Market Commentary AWS
Market Comment ary April 2017
www.qplum.co
Page
1620 Plaza 5 Jersey City, NJ 07311 (201) 377-2302
[email protected]
(201) 604-5422
April Comment ary How do you mat ch up t o an average U.S. invest or? Contrary to a myth popularized by stock brokers, the average U.S. investor doesn?t invest only in the S&P500 index. Contrary to what real estate agents will tell you, the average U.S. investor doesn?t just invest it all in a house either. In this month?s research piece we look at what people really invest in, how much returns have the investors been really making, how are they likely to invest in the near future and how do you compare t o ot hers in your invest ment s. TL;DR: In aggregate, U.S. investors have a diversified portfolio and respond actively to market changes. Investors take measured risk and prioritize income over speculation.
W hy is t his import ant ? W hy should you care about t he average? We all believe in indexing to some extent. Indexing helps us manage the money that we are not actively putting to use. Thus it is crucial to understand the right index of average investor performance. Without this knowledge, you are sure to be making mistakes. For instance, if you try to hug an index like U.S. stocks or U.S. bonds, believing that you are matching the average, then either during a crash or a boom, the regret of having underperformed your peers will catch up with you and disillusion you from investing. Once you know a fair unbiased index representing what others are doing, you will want to know how to invest alongside them. Knowing how we all behave in aggregate, is educational to a young investor who has not lived through a crash yet. It?s easy to look at a history of five to seven years and feel that this is the new norm. However, looking at our investing behavior over fifty to hundred years helps us understand the wisdom we have learned and the reasons for which we had to change allocations in the past.
W hat can I do wit h qplum?s U.S. invest or index? -
See your investment performance compared to that of the average U.S. investor. See the allocation of the average U.S. investor today. You can see the exact percentages in terms of ETFs and even rebalance your portfolio accordingly. Bear in mind that the allocations keep changing as people buy and sell different assets. We will keep updating this when new data is available.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary -
Instead of looking at the intraday performance of asset classes like U.S. stocks, U.S. bonds, U.S. REIT index, etc. you can compare your performance intraday in the app against the average U.S. investor. This is also available to investors who have not invested with qplum. If you tell our chatbot your liquid assets, your home value, and other business investments we can show your net wealth and how it compares to the average U.S. investor. This feature is currently available upon request. Please email us if interested.
For example? Matt: Hey, I want to see how well I did compared to others in my investing. qplum-bot: Great. Can you tell me how much money did you have in the past and the value of your investments today? Matt: I had about $6 million in 2010. Today I have about $13 million. Matt: Since 2010, I have added about $4 million in savings. qplum-bot: Great, You have been able to outperform by about 26%. This is a graph comparing you to the average U.S. household ?
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary Jeff: Hi qplum-bot: How can I help? Jeff: I wanted to understand how to invest according to the qplum investor index. qplum-bot: Okay. How much money are you going to invest? I?ll compute the ETFs that your portfolio should have. Jeff: I want to invest around 300K. qplum-bot: Okay. Based on the current allocations of the US Investor Index, that would be about 700 shares of VTI, 200 shares of VEA, 400 shares of VNQ ... (Thischat isfor illustrative purposesonly)
Out line for t he rest of t he report -
We look at what U.S. households invest in. We will see what they borrow for and how much. We will look at the data sources available to us to figure out the trends in wealth, population, income, expenses, holdings, credit, pension obligations and other financial metrics. We will try to get a sense of the trajectory of the wealth of the average U.S. investor. We will look at trends in how allocations have changed in the past. Key observations and what we can predict about future allocations. We will try to understand why we, investors, have changed allocations. Risk taking and household income How bad the financial crisis was for household wealth. The returns of U.S. households over time Wealth growth of U.S. households over time Our work at qplum this month What happened in markets this month. Returns of major strategies
W hat do U.S. households invest in? The net wealth of U.S. households and non-profit organizations reached $92.8 trillion in Q4 2017. That was a result of about $108 trillion in assets and $15.1 trillion in liabilities[1]. A typical U.S. household invests in both financial and nonfinancial assets. The most important nonfinancial asset would be the investor?s home. This also includes other durables like cars, equipment, intellectual property etc. Out of these, only real estate can be considered an investment, despite its obvious utility. In the allocation chart later, we have grouped all non financial assets except real estate as ?Non-RE Non-Financial Assets?. Financial assets, which make up the majority of our net household wealth, includes stocks, pension entitlements, bonds, loans, and deposits. All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary How do U.S. households borrow? The balance sheet of an average household has assets as mentioned above, and liabilities. The main reasons for borrowing are home loans, student loans, auto loans and credit-card debt. Net household debt had exceeded its pre-financial crisis peak ($14.6[1] trillion in Q3 2008) in Q3 2015 already. It had further risen to $15.1[1] by Q4 2016. We will expand on the details of debt later. However, it is important to cover debt when computing investment returns.
