We’re fans of passive investing here at the Fool — be it through index trackers or exchange-traded funds. These fuss-free vehicles won’t outperform the markets they follow because, of course, their job is to replicate the returns of those very markets, minus fees and a bit of tracking error.
And for a lot of people, this low-cost approach to generating returns will be sufficient. I believe even those who like to pick stocks should consider having at least some of their capital invested in this way in order to keep their risk tolerance in check.
Passive = Active?
But passive investing like this isn’t quite as hands-off as it first seems. Naturally, this strategy still involves making decisions as to which index-tracking funds/markets you put your money to work in.
To locate the best value markets currently, I’m using what’s known as the Cyclically Adjusted Price to Earnings ratio, or CAPE for short.
Devised by US economist Robert Schiller, this metric divides the price of a market by the average earnings from the last decade, adjusted for inflation. The idea behind using 10 years is that it smooths out the effect of business cycles and therefore more accurately reflects just how cheap or expensive a particular market is.
As experienced investors might expect, Schiller found that the lower the CAPE, the better an investor’s returns would be over the next 20 years. In other words, value trumps everything else over time. Taking this into account, here’s what I think are some of the most attractively priced destinations right now.
Ignore Brexit. If you plan to invest on a regular basis for many years to come, the UK market is arguably still one of the best homes for your cash. Despite bouncing back since the beginning of 2019, it’s also reasonably priced, at least relative to other developed markets.
The UK’s CAPE ratio is 16.1 — not bad for the world’s fifth largest economy. You can get easy access to the FTSE 100 and FTSE 250 via products from Vanguard or iShares.
Emerging markets, which have recovered from an awful 2018, may also be worth looking into. Their collective CAPE is 15.8.
Tapping into this the performance of this group of rapidly-growing economies is again simple with a diversified fund like that offered by iShares in its Core range.
Those trying for higher returns (albeit at increased risk) might find Turkey attractive, valued as it is on a bargain basement CAPE of just 7.9.
The country is clearly going through a very difficult time politically but that could be just the incentive contrarian investors need. Again, iShares has a product tracking this market.
But I wouldn’t be rushing to buy…
While some markets are looking cheap, others certainly aren’t. The US market is the obvious candidate here, especially with the S&P 500 at a record high. The biggest economy in the world boasts a CAPE of just under 30 — almost double that of the UK.
To put this in perspective, it’s only ever been this high twice before. Once before the Great Depression and once before the dot.com bust in 2000.
Japan — another popular overseas market for UK retail investors is trading on a CAPE of almost 24. India is only a little lower on 23.
Like the US, I probably wouldn’t jump to buy products tracking these markets today.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.