#$econ

China Reduces Import Tariffs To Boost Consumer Demand

“China will cut import taxes on consumer goods by more than 50% on average in a bid to boost consumer spending,” BBC reports.

Chinese consumers started shopping abroad due to very high tariffs on imported goods. In order to boost domestic demand, Chinese officials are aiming to lower the taxes.

The tariff reduction is an “important measure to create stable growth and push forward structural…

Here is a sobering statistic for you: While the S&P 500 has generated annualized returns of 9.9% over the past 20 years—and a boring old asset allocation of 60% stocks and 40% bonds has managed to return a solid 8.7%—the average investor has eked out a measly 2.5%. 

Inflation has averaged 2.4% over the past 20 years, meaning that in real terms the average investor has returned pretty close to zero. And this during one of the best periods in this history of the U.S. stock market.

Source: JPMorgan

How are returns that bad even possible? If the Efficient Market Hypothesis is to be believed, investors should roughly track the S&P 500 over time, not underperform it by 75%. 

There are a myriad of answers, including everything from overtrading to underdiversification, but the biggest contributing factor is peformance chasing. Investors don't park their cash in the stocks or sectors promising the best value. They jump on whatever is trendy in a perpetual case of closing the barn door after the horse has already bolted.

Late last year, veteran financial writer Mark Hulbert crunched the numbers and found that following the investment newsletter portfolio that performed best during the previous calendar year resulted in annual losses of more than 17% per year. Not just underperformance, mind you, but actual losses. 

In looking at mutual fund performance, the numbers get a little better but are still remarkably bad. In a study done by Vanguard, a strategy of buying the top-performing large blend mutual funds over a rolling three-year period underperformed a naive buy-and-hold strategy by 34%. And while the numbers varied slightly across mutual fund market caps and styles (small-cap value, mid-cap growth, etc.), a naive buy-and-hold approach outperforms across all. Though we see these words so often we become blind to them, experience proves them true: "Past performance is no guarantee of future results." To be more accurate, the data here more or less guarantees that past performance is a guarantee of future results...it just so happens that the future performance in question turns out to be terrible. 

So, what are we to do about this? Buy an S&P 500 Index Fund, hold it forever, and wash our hands of the entire investing process? 

Well, we could do that. But there are better ways to skin this cat. 

Take a second look at the chart at the top of this article. You'll notice that a 60/40 portfolio of stocks and bonds came awfully close to matching the performance of the S&P 500, but what you don't see here is that it did so while taking far less risk. This is the essence of asset allocation: Essentially sprinkling "a little of everything" into a portfolio and regularly rebalancing with the understanding that there will be years when some pieces of the portfolio perform very well and others perform very poorly. 

There is an important catch that a lot of people seem to forget these days: Asset allocation works well when the constituent parts all have reasonably high expected rates of return and--importantly--returns that are not highly correlated.

Asset allocation is going to look a little different today than it did in years past because we are in a very different interest rate environment. I think you can make a very good case for eliminating most bonds altogether or at least for replacing a traditional long-only bond allocation with a tactically-managed one. This is what I have done in portfolios that I manage for clients. And for those clients that qualify, I've been incorporating low-volatility, absolute-returns strategies into the mix. 

For a simple and easy-to-execute asset allocation, consider something along the lines of the following ETF allocation: 

Domestic U.S. Stocks (45%)

17% Cambria Shareholder Yield ETF (SYLD)

11% iShares Select Dividend ETF (DVY)

11% Vanguard Dividend Appreciation ETF (VIG)

6% iShares Core S&P Small Cap ETF (IJR)

International Stocks (21%)

7.5% Cambria Foreign Shareholder Yield ETF (FYLD)

7.5% PowerShares International Dividend Achievers ETF (PID)

3% EG Shares Emerging Markets Consumer ETF (ECON)

3% Cambria Global Value ETF (GVAL)

Real Estate / Infrastructure (24%)

12% Vanguard REIT ETF (VNQ)

12% JP Morgan Alerian MLP ETN (AMJ)

Fixed Income / Cash (10%)

5% PIMCO Total Return Active ETF (BOND)

4% iShares TIPS Bond (TIP)

1% Cash

There is nothing sacred about any of these specific ETF positions. I chose them because I believed them to be a solid proxy for the risk/return exposure I was looking for, but I periodically swap out ETF positions when newer, better alternatives come along. The takeaway is that, while the specific vehicles may change, the asset classes remain pretty constant. 