U.S invest or index Met hodology Every quarter, the Board of Governors of Federal Reserve releases the balance sheet of U.S. households. We have tried to extract the maximum information out of this aggregated data to come up with an index which closely tracks the investment returns of an average investor. Before we go ahead, we have to salute the amazingly thorough work done by the Fed, IRS, BEA in collecting data, and making it available via APIs at FRED [2].
In these balance sheets, we can see 1. Net assets held by households in trillions of dollars 2. Net liabilities of households in trillions of dollars 3. The sectoral breakdown of assets: into real estate, stocks, mutual funds, pension entitlements, treasuries, cash deposits, non-residential nonfinancial assets. 4. The sectoral breakdown of liabilities: into home loans, student loans, auto loans, credit card debt. 5. The net purchases or sales of each sector every quarter. Think about that. That?s just so much work. For instance, FED tells us not only our stock holdings but also how much of that change was due to recent purchases and sales and how much of that was due to appreciation in value! 6. Net personal income in trillions of dollars 7. Net personal outlays / expenditures in trillions of dollars 8. Net capital gains taxes paid in billions of dollars per year
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary Every household can be said to be holding their wealth in the form of assets like stocks, treasuries, real estate, cash deposits, pension entitlements, and physical assets like cars etc. We can look at the quarterly snapshots[1] of the aggregate balance sheet of households to see how the allocation across them has changed. We can also use this data to understand the appreciation in the value of these assets over time. Since we have wealth data and we have to derive investments data we use the equation: Change in wealth = growth in investments + income - expenses - taxes. We first derive the appreciation of each sector every quarter by taking out the impact of the new investments[3]. So what we have now is the quarterly return of each of these asset classes. With these asset level returns and their actual portfolio allocation, we can come up with a better estimate of the growth in the investments of an average investor. But since this data is limited only to quarterly snapshots, we can only estimate an average investor?s growth between two quarterly dates. What if one wanted to compare her investments against the average investor between two arbitrary dates? Or even the intraday change in the wealth of an average investor? Hence, we decided to model each asset class through a set of ETFs, so that a portfolio of those ETFs can effectively mimic the growth of investments in that asset class. Let us call these representative portfolios, as any asset class can be thought of as an investment in an ETF. Using this set of ETFs and their daily returns along with the asset allocation and liability allocation we take from the balance sheet, we have been able to create a growth series that accurately describes the investment returns of U.S. investors. We call this the ?qplum investor index?.
