Dan Genter, president of RNC Genter Capital Management in Los Angeles, says his job is to get his clients to relax.
Clients see scary headlines and think they should do something, says Genter, whose firm manages $3.7 billion in assets. Often, the best course is to do nothing. "The biggest mistake I see individual investors make is to make changes too often," Genter says. "And it's almost always at the wrong time." Edited excerpts of the conversation follow.
1. What data point do you watch closely?
The price-earnings, or p/e, ratio. It seems to get lost in the short-term noise. The market trades to it, whether people like it or not. In the last three years, this market has wanted to trade at a 14 p/e. Every time it gets ahead of 14, it comes back to it. Every time it gets below 14, it comes back to it. [The S&P 500's p/e ratio on Oct. 3 was 12.3, near its lowest point of the year. Its high point for 2011 was 15.8 on Feb. 21.] A 14 p/e is about 10 percent below the long-term average of 15.5. That's normal because it's an uncertain time. I bought in heavy in August when the p/e was at 12, buying stocks I plan to hold for the next three years. If you were going to do market timing, that was the way to do it.
2. What data point do you think gets too much attention?
The monthly employment report. There is so much noise in it on a short-term basis that trying to make a decision based on it is just useless. We've got a high unemployment rate in this country, and you should be aware of it. To use this as a month-to-month trend is futile.
3. What financial product or asset is used too often by individual investors?
Cash. Clients come to us all the time and say, "I want to hold 5 percent or 10 percent of a portfolio in cash." Why? That only makes sense if you're going to spend that in the next three months. If you have no use for that money, why would you have that in a nonproducing asset? Why would you have that as a drag on your portfolio? The vast majority of the securities in your portfolio are readily liquid. So you can raise cash if you have an emergency. And just 5 percent or 10 percent in cash is not going to mitigate your risk significantly. A good alternative to cash is short-term fixed income or short-term municipal bonds.
4. What financial product isn't used often enough?
High-
dividend stocks. They're gaining in popularity. You can get 4 percent or 4.5 percent
dividend yields, almost double what you're getting in Treasury bonds. And you're getting preferential tax treatment. It's like a bond payment that increases, typically by 10 percent or more per year. We've lost track of how significant dividends are.
In the entire history of the S&P 500,
dividend income has been 42 percent of total return. If I want to reduce risk and volatility, what better way to do that than high-
dividend stocks? Baby boomers need income. They're not going to get it from bonds. They've got to get a real source of income that's predictable, and one of the old stalwarts is still there.
5. What types of investments are overvalued or undervalued now?
High-dividend stocks are undervalued. On a p/e basis, they're trading relatively low. Overvalued would have to be gold. If you look at the lifting costs—the cost of getting gold out of the ground—it's an average of $350 an ounce. After other costs, it's hard to make a case that you've got a finished product that is really worth much over $500 an ounce. Every thing else is really speculation. [On Oct. 3, gold was trading at about $1,650 an ounce.]
