Saturday, September 29, 2007

Jeremy Siegel: The Future For Investors

I finished reading Jeremy Siegel's "The Future For Investors" a couple of weeks ago. Before returning the book to the library, I think it's a good idea to write a summary for it in my blog.

In this book, Jeremy Siegel, a professor at the Wharton School and the author of "Stocks For The Long Run", argues about his "market-beating" investment strategy and his view on the baby boomer aging crisis.

The investment strategy Siegel advocates basically says that one should avoid the growth and the new economy traps in the equity market and instead buy the companies with tried-and-true products. The overvaluation (e.g. high P/E ratios) of the growth companies makes the investment risky and the return poor. On the other hand, good companies in the slow growing or even declining industries have low valuation and often pay high and steady dividends. The importance of dividends is especially emphasized for the following reasons. First, dividends are hard evidence that the company is really making profits ("show me the money"). Second, in a bear market the dividend yield can be even higher thanks to the price drop. The dividends, if reinvested, would automatically enable the investor to buy more shares at lower prices, accelerating the recovery from the bear market. The book also presents a sector-by-sector analysis and the author especially loves companies in the consumer staples and health care sectors (and probably the energy sector as well).

Some interesting data from the book include the top performing stocks from 1950 (up until 2003 when the book was written). These companies and their annualized returns are:

1. National Dairy Products (Kraft Food) 15.47%
2. R.J. Reynolds Tobacco 15.16%
3. Standard Oil Of New Jersey (ExxonMobil) 14.42%
4. Coca-Cola 14.33%

Another ranking is among the survivors of the original S&P 500 index (1957-2003):

1. Philip Morris 19.75%
2. Abbott Labs 16.51%
3. Bristol-Myers Squibb 16.36%
4. Tootsie Roll Industries 16.11%
5. Pfizer 16.03%
6. Coca-Cola 16.02%
7. Merck 15.90%
8. PepsiCo 15.54%
9. Colgate-Palmolive 15.22%
10. Crane 15.14%
11. H.J. Heinz 14.78%
12. Wrigley 14.65%
13. Fortune Brands 14.55%
14. Kroger 14.41%
15. Schering-Plough 14.36%
16. Procter & Gamble 14.26%
17. Hershey Foods 14.22%
18. Wyeth 13.99%
19. Royal Dutch Petroleum 13.64%
20. General Mills 13.58%
S&P 500 Average 10.85%

From these lists, it's not hard to find why Siegel thinks consumer staples, health care and energy sectors are the best for investors.

On the aging crisis of the baby boomer generation, Siegel believes the global economy, which he calls the true new economy, is the ultimate solution. Specifically, emerging countries such as China and India will have a relatively young population. They will be the world's major production forces and take over a large proportion of the equities from the Western world's aging population.

Wednesday, September 5, 2007

Asset Allocation Target Plan

Having researched asset allocation for a few months, I finally decided on my own target plan that I feel comfortable sticking with (at least till the end of the year).

Since I have a couple of accounts to manage (my 401(k) and IRA, my wife's 401(k) and IRA, and our taxable account), planning could get complicated. I came up with a top-down or hierarchical approach on the allocation. Specifically I have a global asset allocation, which I then split into the tax-sheltered and taxable portfolios, weighted by their relative sizes. The tax-sheltered portfolio further breaks down to the individual retirement accounts we have. The question of how to split asset classes into different accounts is a separate topic called asset location, which I will cover in a later post.

Our top level asset allocation is shown below:

Note that I don't have cash reserves in the allocation. This is because I always keep a fixed amount of emergency fund in bank savings or money market accounts. And the rest of our money is fully invested.

You will see a few interesting points on the allocation:

1) My international exposure, which totals to 46%, is quite heavy relative to normal U.S. investors.
2) I overweight on emerging markets and especially on China because they provide great diversification. Also I'm a Chinese and I might retire there, so it makes sense for me to aggressively participate in the China growth.
3) I have a tilt toward the small-cap side of the market. There are quite a few research studies that conclude that small-cap outperforms large-cap in the long run.
4) I have a 2% allocation on commodities. Commodities provide good diversification. However, I'm not fully convinced that investing in commodities is truly profitable, especially only with a passively-managed index approach. I will research this more. Currently I haven't committed any investment in commodities yet.