How have allocat ions t o asset classes changed over t ime? In the chart below, you can see how the allocation across each of the asset classes has varied over time. Please note that an increase in allocation of an asset doesn?t necessarily mean that people prefer that asset over others. It can also be because the investments in that asset grew in value over time.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
Sectoral breakdown of U.S. household assets over time Source: Federal Reserve In the image above we can see the portion of the wealth of an average U.S. investor in each asset class. The fractions add up to 1. So if pension entitlements have a value of about 0.21 now, that means about 21% of the net wealth of U.S. households is from pensions promised to them. Now let?s look at how the percentage allocations to asset classes have changed.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
Allocation of U.S. household assets to each sector over time Source: Federal Reserve
Key Observat ions Household invest ment s are only half as risky as t he U.S st ocks are The average risk taken per year by U.S. households since 1995 is just 8.1%. That is about half the risk seen in U.S. stocks in the same period. If we switch to stocks for all our money, it would not make sense. A lot of our net wort h is in pensions More and more of the wealth is now in the form of pension entitlements. As a country, we are relying more and more on the promise of these payments that may actually be severely underfunded. Real est at e will probably grow more t han st ocks Allocation to real estate hit its peak right before the housing crash of 2008-09, owing to people investing most of their wealth in houses, as well as inflated housing prices. However, real estate is probably poised for greater investment from households. All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary We are holding a lot of st ocks now Allocation to stocks hit its peak before the dot-com crisis of 2000. Equity allocation dropped to a twenty-year low of just 24% of net assets in March 2009. March 2009 is also the lowest point of the financial crisis. Equity allocation is again close to the highest values since the early nineties.
W hy do invest ors change t heir allocat ion? If you and I were asked, I think we will guess that people buy and sell stocks and bonds or real estate when they think it is a good investment. However, based on our studies of the net investment of U.S. households, we see that in aggregate people are changing allocation primarily when their assessment of risk changes. For instance, when markets have been sailing smoothly for seven years like they have been recently, people allocate heavily to stocks. During years after the crisis, with the recent memory of the crash, investors were under-allocated to stocks. More often than not people change investment allocations to stick to a certain risk level. They buy or sell when their perception of risks of that investment changes. It seems that investors don?t try to time the market as often as we assume.
In fact , U.S. household wealt h almost never goes down If you look at a history of over sixty years, seldom do you see the net wealth of US households fall by any decent amount. Apart from the financial crisis, we have almost never lost more money in our investments than we could make by income.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
This chart shows the drawdown in the net wealth of U.S. households. Source: Federal Reserve Apart from the financial crisis, we had almost never lost more than 5%. This shows that U.S. investors have been growing more and more reliant on investment gains for our income. This chart also shows how unprepared we were for the financial crisis. We lost six times more money in the crisis than any post-war crash.
W hat are t he ret urns of U.S. households over t ime? The chart below shows the growth of a dollar invested returns of an average U.S. investor since 1995. However, we are not accounting for taxes paid. In future work, we will try to break down the performance of taxable accounts and tax-sheltered accounts. Since 1995, U.S. investors have seen their investments return around 179%. That roughly translates to a yearly gain of 4.7% and they take an average risk of around 8.1%.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
The chart above is the qplum-U.S.-investor-index (QPUSINVX). It shows the growth of $1 invested in the way an average U.S. household has done.
How has t he wealt h of a U.S. household grown over t ime? While QPUSINVX above talks about just the growth of our investments, we have also made an index that shows the growth of net wealth of U.S. investors. We call this the qplum-US-wealth index QPUSWTHX.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
The chart above shows how the wealth of a U.S. household has grown. This will help you compare how you have done compared to an average U.S. household.
W hat did we work on at qplum t his mont h? Invest ment Planning We worked on a holistic investment allocation model, that looks at the liabilities, assets, income and expenses of a household. We did some research into how to allocate between the three investment risk levels of 10% Flagship, 6% - Lotus, 3% - Fairway. At the user level, we might talk about goals and aspirations, and what makes investing a tangible goal. At the planning level, we look at the duration of liabilities and the required reward-to-risk ratio to achieve the goals in that duration. To understand the value of asset-liability planning, see how a planned investment with qplum would have compared to the average US investor?s performance over the last 20 years.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
The growth of $100 invested according to the qplum plan and according to how an average investor has actually invested it.
Note that the risk is roughly the same. While the qplum plan would have had a worst drawdown of 22%, the average investor would have had a worst drawdown of 29%. So for the same risk, following a plan based on assets and liabilities would have achieved a greater investment efficiency for the investor. "If you fail to plan, you plan to fail" - Benjamin Franklin The planning service is available to everyone here.
