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Is Value Investing Finally Making a Comeback?

As our regular readers know, value stocks have underperformed the broader market for the past few years, while growth and momentum stocks have outperformed. In fact, this divergence has been so pronounced that it erased some very long-term records of outperformance among several well-respected value managers.

However, it is important to put the recent past in a broader historical context.  Stepping back and looking at the big picture, we see that value stocks have outperformed the broader market in the vast majority of rolling 5 year periods since WWII, as depicted in the chart below:

Growth vs. Value

The case for value investing is intellectually sound. No matter what process one uses to value equities, there is no denying that stock prices are much more volatile than business values. The main causes for this discrepancy have to do with rapidly changing investors’ expectations and psychology.

Since stocks represent a share of the underlying business, and stock prices do not always reflect the value of the business, the market frequently presents opportunities to exploit the difference between price and value. At any given time, the market is comprised of both undervalued and overvalued assets.  Therefore, buying the undervalued ones should lead to outperformance over time. Importantly, this assumes that stocks do not remain undervalued permanently, i.e. that they do eventually become fully valued or even overvalued as investors’ expectations change. This is what statisticians refer to as reversion to the mean. It has been the case historically, and we have no reason to believe that the future will be different.

Candidly, we do not know when value stocks will outperform again. In the meantime, no matter how painful and unpopular our position might be, we remain committed to a process that we believe will continue to be a source of long-term outperformance for our clients and families. And, we would not be surprised if the time for the reversal comes sooner rather than later.

Now that Rules Have Changed, How Can Married Couples Maximize Their Social Security Benefits?
Unless you were 66-years old before April 29th, you can no longer utilize the “file and suspend” or ‘restricted application” strategies to maximize your social security benefits as a married couple.

The best remaining option is to defer claiming benefits. If you have not done so yet, we recommend that you go to socialsecurity.gov and create your account. It will allow you to see your benefits depending on your retirement age. You will notice that there is a strong incentive to delay past your full retirement age, as benefits increase by about 8% per year up to age 70.

The optimal age to file for social security is contingent on a number of variables and assumptions, but the most important one is how long you might live. According to the social security administration,  a 65-year old today has a 33% chance of living to age 90, and a 14% chance of  living to age 95. For couples, the odds are twice as high that one spouse will live that long. Since the survivor benefits are 100% of the deceased, it makes sense for the higher-earning spouse to delay filing, if possible.

There is no magic bullet to estimate how long you’ll live. Take a look at your own and your spouse’s health history as well as longevity within your families. The social security administration recently published a paper on the subject of maximizing your benefits. Although it is relatively complex, and takes into account the rate of return you project for your portfolio, the bottom line (chart 1 of the document) is that, for most of our clients, if you or your spouse expect to live past 80, the higher earning spouse should delay receiving benefits.

If some of you are concerned about whether they will be any benefits to receive in 20 or 30 years, it is important to note (see this Morningstar video interview) that contrary to what you may have read or heard, social security benefits are not going away. However, it is possible that benefits could be reduced or minimum retirement ages raised, which is why it is so important to continue bolstering your retirement savings.

We recommend that you initiate this discussion with us well before you file for social security, as we have at our disposal some analytical tools to provide you with a more customized review of your options, including potential tax implications of the different filing plans, in coordination with your portfolio withdrawal strategies.