Are rates going to rise, and if so, when?

Will bond market volatility lower my returns?

Is the bond market getting more illiquid?

All these questions can cause anxiety, as there is uncertainty. After last week’s Fed minutes were released, the media is abuzz with predictions that the Fed will begin taking its massive foot off short-term interest rates perhaps after the FOMC meeting in June. No one knows what will happen next. Will rates rise dramatically or will the bond community respond with a yawn? What investment strategies might give investors the best chance to weather this uncertainty?

Investors already saw increased bond market volatility in 2014 created by diverging growth trajectories between the U.S. on one side and the Eurozone and Japan on the other. The divergence in the global growth uncertainty has left the U.S and the U.K among the few countries that are contemplating rate increases while most central banks are lowering theirs. What investment strategies might give investors the best chance to weather this volatility?

Liquidity in the bond market has been getting lower since 2008 due to new banking regulations that require bank balance sheets to be tighter and cleaner. Liquidity is defined as the degree to which an asset or security can be bought or sold without affecting the asset’s price; fewer trades mean each purchase or sale can have a greater impact on price. With tighter balance sheets, banks have reduced their trading volume. What investment strategies might give investors the best chance to trade their bonds effectively?

At GV, we believe these are valid questions and there are risks in the bond market; however, we remain confident that these risks can be managed effectively through prudent investing. We do not believe Bondmageddon is coming. When we look at history to gain perspective, we discover that bond-markets crashes have actually been relatively mild. In the U.S., the biggest one-year drop in the Global Financial Data extension of Moody’s monthly total return index for 30-year corporate bonds (going back to 1857) was 12.5% for the 12 months ending February 1980. If you compare that to the biggest drop in the stock market, the S&P 500 lost 67.8% in the 12 months ending May 1932; moreover, the S&P 500’s one-year losses have exceeded the bond market’s biggest single loss (12.5%) 23 times since 1900.  Source: Robert Shiller, Project Syndicate.

While the above questions are just now becoming mainstream, we have been thinking about the possible impact of these questions on the bond market for some time. Here are few thoughts to consider:

  • With attractive risk-adjusted return opportunities harder to find, investors need to have patience and discipline with a defined process to avoid taking on excessive risk even in bonds.
  • We believe that investors should be aware of the bonds they own. If they bought long-term bonds in the last few years chasing yield, they should understand the implications of rising rates on long-term bonds which lengthens a portfolio’s duration, or its price sensitivity to changes in rates.
  • If investors believe in passive bond investing, they should be aware of the intricacies of trading the passive products in volatile bond markets. An example of this could be seen during the bouts of volatility in high yield credit last year – technical selling in September/October 2014 from outflows in passive strategies like high yield ETFs caused spreads to widen substantially in a short period.

We generally believe that active management remains a prudent strategy for fixed income investors, especially in the current environment, and that active management has the potential to achieve higher returns and greater diversification while providing the desired level of liquidity.

To learn more about GV’s bond investing strategies, contact a GV advisor at www.gvfinancial.com.

Do you expect perfection from the people you interact with?   Do you expect the people you do business with to get it right the first time? When the inevitable mistake happens, do you quickly go to the blame game?   What is wrong with these people?  Are they lazy, or stupid, or do they just not care?

Perfection is a tough standard. Like yourself, the people you do business with are human beings.  Humans make mistakes.

Do you not only expect perfection from others, but also expect perfection from yourself?  When you fall short of perfect, do you turn the blame game on yourself? Do you call yourself stupid, lazy, or blind to the realities around you?

I believe the majority of people, myself included, strive to do a great job at work.  I have yet to meet the individual striving for mediocrity.  The truth is sometimes life gets in the way, or systems get in the way and snafus occur.  When I turn away from the blame game and have compassion for the people struggling to get it right, it is much easier for me to have compassion for myself.

When I see myself with compassionate eyes, I feel less agitated, and I can move ahead with confidence and a clear mind.

Can you avoid the blame game?

The path to pursuing our dreams is never an easy one.  There are always setbacks, challenges and unforeseen obstacles that get in our way. Despite our best efforts, we get knocked down again and again and again.

Faith is what keeps us going.  Faith that we will achieve our dream. Faith gives us the power to persevere, to keep pushing forward when all seems lost. Without our capacity for faith, we would quit when the going gets tough.

We cannot, however, close our eyes to the challenges and obstacles that lay before us.  We can’t pretend they don’t exist – they do. We can’t hope they will just go away – they won’t.