Trading St rat egy based on condensed economic dat a -
Economic data has the potential to indicate how the different economies and asset classes within them would do in the future. For example, based on our current economic models we expect emerging markets to outperform US stocks in the coming years. The hard part here is to collect all the data, clean it properly and transform it such that it can be interpreted to gather useful insights. We have recently put in a lot of effort into this and the results look promising. We will soon be adding this strategy to our portfolios.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary W hat happened in market s t his mont h? How does it impact me? We performed really well at qplum. We performed better than all other indices people compare us to. Overall we see how allocating to strategies is working much better than allocating to asset classes. The streak of good months continues. Once again we have pretty much everything making money except CTAs and Trend Followers. The plight of trend followers can also be inferred from the ?Fear Index?dropping to very low levels. VIX, a.k.a the fear index is usually at very low values only when the market has been slowly and calmly moving up. This was another month where low-risk assets outperformed high-risk assets. An average income-oriented investor (?Global Low-Risk Income?) earned 0.9% this month. Compared to the annual risk of 3.0%, that is a lot. Stocks and Real estate outside the U.S. outperformed. Be it developed markets outside the U.S. or emerging markets, stocks and real estate based companies returned around 2% this month. That is much better compared to the performance of the same sectors in the U.S. Hedge funds continued their streak of positive months. Most hedge fund indices grew between 0.3 to 0.7%. On a daily basis, the correlation of hedge funds to stocks crossed 90% this quarter. This quote from McKinsey describes hedge funds well ? ?If there is an inconvenient truth in the asset management industry, it is that the financial profile of the ?average?asset manager is a leveraged play on market beta?
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary Ret urns of major invest ment st rat egies in April 2017:
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
References: 1. Balance sheets (Household and nonprofit organizations): https://www.federalreserve.gov/releases/z1/current/html/b101.htm 2. Federal Reserve Bank of St.Louis, Economic REsearch database: https://fred.stlouisfed.org/ 3. Flows data (Household and nonprofit organizations): https://www.federalreserve.gov/releases/z1/current/html/f101.htm
Disclosures All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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www.qplum.co
Page
1620 Plaza 5 Jersey City, NJ 07311 (201) 377-2302
[email protected]
(201) 604-5422
April Comment ary How do you mat ch up t o an average U.S. invest or? Contrary to a myth popularized by stock brokers, the average U.S. investor doesn?t invest only in the S&P500 index. Contrary to what real estate agents will tell you, the average U.S. investor doesn?t just invest it all in a house either. In this month?s research piece we look at what people really invest in, how much returns have the investors been really making, how are they likely to invest in the near future and how do you compare t o ot hers in your invest ment s. TL;DR: In aggregate, U.S. investors have a diversified portfolio and respond actively to market changes. Investors take measured risk and prioritize income over speculation.
W hy is t his import ant ? W hy should you care about t he average? We all believe in indexing to some extent. Indexing helps us manage the money that we are not actively putting to use. Thus it is crucial to understand the right index of average investor performance. Without this knowledge, you are sure to be making mistakes. For instance, if you try to hug an index like U.S. stocks or U.S. bonds, believing that you are matching the average, then either during a crash or a boom, the regret of having underperformed your peers will catch up with you and disillusion you from investing. Once you know a fair unbiased index representing what others are doing, you will want to know how to invest alongside them. Knowing how we all behave in aggregate, is educational to a young investor who has not lived through a crash yet. It?s easy to look at a history of five to seven years and feel that this is the new norm. However, looking at our investing behavior over fifty to hundred years helps us understand the wisdom we have learned and the reasons for which we had to change allocations in the past.
W hat can I do wit h qplum?s U.S. invest or index? -
See your investment performance compared to that of the average U.S. investor. See the allocation of the average U.S. investor today. You can see the exact percentages in terms of ETFs and even rebalance your portfolio accordingly. Bear in mind that the allocations keep changing as people buy and sell different assets. We will keep updating this when new data is available.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary -
Instead of looking at the intraday performance of asset classes like U.S. stocks, U.S. bonds, U.S. REIT index, etc. you can compare your performance intraday in the app against the average U.S. investor. This is also available to investors who have not invested with qplum. If you tell our chatbot your liquid assets, your home value, and other business investments we can show your net wealth and how it compares to the average U.S. investor. This feature is currently available upon request. Please email us if interested.
