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Is It Ever A Bad Time To Invest?

When the markets seem scary, it’s tempting to wait for a “better” time to invest. History suggests this may be a mistake. Many investors feel nervous about making a commitment to equities, particularly following robust periods of market performance. There are always economic clouds on the horizon, and no one wants to envision their investments taking an immediate loss. But trying to “time the market” by waiting for a more opportune time to invest may be a mistake, as time horizon has often been a significant factor in long-term market results. We would all time the market if we could do it successfully. Who wouldn’t want to avoid major market declines or fully participate in a bull market? The problem is that market timing requires one to make decisions that even professionals find difficult, if not impossible. This is not to say that considering the overall direction of the markets and making tactical tilts aren’t without merit. Trying to time one’s overall exposure to the equity market, however, brings with it a new set of risks, and may ultimately derail an investor’s long-term goals and objectives. The Pitfalls of Timing Individual investors are notoriously bad at picking the right times to invest. Fund flows show that investors tend to move in and out of the market at precisely the wrong time – in essence, buying high and selling low. In 2008 and 2009, for example, during the depths of the bear market, investors pulled significant assets out of equity funds. Several years later, they moved back into equity funds just as many equity indexes were approaching or had surpassed old highs (see Figure 1). Figure 1: Market Timing Travails Source: Strategic Insight Simfund MF, FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. In fact, the patterns of overall equity market returns are one of the reasons that market timing is so difficult. Market increases have often come in spurts, and missing some of the market’s best days could have a significant impact on returns, as those days have historically accounted for a surprising portion of the market’s overall annual returns (see Figure 2). Figure 2: Impact of Missing Equity Market’s Best Days S&P 500 10 Years Ending October 21, 2015 Source: FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Over Time, Stocks Have Tended To Go Up Over extended periods of time, the U.S. stock market has tended to rise in value. Consider Figure 3, which shows that the S&P 500 has risen in 75% of all one-year time periods since reliable market data began (in 1926). Over longer periods, the percentage of positive outcomes has also increased as well – for example, there has been no 15- or 20-year period in the S&P 500’s history in which the index has registered a negative return. Figure 4 shows the S&P 500’s performance over rolling 10-year periods (that is, the 10-year periods ending in 1935, 1936, 1937 and so on). In only two instances – ending in the depths of the Great Depression and in the midst of the global financial crisis – did the S&P 500 produce negative returns after a 10-year holding period. We believe this underscores the importance of maintaining a long-term perspective. Figure 3: The Percentage of Positive S&P 500 Outcomes Has Varied by Holding Period Source: FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Figure 4: Benefits of Long-Term Investing S&P 500 10-Year Rolling Returns Source: FactSet. Data as of October 31, 2015. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Managing Risk Through Diversification Of course, the case for any given asset class only goes so far. Maintaining diversification is another way to help mitigate the downside risk of an overall portfolio. Investors have often relied on a mix of stocks and investment-grade bonds for this reason. In the current low-yield environment, however, we favor diversification across a broader asset allocation framework that reaches beyond traditional equities and fixed-income to enhance diversification against broad market risk. Investors today also have access to a broader array of investment options that can provide diversification benefits. For example, once the province of institutions and wealthy individuals, alternative investment strategies are now increasingly available in vehicles without investor qualification restrictions. So-called “liquid alternative” funds are retail mutual funds that pursue alternative investment strategies. Adding alternatives strategies to a portfolio of traditional equity and bond investments can help lower correlations to equity and fixed-income markets. Given the significantly expanded range of alternative strategies available today to a broad audience, adding the potential diversification benefits of non-traditional approaches has become a simpler exercise. Climbing The Wall Of Worry Over time, the stock market has managed to navigate periods of economic crisis and geopolitical uncertainty and has overcome significant market pullbacks. Although the global economy continues to expand at a moderate pace, helped by the stimulative efforts of central banks, the proverbial wall of worry stands high today. The Federal Reserve’s potential tightening cycle, China’s slowing growth trajectory, weak commodity markets and elevated valuations are just a handful of concerns that have investors pondering a move to the sidelines. The angst investors feel in the current environment is understandable, and behavioral tendencies can be difficult to resist. Working with a financial advisor can provide investors with a long-term perspective and help them make decisions based on goals, objectives and risk tolerance rather than emotion. This material is provided for informational purposes only. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The views expressed herein are generally those of Neuberger Berman’s Investment Strategy Group (ISG), which analyzes market and economic indicators to develop asset allocation strategies. ISG consists of a team of investment professionals who consult regularly with portfolio managers and investment officers across the firm. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results. Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates. Certain products and services may not be available in all jurisdictions or to all client types. Indexes are unmanaged and are not available for direct investment. Unless otherwise indicated, returns shown reflect reinvestment of any dividends and distributions. Neuberger Berman LLC is a Registered Investment Advisor and Broker-Dealer. Member FINRA/SIPC. The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