We must look ahead with open eyes as we confront our challenges and obstacles head on.  This is not easy.  It’s hard to admit our challenges are daunting, and continually explore new ways to overcome them.  It is hard to struggle in the face of adversity.

Hard, but almost always worth it. Because the struggle makes us stronger, and because we are at our best when we pursue our dreams.

A loved one passes away. We suffer a financial setback. Our marriage hits the rocks. We are diagnosed with a serious, maybe life-threatening illness. Our children struggle.

All too often, we lament, ‘Why me?’ Or, ‘It’s not fair!’  We look around and it seems like everyone else is doing fine. Why do we have to endure this terrible hardship?

We have to endure this hardship because we are human. Inevitably, we all go through tough times.  Nobody escapes it.

When we tell ourselves it’s not fair and ask why me, we deny our humanity and increase our suffering.

But when we embrace our humanity, we realize tough times are part of life.  We shift our focus from feeling sorry for ourselves to figuring out how we can seek support to help us navigate these difficult times.  We shift from being a victim to taking charge of our lives.

Can you embrace your humanity the next time the going gets tough?

Do you ever feel like you are wandering in the dark?

There is something missing in my life, and I can’t figure out what it is.

My child is struggling, and I don’t know how to help her.

My big project at work is overwhelming.

The sobering truth is there are many times in life where we feel lost and confused. We don’t know what to do; we can’t see the path ahead of us. As we peer into the darkness before us, every step seems treacherous.

We might not be able to see far into the distance, but we often can see a short distance in front of us. Focus on that. Stop asking yourself how to solve the problem; start asking yourself what is the next right step for me to take. Take that one step. Then focus on the next short distance, the next right thing to do.

As you focus on each small step, have faith that you will figure it out. Have faith that you will get to where you need to go. Take a deep breath. Remind yourself of the enormous resources at your disposal, your Signature Talents™ and accrued wisdom, your network, your intelligence, persistence and resilience.

Do you feel like you are wandering in the dark? Can you look to the future with faith and confidence and take that all-important next step?

I knew and you should have known…

That the Seahawks were going to lose.

That the S&P 500 was going to rally double digits in 2014.

Surely, someone knew this was going to happen and profited from it.

We probably all have heard similar statements.  It makes us wonder if anyone is aware of the havoc hindsight bias can play on an investor’s portfolio.

What is hindsight bias?  Wikipedia describes it as the “I-knew-it-all-along” effect.  Psychologically speaking, it is the inclination, after an event has occurred, to see the event as having been predictable – despite the fact that there was little or no objective basis for predicting the outcome.  It’s a common memory distortion that can lead us to find casual connections where none exist and these errors can affect how we interpret not only a past event but future events as well.

Hindsight bias can lead investors to buy high and sell low. The danger of hindsight bias isn’t just that it affects one bad call. The real danger is that believing somebody “should have known” can lead investors to make decisions and design portfolios with too little consideration for their own risk or goals. How?  Overestimating the accuracy of our past forecasts may lead to overconfidence in our future forecasts (“Hey, I was right before!”) and hence to taking excessive risks. Hindsight bias also can affect relationships between investors and their advisors; if an investor believes his or her advisor should have been able to accurately forecast market performance, they could lose confidence in their advisor’s abilities and advice.

Hindsight Bias Can Affect Everyone.  After the fact, events often seem “obvious” and “inevitable.”  Most people forget what they were thinking before the event occurred. For example, a globally diversified portfolio, one that contains both international and U.S. investments, looks silly (or worse) since the U.S. market has outperformed the international markets by 100% over the past six years.  When we feel the first “But this was so obvious!” thoughts creeping in, this is when we should pause and think about not only what did happen but what could have happened.

Still not convinced?  Let’s take a broader look at how U.S. markets performed in comparison to international markets. If you remember, in the 1990’s, the U.S. outperformed international markets essentially throughout the entire decade. By the time the dot.com market became the dot.com bubble, most Americans considered it foolish to invest in overseas companies.  Do you remember what happened next?  The chart shows International markets regained the lead over domestic markets around the bottom of the bear market; beginning in 2002, and they outperformed U.S. markets for six consecutive years – until the subprime crisis (likewise unpredicted) hit in 2008. Do you now feel more or less confident about predicting which one will lead this year?  Hindsight bias can make any tactic employed to defend against potential bear market scenarios in the past look silly when viewed from the perspective of the current U.S. market leader.

Source: Morningstar.

Source: Morningstar.

