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Sitting in the Bleachers

Jonathan Clements  |  December 21, 2016

I RARELY MAKE significant changes to my portfolio, but I still love to watch the financial markets. They’re great theater—and, if you can resist the urge to trade, free entertainment. Here are five random observations from the cheap seats:

First, don’t let your political views guide your investment strategy. The stock market has rallied modestly since Trump’s election, horrifying Clinton supporters who fear for the country’s future. But remember, any time you swap stocks for bonds, you’re making a bad long-term bet, because you’re exchanging a high-return asset for one with a lower expected return.

Second, stocks have been lackluster performers for the past 19 months. Even with the post-election rally, the S&P 500 is just 6.6% above its May 2015 high. One reason for that sluggish performance: Reported earnings per share for the S&P 500 companies peaked in 2014—and they remain 16% below that level.

Third, the so-called Smart Money keeps bashing everyday investors who favor dividend-paying stocks—and dividend investors keep getting richer. The Smart Money’s argument: All securities should be priced to deliver the same risk-adjusted return, so what folks make in dividends they should sacrifice in price appreciation. But if that’s the case, where’s the harm in favoring dividends? If you buy the Smart Money’s argument, it should be a wash.

And there’s a chance it won’t be a wash—and dividend investors will come out ahead. Dividend-paying stocks are often value stocks, and may benefit from the historical tendency for value stocks to outperform growth stocks. In addition, dividend-paying companies may be better run, because paying that regular dividend forces management to be more careful in handling the corporation’s cash.

Fourth, the Smart Money also likes to bash yield chasers who buy preferred stock, junk bonds and other riskier “fixed income” investments. I have more sympathy with this criticism, because I fear investors don’t realize that the high income may come at the expense of capital losses.

That said, ponder this: Many observers—including me—expect muted stock returns over the next decade, perhaps 6% a year. If you buy an emerging market debt fund or a high-yield junk bond fund that yields 6%, you might notch returns that aren’t that much worse than the stock market, even if you suffer some capital losses. My hunch: Emerging market debt could benefit as developing countries see their credit standing upgraded, while junk bonds are a dodgier proposition.

Finally, gold has been on a wild ride this year. It started 2016 at $1,060, got as high as $1,387 and is now back to $1,134 The ride has been even wilder for investors in gold stock funds, which are effectively a leveraged bet on gold. For instance, Vanguard’s gold fund—one of the category’s tamer offerings—had doubled in value as of August, but now sports a year-to-date gain of 41%. Were you enthusiastic about gold in August? You should be even more enthusiastic now.

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