Latest posts by Dr. Brian Jacobsen, CFA, CFP® (see all)

    Market conditions in 2017 were so calm that investors may have forgotten what it’s like to see stocks move markedly lower. So far, 2018 has been the year of rising volatility. Most long-term investors will correctly tell you that while the journey might be bumpy, what really matters is the destination: a little volatility doesn’t have to throw you off course when you’re pursuing your financial goals. 

    When people say yields are low, I always like to ask, “Which yields?” As we discussed in last week’s blog post, while yields are low—both in nominal and inflation adjusted terms—there is still decent income to be found. In my opinion, the trick is to look for income by casting a wider net: look across asset classes and geographies.

    When talking with investors, it’s almost like they think of the world in BTR and ATR terms—Before Tax Reform and After Tax Reform. Many people were surprised that tax reform took a matter of a few months rather than a matter of a few years. As we discussed back in October, when surprises happen, markets move. That’s why the “golden key” to investing is to have better expectations than others. However, that’s really hard to do on a consistent basis. Those who anticipated tax reform would get done were likely duly rewarded for their foresight.

    Income investing is hard when income seems scarce. Even the yield on the Bloomberg Barclays U.S. Corporate High Yield Index doesn’t seem all that high. As of 1-3-2018, the yield to worst on this index was 5.65%, well below the average of 9.12% for the 1987 through 2017 period. Even adjusting for inflation, that yield seems a little skimpy. Inflation—as measured by the year-on-year change in the consumer price index—averaged 2.6% for that time period, with the most recent reading for November 2017 coming in at 2.2%. It is no wonder that income-oriented investors are probably looking for alternative sources of income, and casting a more global net across multiple asset classes.

    Investors may already be feeling like 2018 is full of “what ifs?” Naturally, that type of uncertainty can lead to worry. What if an asset class defies expectations, in terms of performance or price? What if a macro driver of returns doesn’t play out the way you envisioned? These are understandable concerns. However, instead of letting “what ifs” and worries build up, why not build a risk management program that can provide strategy, peace of mind, and leeway to adapt if the situation calls for it?