The future is not as predictable as we might like to believe.  Who predicted that oil would fall 50% from its recent highs?  Or that the Swiss Franc would rise 41% in a single day? When you start to think you could have or should have predicted it, remember, everyone else thinks they can, too. Someone is always wrong, and most of us can’t remember times when we were wrong because it’s part of the memory distortion that comes with hindsight bias.

Invest for an unpredictable future.  We recommend making investment decisions based on what you need an investment to do for you, not based on what you think is going to happen  Acknowledging what we cannot control helps us stay focused on what we can control. Life does not always play out according to even our best-laid plans. Expect the unexpected. Ask yourself what could go wrong and manage for that possibility, rather than focusing exclusively on what you believe will go right. Remember the importance of diversification.  It’s not to increase portfolio returns; rather, diversification is designed to protect you should events not turn out exactly as you would like.

I want to spend more time with my kids who are growing up way too fast. 

I want to learn to play the piano. 

I want a job that I feel good about. 

I want to raft down the Colorado River.   

My wife and I have been struggling in our marriage for years; I want to be in a mutually supportive, loving relationship. 

I want to . . .

Time inexorably marches on.  Tomorrow is promised to nobody.

Live your life. Take chances. Be crazy. Don’t wait.  Because right now is the oldest you have ever been and the youngest you’ll ever be again.

What are you waiting for?

How often do you think about money? Do you worry about losing your money or not having enough for retirement? How often do you look at your investments or calculate your net worth? Do you worry about paying your bills? Do you use money as a measuring stick for knowing if you’re getting ahead or falling behind?

It’s easy to obsess about money. Easy, but not helpful.

As humans, we can focus our attention on only one thing at a time. When we obsess about money, we diminish our ability to live in the present, to connect with the people around us, or simply to have fun.

Our financial situation doesn’t change very much every day. A well-diversified portfolio doesn’t need daily monitoring. Worrying about our bills doesn’t help get them paid. Using money as a measuring stick just distracts us from what really matters in life.

Turning off our mind’s money chatter is not easy, but it is possible if we take some simple steps. Turn off the financial talking heads. Check your portfolio every month, or better yet, every quarter or even annually. If you are a worrier, set aside ten minutes a day to worry about money and banish those worries for the rest of the day. Cultivate a sense of gratitude for your abundant life blessings.

How can you think less about money?

After years of faithful service, my toaster needs replacing.  On Sunday morning, I decided to shop on Amazon for a new one. With just a few key strokes and clicks, I had hundreds to choose from.  I started reading the reviews to understand toaster technology and to figure out which toaster would be right for me.

After 30 minutes, a startling realization hit me like a bolt of lightning.  I was spending my precious time on a Sunday morning reading about toasters.

None of the toasters I was considering cost very much.  They were all in the $20 – $50 price range.  More importantly, all I wanted was a toaster to toast my morning bagel, and all of them could do that just fine.  So I stopped analyzing, bought a toaster, and went back to enjoying Sunday morning with my wife Heidi.

It’s incredibly easy to spend time on things that don’t really matter.  If you are not careful, all of sudden you’ll find yourself deep in thought reading toaster reviews, and forfeiting your favorite time with your family.

We live in a world that offers a gluttony of choice. (Do we really need hundreds of toasters to choose from?)  Sometimes the right choice is to choose quickly, and get back to living your life.

Have you fallen into the 30-minute toaster trap?

I can’t believe I did that. What was I thinking?

The answer was staring me in the face. How could I be so stupid?

Why can’t I lose this weight? I know what I have to do, eat right and exercise. Why am I so lazy and undisciplined?

Sound familiar? Do you often engage in self-attack, beating yourself up for not doing it perfect – err, perfectly?  Do you call yourself names in a vain attempt to whip yourself into shape?

I hate to be the one to break the news to you, but you are human, just like the rest of us. We all make mistakes and we all have our struggles. It is just part of life.

Self-attack is never a winning strategy. Self-shaming is self-defeating. It drains our confidence and leaves us feeling discouraged, often driving us to engage in the exact behaviors we are trying to avoid. When we beat ourselves up for eating that donut, we feel depressed. And all too often, we grab another donut to soothe ourselves.

Catch yourself the next time you consider calling yourself stupid or lazy. Try substituting self-compassion for those degrading self-attacks. Embrace your humanity, and remind yourself that we all struggle, and that life is about progress, not perfection.

Forgive yourself as you would a friend, and move forward with the resolve to do a little better next time.

Next time you struggle, can you try a little self-compassion?

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