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Strategies For Coping With A Volatile Market

It’s easy for stock investors to be lulled into a false sense of security when everything is going their way. The past year, however, has brought reality back to the table and is evidence of the fact that stocks don’t always grow unfettered into the sky. Whether the bump in the road that stock investors are experiencing proves transient or longer term in nature, it does serve as a reminder that various risks abound in the global economic marketplace, and that nothing should be taken for granted. Manage Expectations During a Volatile Market While many investors get into the market expecting to make huge sums of money over a relatively short period of time, history would indicate that that is an overly optimistic frame of mind. Backward looking market returns over the past century have collectively averaged in the upper-single-digits per annum. Investors taking a passive index approach who are expecting to double their money every five years, like they may have post financial crisis, may have found the 2015 market as somewhat of a rude awakening. Of course, if you have a portfolio loaded with FANG stocks (Facebook (NASDAQ: FB ), Amazon (NASDAQ: AMZN ), Netflix (NASDAQ: NFLX ), and the like), you may have done exponentially better than average near term. Chasing returns, however, rarely ends well. In the late 90s, sell-side stock analysts creatively encouraged investors to buy into weak stories they felt held promise simply because of their relation to the Internet. Some abandoned “old economy” stocks and embraced every “dot com” or technology infrastructure enterprise they could get their hands on. There were survivors, but as we know, many succumbed to their flimsy business models. Further, stock prices became so out of whack in many cases that it has taken more than a decade for survivors to build back capital sacrificed during speculative times. Concentrated portfolios may provide more upside potential, but the counterpoint is that much can be lost and never regained if one becomes too speculative. Today, with the market trading on the high end of an expected valuation spectrum, even more conservative expectations may prove optimistic. Newer investors or those with short-term memories should refer to index performance during the so-called “Lost Decade” from 2000-2010 for evidence on how price can stagnate. Asset Allocation Given recent volatility, investors with overly aggressive equity allocations – either by merit of stock type or sheer amount – may be losing a bit of sleep or feeling a knee jerk reaction to sell. While that may be somewhat normal, it might mean that the portfolio is in need of some housecleaning. Decreasing allocation to equities and increasing it to fixed income, cash, or potentially some other hard asset may be just what the doctor ordered. More balanced allocations help smooth the volatility of a mostly equity portfolio and may help to decrease a knee-jerk reaction to sell assets potentially at the worst of times. While this may decrease your total return potential over the long term, it will promote less personal angst when the market decides to turn against your portfolio. Conventional wisdom says that investors should stick to a plan and ride out the rough times – no matter how severe. The problem is that conventional wisdom is not a guarantee. Each and every dime you expose to equities is a dime that you are putting up as risk capital. Though it may stand to reason that shares of Microsoft will be higher in one decade, Microsoft will not be guaranteeing that fact, nor will the party that you are buying shares from. While it probably isn’t realistic to assume that Microsoft will go out of business in 10 years – rendering its equity worthless, no investor should be willing to bet their life that profits will necessarily be leaps and bounds higher either. In times past, companies like Bethlehem Steel, Eastman Kodak (NYSE: KODK ), and other household names were considered “widows and orphans” stocks, the kinds of investments that were bulletproof, set it and forget it ideas. As we know times change, economic conditions fluctuate, and an organization that can’t compete effectively can end up in the bankruptcy bin. The investment space isn’t as foolproof as it once was. Market volatility is not always easy to get through. Arguably, the financial crisis was the scariest episode of economic history since the market crash of 1929 and the pursuant Great Depression. Though we were able to sidestep a potential catastrophe there, the sheer experience should serve as a reminder that stocks present an economic vulnerability beyond the individual investor’s control. Though the downside potential can be easy to forget amidst a bull run, it should not be forgotten or ignored. Understanding the realities behind fluctuating-value assets, maintaining reasonable expectations with that which you are investing in, and allocating assets in balanced fashion commensurate with life stage and risk tolerance are all free ways to get you sanely through volatility. With today’s economic uncertainties and rapidly moving markets, volatility should not be just anticipated, it should be expected. Original Post

The Bear Market Playbook

As many markets enter bear market territory around the globe, investors are inevitably getting skittish. Bear markets are a regular part of the financial markets, but that doesn’t make them easy to handle. Here are some keys to handling a bear market: 1. Don’t lose your perspective. In the last 45 years, a globally allocated 60/40 stock/bond portfolio has never had a negative rolling 5-year return. Of course, it’s not easy to maintain a 5-year time horizon, but if you have less than a 5-year time horizon, you probably shouldn’t be owning stocks and bonds in the first place. Resisting recency bias is the greatest struggle for most investors. And unfortunately, most people never overcome it…. I’ve witnessed this for decades with clients. The financial markets are a revolving door of investor after investor dying one funeral at a time, thanks to excessive short-termism. You don’t have to be irrationally long term, but focusing on the short term is just as irrational. Of course, if you don’t have a proper allocation in the first place, then you need to ensure that your risk profile is aligned with your asset allocation . 2. Turn off the news. Most of the financial media isn’t there to help you. They’re there to get your attention so they can earn a profit selling ad placements. Unfortunately, there is no emotion more powerful than fear. This is why financial TV ratings surge during bear markets. You tune in, get scared out of your wits, churn up a bunch of taxes and fees in your account, sell into panics, rinse wash repeat. I turned off financial TV almost a decade ago. It was one of the best financial decisions I ever made. 3. Stop looking at your account. Fidelity once found that investors who don’t log in to their accounts perform better than investors who log in regularly. The best thing most investors could do is lose their password to their account about once every five years. Logging in and incessantly focusing on your portfolio is just about the best way to ensure that you become a victim of recency bias. If you have a reasonable plan in place, you just need to let time do the heavy lifting for you. 4. Focus on something else. Get your mind off the short-term swings in the market. There is nothing you can do to control the markets. Excessive activity is the illusion of control during the course of creating inefficient portfolio frictions. Get your mind off your portfolio by focusing on hobbies or work. Sitting around worrying about your portfolio isn’t going to help you or your portfolio.