For another perspective, check out The Gone Fishin' Portfolio. Alex Green chooses a few asset classes that I would avoid--such as gold miners--but his recommendations are solid and simple to implement. And if you really enjoy digging into asset allocation strategies, check out Meb Faber's latest, Global Asset Allocation. It's a short read and worth many times over the $3 price tag. 

There a million different ways to allocate a portfolio well, but most poorly-allocated ones have one point in common: They chase whatever has been recently hot.

Don't do that.

Disclosures: Long AMJ, BOND, DVY, ECON, FYLD, GVAL, IJR, PID, SYLD, TIP, VIG, VNQ

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

They’re cheap, most investors are scared to death of them, and yet they have been slowly grinding higher throughout 2015. Are emerging markets — and the iShares MSCI Emerging Markets ETF (EEM) — worth owning as we jump into the second quarter?

In years past, that would’ve been two very distinct questions. The EEM ETF, despite its name, was not really a play on "emerging markets." It was primarily a play on developed Asian markets like Taiwan and South Korea — countries that already emerged decades ago with standards of living on par with Western Europe. And ironically, it was an indirect play on growth in the U.S. and Europe, as its allocation was massively skewed toward global exporters that sent their wares primarily to the West. And due to quirks in MSCI’s index construction, you even get oddball countries like Greece included in the index. (Hey, I agree in principle with demoting Greece from big-boy, developed-market status, but can you credibly call that mess an “emerging” market?) 

For true exposure to growth in the developing world, you had to look elsewhere, such as to the EG Shares Emerging Market Consumer ETF (ECON). The ECON ETF invests in consumer-focused stocks that catered to domestic emerging-market shoppers. 

Today, the EEM ETF is still heavily weighted toward developed Asia; South Korea and Taiwan collectively make up 28% of the portfolio, and the two largest stock holdings are Samsung Electronics (SSNLF) and Taiwan Semiconductor (TSM). But as liquidity has improved in “real” emerging markets, so has EEM’s allocation. Today, China is the largest single-country allocation, at 21% of EEM’s portfolio. South Korea and Taiwan take the two and three slots, with 14.6% and 12.6%, respectively. Brazil, South Africa and India round out the top five, with 8.8%, 7.8% and 7.1%, respectively.

EEM still has far too much Taiwan and South Korea for its own good, but valuations are attractive in both of those markets. More on that shortly.

Looking at the EEM ETF’s track record in recent years, you might wonder why anyone in their right mind would put a single dollar in emerging markets. 

Outside of the modest dividend yield, investors have seen no returns at all since the first quarter of 2007. Emerging markets cratered in 2008 during the global housing crisis, cratered again in 2011 during the eurozone crisis and have traded sideways ever since. Excessive dollar strength — which means excessive emerging-market-currency weakness — certainly hasn’t helped either. 

But this is precisely what makes the EEM ETF interesting right now. U.S. stocks have been the only game in town for years. But after six years of uninterrupted bull market, U.S. stocks are also wildly expensive, trading at a cyclically adjusted price/earnings ratio (“CAPE”) of over 27. This doesn’t mean a crash is guaranteed, of course, but it does make me want to expand my scope a little beyond U.S. borders.

Today, valuations are cheap and expected returns are high in the countries that make up the EEM ETF’s largest allocations. Using data from Research Affiliates, we see reasonable expected annual returns over the coming 10 years ranging from 3.8% in Taiwan to 11.7% in Brazil. 

To put that in perspective, Research Affiliates estimates returns of only 0.7% annualized in American stocks over the next decade. 

Estimates are just that — estimates. There is no divine universal law that says that stock returns “have” to follow what their valuations suggest they will, but they give us a useful rule of thumb. I don’t expect emerging markets to generate the kind of eye-popping returns we saw in the mid-2000s, but I do think we can credibly say that emerging markets are priced to, if nothing else, perform better than U.S. stocks over the next decade. 

They’re cheap, their currencies have been battered, and a long string of bad macro data has already been priced in. And that makes emerging markets worth a look.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.