For example? Matt: Hey, I want to see how well I did compared to others in my investing. qplum-bot: Great. Can you tell me how much money did you have in the past and the value of your investments today? Matt: I had about $6 million in 2010. Today I have about $13 million. Matt: Since 2010, I have added about $4 million in savings. qplum-bot: Great, You have been able to outperform by about 26%. This is a graph comparing you to the average U.S. household ?
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary Jeff: Hi qplum-bot: How can I help? Jeff: I wanted to understand how to invest according to the qplum investor index. qplum-bot: Okay. How much money are you going to invest? I?ll compute the ETFs that your portfolio should have. Jeff: I want to invest around 300K. qplum-bot: Okay. Based on the current allocations of the US Investor Index, that would be about 700 shares of VTI, 200 shares of VEA, 400 shares of VNQ ... (Thischat isfor illustrative purposesonly)
Out line for t he rest of t he report -
We look at what U.S. households invest in. We will see what they borrow for and how much. We will look at the data sources available to us to figure out the trends in wealth, population, income, expenses, holdings, credit, pension obligations and other financial metrics. We will try to get a sense of the trajectory of the wealth of the average U.S. investor. We will look at trends in how allocations have changed in the past. Key observations and what we can predict about future allocations. We will try to understand why we, investors, have changed allocations. Risk taking and household income How bad the financial crisis was for household wealth. The returns of U.S. households over time Wealth growth of U.S. households over time Our work at qplum this month What happened in markets this month. Returns of major strategies
W hat do U.S. households invest in? The net wealth of U.S. households and non-profit organizations reached $92.8 trillion in Q4 2017. That was a result of about $108 trillion in assets and $15.1 trillion in liabilities[1]. A typical U.S. household invests in both financial and nonfinancial assets. The most important nonfinancial asset would be the investor?s home. This also includes other durables like cars, equipment, intellectual property etc. Out of these, only real estate can be considered an investment, despite its obvious utility. In the allocation chart later, we have grouped all non financial assets except real estate as ?Non-RE Non-Financial Assets?. Financial assets, which make up the majority of our net household wealth, includes stocks, pension entitlements, bonds, loans, and deposits. All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary How do U.S. households borrow? The balance sheet of an average household has assets as mentioned above, and liabilities. The main reasons for borrowing are home loans, student loans, auto loans and credit-card debt. Net household debt had exceeded its pre-financial crisis peak ($14.6[1] trillion in Q3 2008) in Q3 2015 already. It had further risen to $15.1[1] by Q4 2016. We will expand on the details of debt later. However, it is important to cover debt when computing investment returns.
U.S invest or index Met hodology Every quarter, the Board of Governors of Federal Reserve releases the balance sheet of U.S. households. We have tried to extract the maximum information out of this aggregated data to come up with an index which closely tracks the investment returns of an average investor. Before we go ahead, we have to salute the amazingly thorough work done by the Fed, IRS, BEA in collecting data, and making it available via APIs at FRED [2].