On Currencies That Are A Store Of Value, But Maybe Not For Long

Picture Credit: Dennis S. Hurd I get letters from all over the world. Here is a recent one: Respected Sir, Greetings of the day! I read your blog religiously and have gained quite a lot of practical insights in financial field. Your book reviews are very helpful and impartial. I request you to write blog post on dollar pegs in Middle East and under what conditions those dollar pegs would fall. If in case you cannot write about it, kindly point me to some material which can be helpful to me. Thanks for your valuable time. Now occasionally, some people write to me and tell me that I am outside my circle of competence. In this case, I will admit I am at the edge of that circle. But maybe I can say a few useful things. Many countries like pegging their currency to the US dollar because it provides stability for business relationships as businesses in their country trade with the US, or, with other countries that peg their US dollar, or, run a dirty peg of a controlled devaluation. Let me call that informal group of countries the US dollar bloc [USDB]. The problem comes when the country trading in the USDB begins to import a lot more than they export, and in the process, they either liquidate US dollar-denominated assets or create US dollar-denominated liabilities in order to fund the difference. Now, that’s not a problem for the US – we get a pseudo-free pass in exporting claims on the US dollar. The only potential cost is possible future inflation. But, it is a problem for other countries that try to do so, because they can’t manufacture those claims out of thin air as the US Treasury does. Now in the Middle East, it used to be easy for many countries there because of all the crude oil they produced. Crude oil goes out, goods and US dollar claims come in. Now it is reversed, as the price of crude is so low. Might this have an effect on the currencies of the Middle East. Well, first let’s look at some currencies that float that are heavily influenced by crude oil and other commodities: Australia, Canada, and Norway: Click to enlarge Commodity Currencies As oil and commodities have traded off so have these currencies. That means for pegged currencies, the same stress exists. But with a pegged currency, if adjustments happen, they are rather large violent surprises. Remember the old saying, “He lied like a finance minister on the eve of the devaluation,” or Monty Python, “No one expects the Spanish Inquisition!” That’s not saying that any currency peg will break imminently. It will happen later for those countries with large reserves of hard currency assets, especially the dollar. It will happen later for those countries that don’t have to draw on those reserves so rapidly. Thus, my advice is threefold: Watch hard currency reserve levels and project future levels. Listen to the rating agencies as they downgrade the foreign currency sovereign credit ratings of countries. When the ratings get lowered and there is no sign that there will be any change in government policy, watch out. Watch the behavior of wealthy and connected individuals. Are they moving their assets out of the country and into hard currency assets? They always do some of this, but are they doing more of it – is it accelerating? Point 3 is an important one, and is one seemingly driving currency weakness in China at present. US Dollar assets may come in due to an excess of exports over imports, but they are going out as wealthy people look to preserve their wealth. On point 2, the rating agencies are competent, but read their write-ups more than the ratings. They do their truth-telling in the verbiage even when they delay downgrades longer than they ought to. Point 1 is the most objective, but governments will put off adjustments as long as they can – which makes the eventual adjustment larger and more painful for those who are not connected. Sadly, it is the middle class and poor that get hit the worst on these things as the price of imported staple goods rise while the assets of the wealthy are protected. And thus, my basic advice is this: gradually diversify your assets into ones that will not be harmed by a devaluation. This is one where your government will not look out for your well-being, so you have to do it yourself. As a final note, when I wrote this piece on a similar topic , the country in question did a huge devaluation shortly after it was written. Be careful. Disclosure: None.

Evaluating Enterprise Risk For Alternative Investments

Enterprise risk includes all of the factors that can affect an enterprise: market factors, reputation, regulation, compliance, operations, and legal risk are among the most prominent. Enterprise risk analysis , which uses stress tests and scenario assessments to estimate investment risks across asset classes, has become increasing popular with institutional investors, who understand the impact enterprise risk can have on their portfolios. But while enterprise risk analysis works well with traditional asset classes, using enterprise risk analysis on alternatives – such as hedge funds, private equity, and real estate – presents challenges. This, at least, is the view of BNY Mellon (NYSE: BK ) and affiliate HedgeMark, as articulated in their January 2016 white paper Considering the Alternatives: A Practical Look at Enterprise Risk Analysis and Alternative Investments . The paper explores the impact of incorporating alternative investments into enterprise risk analysis and looks at how different approaches to data management can impact the resulting conclusions. Evaluating Risk Across the Portfolio “With a sharper focus on risk by regulators and other stakeholders, many institutional investors seek a fuller picture of how risk operates across investments within an entire portfolio,” said Frances Barney, head of Consulting-Americas for Global Risk Solutions at BNY Mellon, in a recent announcement. “Data is getting more and more critical and investors need to be informed and comfortable with the assumptions of their risk assessment, otherwise, they can come out of it with a false sense of security about their portfolio.” The paper’s key findings and insights into best practices include: A “granular approach” to risk evaluation is preferable, with position-level information for all asset classes “the gold standard.” This kind of position-level transparency, liquidity, and control may be available in dedicated managed accounts and liquid alts, as well as traditional hedge funds. Information accuracy is obviously important, and that’s why the paper argues for single-vendor sourcing of investment data. Using a single vendor promises uniform data, whereas drawing data from multiple sources increases the likelihood of errors. Different approaches to data management can lead to different conclusions about risk. Having a different approach for each asset class can be problematic, which is why many firms are establishing a Chief Risk Officer position to evaluate risks across all asset classes. Consistency is especially important in light of the regulatory environment. Some regulators already require reports on stress testing and scenario analysis, through Form PF for U.S. investment advisers to hedge funds; and pursuant to Solvency II for insurance companies, and UCITS for European investment funds. “We’ve learned the most crucial component is the veracity of the underlying data, which becomes even more important and difficult to manage as more opaque assets are held in the portfolio,” said Ms. Barney. Jason Seagraves contributed to this article.