Investing 202:

How To Monitor the Market

How To Monitor the Market• First Step: Identify

your end-game and NEVER forget it!– Retirement is your

end-game• Retirement goals

– Focus on longer term• Investment horizon

– Stick with your Basic Plan• An Investment Policy

Statement helps you remember

How To Monitor the Market

• First, the basic “deal”:– Cash (checking account, savings, money markets, etc.): You

deposit dollars, they contractually agree to give them back, sometimes with interest

– Bonds (bond mutual funds): You purchase debt issued by some entity, they have a contractual obligation to return those dollars at some point in the future, and usually pay interest during the life of the bond

– Stocks (stock mutual funds): You purchase a right to a portion of the earnings and dividends generated by a company, but they have NO obligation to make those earnings, or pay dividends if they do.

How To Monitor the Market

• Terms to know– GDP: The monetary value of all the finished goods and

services produced within a country's borders– Profits (Earnings): A company’s net income after adjusting

for inventory adjustments and corporate taxes– Dividends: Payments to shareholders from a company’s

net profits– P/E: The price investors are willing to pay for a company’s

stock divided by the profits that company generates– The “Market”: Aggregate of companies grouped by under

certain parameters, eg. S&P500

• Long term Market Drivers– True value of stock

derived from dividends received

– Dividends are paid out of profits

– Profits are made from sales

How To Monitor the Market

Sales

Profits

Dividends

• Sales are driven by the economy

• Long term market values fluctuate according to value investors place in all:– Sales– Profits– Dividends

How To Monitor the Market

How To Monitor the Market

• Nominal GDP (Real economic growth plus inflation) has stayed below long term trends for almost twenty years now.

How To Monitor the Market

• Dividends (brown) and earnings (blue) are the major components, and have been declining along with GDP

• P/E swings (green and red) are what cause our heartburn

How to Monitor the Market

• How do you know if investors are correctly valuing sales, profits, dividends, etc?

How to Monitor the Market

• 10 experts = 10 answers

How to Monitor the Market

DIY – Do It Yourself• Use PE Ratio– Price / Earnings

• Calculate average PE Ratio for latest 10 years

• Compare with current PE Ratio of market

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How to Monitor the Market

DIY – Do It Yourself• Use PE Ratio– Price / Earnings

• Calculate average PE Ratio for latest 10 years

• Compare with current PE Ratio of market www.multpl.com

How to Monitor the Market

16.42 Mean÷ 22.83 Current≈ 29% higher than

long term mean

How to Monitor the Market

Starting Points Matter!

• From today’s starting point, your “most likely” return over ten years is 2.14% plus inflation.

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How to Monitor the MarketStarting Points Matter!

• From the historical mean, projected ten year returns are more than 2-1/2 percentage points higher.

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How to Monitor the Market

What should all this mean to my investment plan?

How to Monitor the Market

Domestic Stocks

Corp Bonds

US Treasury Bonds

Intl Stocks

Cash

Chocolate

other

Have a long term commitment to a certain asset allocation.Stocks: x% to y%

DomesticIntl

Bonds: xy% to yz%CorpGov

How to Monitor the Market

You can then adjust according to prices• High prices =

caution• Low prices =

aggressive

How to Monitor the MarketFrom Passionsaving.com• P/E10 value of 20 is The Red-Alert

Danger Zone. • Hedge your bets. Maintain a small stock

allocation (perhaps 30 percent) even when prices are at absurd highs.

www.mutpl.com

How to Monitor the MarketFrom Passionsaving.com• P/E10 value of 20 is The Red-Alert

Danger Zone. • Hedge your bets. Maintain a small stock

allocation (perhaps 30 percent) even when prices are at absurd highs.

• Hold back from going with 100 percent stocks even when prices are at mouth-wateringly low levels (any P/E10 value below 12 is mouth-watering).

www.mutpl.com

How to Monitor the MarketFrom Passionsaving.com• P/E10 value of 20 is The Red-Alert

Danger Zone. • Hedge your bets. Maintain a small stock

allocation (perhaps 30 percent) even when prices are at absurd highs.

• Hold back from going with 100 percent stocks even when prices are at mouth-wateringly low levels (any P/E10 value below 12 is mouth-watering).

• I can see making an exception when the P/E10 level goes above 30 or below 8. It’s important to keep in mind, though, that short-term price moves are unpredictable.

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Thank YouSchedule your personal consultation now!

Visit http://amway.bemanaged.comContact us at (616) 871-0751 or (888) 738-8780

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