How to Monitor the Stock Market

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How to Monitor the Stock Market

  1. 1. Investing 202:How To Monitor the Market
  2. 2. 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
  3. 3. 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.
  4. 4. How To Monitor the Market• Terms to know – GDP: The monetary value of all the finished goods and services produced within a countrys 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
  5. 5. How To Monitor the Market• Long term Market Drivers Dividends – True value of stock derived from dividends Profits received – Dividends are paid out of profits Sales – Profits are made from sales
  6. 6. How To Monitor the Market• Sales are driven by the economy• Long term market values fluctuate according to value investors place in all: – Sales – Profits – Dividends
  7. 7. How To Monitor the Market • Nominal GDP (Real economic growth plus inflation) has stayed below long term trends for almost twenty years now.
  8. 8. 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
  9. 9. How to Monitor the Market• How do you know if investors are correctly valuing sales, profits, dividends, etc?
  10. 10. How to Monitor the Market• 10 experts = 10 answers
  11. 11. How to Monitor the MarketDIY – Do It Yourself• Use PE Ratio – Price / Earnings• Calculate average PE Ratio for latest 10 years• Compare with current PE Ratio of market www.mutpl.com
  12. 12. How to Monitor the MarketDIY – 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
  13. 13. How to Monitor the Market 16.42 Mean÷ 22.83 Current≈ 29% higher than long term mean
  14. 14. How to Monitor the Market Starting Points Matter! www.passionsaving.com• From today’s starting point, your “most likely” return over ten years is 2.14% plus inflation.
  15. 15. How to Monitor the Market Starting Points Matter! www.passionsaving.com• From the historical mean, projected ten year returns are more than 2-1/2 percentage points higher.
  16. 16. How to Monitor the MarketWhat should all thismean to my investmentplan?
  17. 17. How to Monitor the MarketHave a long termcommitment to a certain Domesticasset allocation. Intl Stocks Stocks CashStocks: x% to y% US Chocolate Treasury Domestic Corp Bonds Bonds Intl otherBonds: xy% to yz% Corp Gov
  18. 18. How to Monitor the MarketYou can then adjustaccording to prices• High prices = caution• Low prices = aggressive
  19. 19. 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
  20. 20. 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
  21. 21. 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. www.mutpl.com
  22. 22. Thank You Schedule your personal consultation now! Visit http://amway.bemanaged.comContact us at (616) 871-0751 or (888) 738-8780www.mutpl.comwww.passionsaving.com

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