Asset Allocation: ‘Scenic Route’ For Fed Should Lend Support To Risk Assets

As we move into 2016, investors are anticipating a period of sustained interest rate increases by the Federal Reserve – not an aggressive climb as sometimes seen in the past, but a mild, steady stroll to modest heights. Meanwhile, Europe and Japan remain on level policy ground, as they look to quantitative easing to maintain recovery and avert further contraction, respectively. Potential turbulence in the form of slowing Chinese growth could make the journey a bit uncomfortable, given that country’s central role in global economic health. Putting all this together, the Neuberger Berman Asset Allocation Committee believes that still-friendly monetary conditions and gradual economic improvement should lend support to risk assets and underscore our preference for stocks over bonds in the coming year. Global Equities: Leaning into Europe We are positive on global equities, particularly in Europe, where stocks stand to benefit from continued quantitative easing and a weaker euro. While we had an overweight view on U.S. stocks just a few months ago in light of reasonable valuations and potential for earnings improvement in 2016, that positioning has moved to neutral given the sharp price recovery in October. However, we see opportunity in master limited partnerships, which, despite near-term concerns around energy prices and the sustainability of distributions, still appear to offer attractive valuations and yields. We are relatively cautious on Japan’s market. Although stocks are benefiting from the weak yen and reallocation of pension fund assets, the country faces slow or negative growth and is vulnerable to a slower Chinese economy. Elsewhere, we have a neutral view of emerging markets, where China volatility, commodity weakness and dollar strength are creating economic headwinds, while corporate profitability remains under pressure. In our view, selectivity from a country and company perspective remains paramount. Fixed Income: Appeal of Spreads We are underweight global fixed income for the coming year given our low return outlook for the large, developed-country sovereign bond markets in light of a trend toward higher rates in the U.S. and easy policy in Europe and Japan. In the U.S., we believe the Fed’s rate normalization will be a dovish process relative to past tightening cycles. A meaningful spike in long-term rates appears unlikely to us, but investors should be prepared for periods of heightened volatility. We maintain a preference for credit based on our outlook for modest economic growth and current attractive spread levels. In particular, we see appeal in high yield, where spreads remain at wide levels due to commodity-related weakness. In our view, credit quality among issues in the rest of the high yield universe remains quite good. Credit fundamentals in emerging markets debt remain relatively strong, in large part due to higher reserve levels and much-improved policymaking over the last two decades. Recent troubles, however, have exacerbated weak growth stemming from soft domestic demand in the major emerging markets. We are neutral on a one-year horizon, but are more constructive further out, as we believe the developed market recovery should lend support to emerging markets’ growth and credit fundamentals. Alternatives: Directional Hedge Funds Could Benefit from Volatility Within alternatives, we now have a slightly overweight stance on directional hedge funds, as increased volatility is creating more opportunities for astute traders and active managers to add value. Within this group, distressed managers have suffered in 2015 from exposure to Puerto Rico, Greece and the energy sector, but we believe there are ample opportunities over a 12-month time horizon. We have a modest overweight view on lower-volatility hedge funds and believe that they continue to play an important role in asset allocations, particularly in an environment of higher volatility and likely rising rates in the U.S. Our view on private equity continues to be neutral in light of its long cycle of growth and more elevated valuations. Elsewhere, we are neutral on commodities – an improvement from six months ago – believing that these markets have come under so much pressure that they are not likely to deteriorate much further. China growth concerns may lend support to precious metal prices, while the drought in many parts of the U.S. should help soft and agriculture commodities. We believe oil is likely to be range-bound, but we anticipate better supply/demand dynamics on the margin. For the broader commodity complex, the potential for higher interest rates and the resulting stress on certain commodity producers may lead to production cuts and more balance across markets. Uncertain Journey We believe elevated uncertainty is likely to accompany investors for much of 2016, whether around future monetary policy, geopolitical events, the price of oil or the extent of slowing growth in China. We will continue to monitor developments as we seek to provide guideposts for the current challenging environment. Market Views Based on 1-Year Outlook for Each Asset Class Regional Focus Fixed Income, Equities and Currency * The currency forecasts are not against the U.S. dollar, but stated against the other major currencies. As such, the forecasts should be seen as relative value forecasts and not directional U.S. dollar pair forecasts. Currency forecasts are shorter-term in nature, with a duration of 1-3 months. Regional equity and fixed income views reflect a 1-year outlook. The Committee members are polled on the asset classes listed above, and these discretionary views are representative of an Asset Allocation Committee consensus. As of fourth-quarter 2015. Views expressed herein are generally those of the Neuberger Berman Asset Allocation Committee and do not reflect the views of the firm as a whole. Neuberger Berman advisors and portfolio managers may make recommendations or take positions contrary to the views expressed. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. About the Asset Allocation Committee Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted. The committee covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience. 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