In these balance sheets, we can see 1. Net assets held by households in trillions of dollars 2. Net liabilities of households in trillions of dollars 3. The sectoral breakdown of assets: into real estate, stocks, mutual funds, pension entitlements, treasuries, cash deposits, non-residential nonfinancial assets. 4. The sectoral breakdown of liabilities: into home loans, student loans, auto loans, credit card debt. 5. The net purchases or sales of each sector every quarter. Think about that. That?s just so much work. For instance, FED tells us not only our stock holdings but also how much of that change was due to recent purchases and sales and how much of that was due to appreciation in value! 6. Net personal income in trillions of dollars 7. Net personal outlays / expenditures in trillions of dollars 8. Net capital gains taxes paid in billions of dollars per year
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary Every household can be said to be holding their wealth in the form of assets like stocks, treasuries, real estate, cash deposits, pension entitlements, and physical assets like cars etc. We can look at the quarterly snapshots[1] of the aggregate balance sheet of households to see how the allocation across them has changed. We can also use this data to understand the appreciation in the value of these assets over time. Since we have wealth data and we have to derive investments data we use the equation: Change in wealth = growth in investments + income - expenses - taxes. We first derive the appreciation of each sector every quarter by taking out the impact of the new investments[3]. So what we have now is the quarterly return of each of these asset classes. With these asset level returns and their actual portfolio allocation, we can come up with a better estimate of the growth in the investments of an average investor. But since this data is limited only to quarterly snapshots, we can only estimate an average investor?s growth between two quarterly dates. What if one wanted to compare her investments against the average investor between two arbitrary dates? Or even the intraday change in the wealth of an average investor? Hence, we decided to model each asset class through a set of ETFs, so that a portfolio of those ETFs can effectively mimic the growth of investments in that asset class. Let us call these representative portfolios, as any asset class can be thought of as an investment in an ETF. Using this set of ETFs and their daily returns along with the asset allocation and liability allocation we take from the balance sheet, we have been able to create a growth series that accurately describes the investment returns of U.S. investors. We call this the ?qplum investor index?.
How have allocat ions t o asset classes changed over t ime? In the chart below, you can see how the allocation across each of the asset classes has varied over time. Please note that an increase in allocation of an asset doesn?t necessarily mean that people prefer that asset over others. It can also be because the investments in that asset grew in value over time.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
Sectoral breakdown of U.S. household assets over time Source: Federal Reserve In the image above we can see the portion of the wealth of an average U.S. investor in each asset class. The fractions add up to 1. So if pension entitlements have a value of about 0.21 now, that means about 21% of the net wealth of U.S. households is from pensions promised to them. Now let?s look at how the percentage allocations to asset classes have changed.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
Allocation of U.S. household assets to each sector over time Source: Federal Reserve
Key Observat ions Household invest ment s are only half as risky as t he U.S st ocks are The average risk taken per year by U.S. households since 1995 is just 8.1%. That is about half the risk seen in U.S. stocks in the same period. If we switch to stocks for all our money, it would not make sense. A lot of our net wort h is in pensions More and more of the wealth is now in the form of pension entitlements. As a country, we are relying more and more on the promise of these payments that may actually be severely underfunded. Real est at e will probably grow more t han st ocks Allocation to real estate hit its peak right before the housing crash of 2008-09, owing to people investing most of their wealth in houses, as well as inflated housing prices. However, real estate is probably poised for greater investment from households. All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary We are holding a lot of st ocks now Allocation to stocks hit its peak before the dot-com crisis of 2000. Equity allocation dropped to a twenty-year low of just 24% of net assets in March 2009. March 2009 is also the lowest point of the financial crisis. Equity allocation is again close to the highest values since the early nineties.
W hy do invest ors change t heir allocat ion? If you and I were asked, I think we will guess that people buy and sell stocks and bonds or real estate when they think it is a good investment. However, based on our studies of the net investment of U.S. households, we see that in aggregate people are changing allocation primarily when their assessment of risk changes. For instance, when markets have been sailing smoothly for seven years like they have been recently, people allocate heavily to stocks. During years after the crisis, with the recent memory of the crash, investors were under-allocated to stocks. More often than not people change investment allocations to stick to a certain risk level. They buy or sell when their perception of risks of that investment changes. It seems that investors don?t try to time the market as often as we assume.
In fact , U.S. household wealt h almost never goes down If you look at a history of over sixty years, seldom do you see the net wealth of US households fall by any decent amount. Apart from the financial crisis, we have almost never lost more money in our investments than we could make by income.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
This chart shows the drawdown in the net wealth of U.S. households. Source: Federal Reserve Apart from the financial crisis, we had almost never lost more than 5%. This shows that U.S. investors have been growing more and more reliant on investment gains for our income. This chart also shows how unprepared we were for the financial crisis. We lost six times more money in the crisis than any post-war crash.
