go at your own pace, and pack in the sights and experiences youwant to see.

Give that Hobby a try

Careers, families, and various other obligations don’t leave you with much free time, but retirement does. Maybe now you can finally find a hobby that you enjoy. Some of the most common Boomer hobbies are cooking, DIY projects, sports, and volunteering, but the possibilities truly are endless. You might even find a hobby that you can use to make a little extra cash. For example, you can sell produce from your garden at the farmers market, sell handmade furniture with your knack for woodworking, or make jewelry to sell at local boutiques and fairs. Continue Reading…

The importance of diversification

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By Noah Solomon

Special to the Financial Independence Hub

Harry Markowitz, recipient of both the 1990 Nobel Memorial Prize in Economic Sciences and the 1989 John von Neumann Theory Prize, referred to diversification as “the only free lunch in finance.”

As most investors are aware, diversification is an essential element of any well-constructed portfolio. Diversification across different markets and individual securities can lower volatility, mitigate losses in declining markets and produce higher risk-adjusted returns over the long-term.

Easier said than done: the temptation to chase returns

Of course, during times when one asset class or country outperforms for an extended period, this can lead to feelings of regret. Looking in their rear-view mirrors, investors often wish that they had been less diversified and had an overweight position in the outperforming asset class. This regret can result in FOMO (fear of missing out), whereby investors pour capital into those areas of the markets which have been outperforming.

The U.S. stands alone

Since the post-financial crisis market bottom of March 2009, the U.S. stock market has dwarfed those of other markets in terms of performance. U.S. stocks have produced almost double the return of emerging markets stocks, which have been the second-best performer.

Country Annualized Return Cumulative Return
U.S. 15.1% 381%
Emerging Markets 7.5% 199%
Europe 6.9% 189%
U.K. 6.1% 176%
Japan 5.7% 170%
Canada 4.9% 157%

 

Sources: MSCI, Factset Research Systems

Unsurprisingly, the outperformance of U.S. stocks, reflected in the table below, indicates that the U.S. market currently stands as the most richly valued market as measured by its cyclically-adjusted Price/Earnings Ratio (CAPE).

Country Cyclically Adjusted P/E (CAPE)
U.S. 32.1
Japan 27.2
Canada 22.0
Europe 19.4
U.K. 16.9
Emerging Markets 16.4

 

Source: www.starcapital.de

Punished for doing the right thing

The spectacular outperformance of the U.S. stock market means that portfolios that have been heavily concentrated in U.S. stocks have generated considerably higher returns than their more diversified counterparts. In other words, investors who have sacrificed diversification in favour of being overweight U.S. stocks have been handsomely rewarded. Continue Reading…