Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Directions
Newsletter Sign-up
Site Search
Site Map
Home
Tell A Friend About This Website
 
 
 
Financial Briefs

 

Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

UNDERPERFORMANCE/OVERPERFORMANCE

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.®and EmergingWealth Investment Management, Inc. and Editor of The Global Investment Pulse

A substantial number of active portfolio managers who run domestic and foreign mutual funds, especially value-oriented ones, currently have significantly larger cash positions than normal.  In some cases, cash being held is in the 20.0% to as much as 70.0% range.  Why?  Are they trying to time the equity markets?

Generally, these managers are not trying to time the equity markets.  Instead, they are finding valuations of most stocks expensive regardless of the country.  While investing in funds with large cash balances may be unattractive to investors who want to keep up with the stock market whenever it rises, the strategy may outperform in the long run (over the next five to ten years).  Some readers may say, “How is this possible?”  Well, to understand this thought process, think of how Warren Buffet manages money.

Mr. Buffet sometimes holds as much as $40 to $50 billion of cash in his portfolios.  Why?  Well, it can be safely said he’s not looking to earn those high market returns!  Instead, he’s being patient, looking for opportunities when certain select companies that he likes drop in price.  That’s when he’ll buy.  That strategy has proven to be very successful over several decades for Mr. Buffet, who is widely considered the world’s most successful investor.

The next benefit of large cash balances within portfolios will come when the stock market eventually does fall.  Those investors (Portfolio Managers) with significantly larger than normal cash balances will suffer less of a decline in their portfolios.  After all, if one suffers a 50.0% decline in their investments, they then have to earn a 100.0% return to break even (See the chart below.).  However, if they suffer a 20.0% decline, it requires only a 25.0% return to break even.  With a smaller loss though, the same return will result in a higher long-term return.  As a result, the biggest risk is missing out on near-term future returns.  Remember 1998 and 1999!  Therefore, each individual investor needs to determine how aggressive they want to be in the short-term and how much further they expect the equity markets to rise.  Considering we are at one of the top ten valuation peaks in history, at best, it would appear another year or two of increasing equity markets is all that should be expected.  The bottom line for every investor is: “Does the risk justify the reward?”

 

 

COPYRIGHT 2014 LEGEND FINANCIAL ADVISORS, INC.®

 

REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

 



INDEX
  • Why Aren't More Millennials Moving On Up And Out?
  • Taking Socially Responsible Investing To The Next Level
  • Don't Be Caught Red-Handed By The Wash Sale Rule
  • Leading Economic Indicators Hit 10-Year High
  • Avoid These 6 Mistakes In Stretch IRA Planning
  • More Flexibility Allowed In Flex Spending Accounts
  • Individual Bonds-Ugh!
  • Set Aside The Funds One Might Need For A Rainy Day
  • Protect Against Possible Terrorist Attack
  • U.S. Leading Economic Indicators Rose Again
  • Fed Chair Strikes A More Cautious Tone, But Still Expects Moderate Growth
  • Count Off 3 Tax Breaks For Higher Education
  • Don't Be Victimized By These 10 Common Scams
  • Retirement Plan Choices For The Self-Employed
  • New Law Says Tax Debtors May Lose Their Passports
  • Compare Minor's Account To 529 Plan
  • Are You Being Socially Responsible?
  • 8 Smart Moves For College Grads
  • Seeking Financial Aid: Don't Fear The FAFSA
  • New Baby? Consider An Education Savings Plan
  • HOW THE IRS RESOLVES AN IDENTITY THEFT CASE:
  • 3 Ways To Deduct Mortgage Interest
  • HOW THE IRS RESOLVES AN IDENTITY THEFT CASE
  • Understanding Deflation
  • Don't Play Up Super Bowl Outcome In Stock Decisions
  • When Should Millennials Start Retirement Saving?
  • Have Your Child Kick Into A Roth With A Reward To Boot
  • Sizing Up The Energy Boost To The Economy
  • A Stock Plunge Amid Strong Economic Data
  • 14 Top Year-End Tax Moves For Individuals In 2014
  • Drill Down For Three Key Oil And Gas Tax Breaks
  • When It Pays To ID Security Sales
  • GDP Growth Data Masks Strength Of The Recovery
  • Be On The Lookout For Crimes Involving An Elder Fraud
  • UNDERPERFORMANCE/OVERPERFORMANCE
  • S&P 500's New All Time High Wednesday Will Probably Continue Over Upcoming Months, But Other Indexes Are Struggling
  • U.S. Stock valuations are within the top 10 valuations of all time but probably won't crash. Why?
  • Seven Steps To Digging Your Way Out Of Deep Debt
  • 5 Steps To Protect The Digital Assets You Own
  • The Long-Term Fiscal Status Of The United States
  • Margin Debt At Record Levels
  • What To Do When You're Suddenly Widowed
  • A Common Error In Powers Of Attorney
  • Should You Move To A Different State?
  • Tax Cost Of Being Your Own Landlord
  • Why Do GRATs Remain In Such High Demand?
  • Don't Wait To Harvest Your Losses
  • The Best States To Move To For Tax Purposes
  • 10 Reasons For The IRS To Flag Your Return
  • Many Women Face Special Challenges As Retirement Nears
  • Nine Reasons To Consolidate Debt
  • Straight Talk About Living Trusts
  • SEPPs From An IRA: Don't Change Horses Midstream
  • New Regulations Fill In Gaps On 3.8% Surtax
  • Do You Know Life Insurance Basics?
  • Top Income-Earners Drive U.S. Economic Growth
  • Give IRA Cash To Charity: Heads You Win, Tails You Win
  • Four Wash Sale Strategies To Help Clean Up Taxes
  • College Savings: How Much Do You Need Each Month?
  • Surprising New Research: Large Caps Top Small Caps
  • Newly Widowed Face 401(k), IRA Options
  • Retirement Saving Takes Time And Must Be A Priority
  • Divide-Conquer To Convert To Roth IRA
  • What Is Probate And What Does It Protect?
  • A Research Surprise On Bond Funds
  • After New Tax Law, Do You Still Need A Bypass Trust?
  • Start Estate Planning For Your Child Now
  • Seven Tax Ideas To Use Throughout The Year
  • A Comprehensive Way To Plan For College Savings
  • Bulletproofing Your Will Before Death
  • IRS Mercy on 60-Day IRA Rollover Error
  • Feds Warn Of Life Settlement Dangers
  • Know The Tax Rules On Charitable Gift Deductions
  • IRS Ruling Boosts IDTs as Estate Planning Technique
  • A Defined Benefit Plan Lets You Sock Away Large Amounts If You Can Overcome Some Obstacles
  • Economic Shifts Bring New Pitfalls And Prizes
  • Evaluating Great Companies
  • Inflation Versus Deflation
  • Jeremy Grantham And Lou Stanasolovich Discuss Market Valuations
  • Ramifications Of A Weakening Dollar
  • Secular Versus Cyclical Bear Markets
  • Small Business And Work Opportunity Tax Act
  • Time To Plan For Estates, Wills, & Trusts



  • ©2017 Legend Financial Advisors, Inc.®. All rights reserved.