W hat are t he ret urns of U.S. households over t ime? The chart below shows the growth of a dollar invested returns of an average U.S. investor since 1995. However, we are not accounting for taxes paid. In future work, we will try to break down the performance of taxable accounts and tax-sheltered accounts. Since 1995, U.S. investors have seen their investments return around 179%. That roughly translates to a yearly gain of 4.7% and they take an average risk of around 8.1%.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
The chart above is the qplum-U.S.-investor-index (QPUSINVX). It shows the growth of $1 invested in the way an average U.S. household has done.
How has t he wealt h of a U.S. household grown over t ime? While QPUSINVX above talks about just the growth of our investments, we have also made an index that shows the growth of net wealth of U.S. investors. We call this the qplum-US-wealth index QPUSWTHX.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
The chart above shows how the wealth of a U.S. household has grown. This will help you compare how you have done compared to an average U.S. household.
W hat did we work on at qplum t his mont h? Invest ment Planning We worked on a holistic investment allocation model, that looks at the liabilities, assets, income and expenses of a household. We did some research into how to allocate between the three investment risk levels of 10% Flagship, 6% - Lotus, 3% - Fairway. At the user level, we might talk about goals and aspirations, and what makes investing a tangible goal. At the planning level, we look at the duration of liabilities and the required reward-to-risk ratio to achieve the goals in that duration. To understand the value of asset-liability planning, see how a planned investment with qplum would have compared to the average US investor?s performance over the last 20 years.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
The growth of $100 invested according to the qplum plan and according to how an average investor has actually invested it.
Note that the risk is roughly the same. While the qplum plan would have had a worst drawdown of 22%, the average investor would have had a worst drawdown of 29%. So for the same risk, following a plan based on assets and liabilities would have achieved a greater investment efficiency for the investor. "If you fail to plan, you plan to fail" - Benjamin Franklin The planning service is available to everyone here.
Trading St rat egy based on condensed economic dat a -
Economic data has the potential to indicate how the different economies and asset classes within them would do in the future. For example, based on our current economic models we expect emerging markets to outperform US stocks in the coming years. The hard part here is to collect all the data, clean it properly and transform it such that it can be interpreted to gather useful insights. We have recently put in a lot of effort into this and the results look promising. We will soon be adding this strategy to our portfolios.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary W hat happened in market s t his mont h? How does it impact me? We performed really well at qplum. We performed better than all other indices people compare us to. Overall we see how allocating to strategies is working much better than allocating to asset classes. The streak of good months continues. Once again we have pretty much everything making money except CTAs and Trend Followers. The plight of trend followers can also be inferred from the ?Fear Index?dropping to very low levels. VIX, a.k.a the fear index is usually at very low values only when the market has been slowly and calmly moving up. This was another month where low-risk assets outperformed high-risk assets. An average income-oriented investor (?Global Low-Risk Income?) earned 0.9% this month. Compared to the annual risk of 3.0%, that is a lot. Stocks and Real estate outside the U.S. outperformed. Be it developed markets outside the U.S. or emerging markets, stocks and real estate based companies returned around 2% this month. That is much better compared to the performance of the same sectors in the U.S. Hedge funds continued their streak of positive months. Most hedge fund indices grew between 0.3 to 0.7%. On a daily basis, the correlation of hedge funds to stocks crossed 90% this quarter. This quote from McKinsey describes hedge funds well ? ?If there is an inconvenient truth in the asset management industry, it is that the financial profile of the ?average?asset manager is a leveraged play on market beta?
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary Ret urns of major invest ment st rat egies in April 2017:
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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April Comment ary
References: 1. Balance sheets (Household and nonprofit organizations): https://www.federalreserve.gov/releases/z1/current/html/b101.htm 2. Federal Reserve Bank of St.Louis, Economic REsearch database: https://fred.stlouisfed.org/ 3. Flows data (Household and nonprofit organizations): https://www.federalreserve.gov/releases/z1/current/html/f101.htm
Disclosures All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
All investments carry risk. This material is for informational purposes and should not be considered specific investment advice or recommendation to any person or organization. Past performance is not indicative of future performance. Please visit our website for full disclaimer and terms of use.
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