I am introducing a new weekly feature to answer reader questions publicly. It helps me to publish a meaningful post and you get the extra benefit of feedback from other knowledgeable readers. You are welcome to contact me via email at ccapitalist(at)yahoo(dot)ca with “Reader Question” in the subject line and I will try my best to answer it, failing which I will ask other readers for help.
To kick off the new feature, here’s a question from Marc:
I am planning on investing in the iShares S&P 500 ETF (XSP on the TSX) and I am wondering if you think the S&P 500 will continue to perform well in 2007.
I’ll assume that you have devised an asset allocation that is suitable for you and want to invest in the S&P 500 index for the US equity portion of your portfolio.
The S&P 500 has staged a significant recovery from the depths of the previous bear market. After posting negative returns in three calendar years, the index has returned 28.7% in 2003, 10.9% in 2004, 4.9% in 2005 and 15.8% in 2006. Will the S&P 500 continue its positive streak this year?
I am a firm believer that you cannot predict stock market returns, especially over such a short time frame. You will find market pundits publish “target” values for the S&P 500, but such forecasts have a sad history of failing to materialize. It is far more useful to compare the S&P 500 (trailing) earnings yield of 6.25% to the benchmark 10-year US Treasury yield of 4.87% and conclude that it is probably a good time to invest in US equities. If you are still interested, you can find analyst forecasts for S&P 500 here.
Also, note that the XSP ETF is currency neutral and you’ll get the S&P 500 returns in C$ less expenses. If you want the unhedged version, you may want to consider directly investing in IVV.