This Week on TRB

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These were the most read posts on the site this week, in case you missed it: 



Why Inactivity Can Be Your Best Friend

When most of us think about the word inactive, we may think negatively – such as lounging around on the couch, being lazy, or apathetic to a given situation. Most of us feel the need to be active to promote a healthy lifestyle through exercise, perform optimally at our job, or being involved with our family. In many cases, this is valid.

There is one area where inactivity can be beneficial.

When it comes to investing, doing less can help us achieve the expected return we need on our portfolios, while keeping expenses as low as possible.

For many of us, this seems counterintuitive. Many of us can’t help but to do something, anything. Some of us may feel that if we are in control of our investments, we can impact their performance.

But the truth is for most us, we are not in control. We cannot control the markets. We cannot control the fluctuations. Being active in our portfolios to control volatility and returns is a frivolous endeavor.

What do I mean by active? Here are a few examples. Selling out of a stock or fund when it is underperforming, without any other basis for consideration. Just because an asset is underperforming doesn’t mean it should be sold. In fact, we should expect assets in our portfolios to underperform – to lose money from time to time. This means we are diversified.

Another example is buying an asset based on recent performance. Based on its recent good performance, we may feel it’s bound to keep going up. We may also feel the need to buy and sell based off news reports, market prognosticators, or tips from family and friends. This can lead to the temptation of day trading – a recipe for disaster.

To paraphrase the great Warren Buffett, much can be attributed to inactivity, but investors cannot resist the urge to do something.

What do we mean by inactivity? Inactivity means once we have our asset allocation determined, and have the appropriate diversification among the asset classes, we need to sit back and let our investments do their work. This keeps expenses low, transaction costs to a bare minimum, and more importantly, allows us to focus on things we can control – such as other areas in our wealth management planning.

I jokingly call this a “Rip Van Winkle” portfolio. Set it up, fall asleep for many years, then wake up and look at how much money you have. We’ll have save money, time, and energy by not trying to control what we can’t. And over time, we’ll find that we’ve done way better in our investments than those who are busy (and stressing) for the sake of being active.

The post Why Inactivity Can Be Your Best Friend appeared first on Getting Your Financial Ducks In A Row.


What I told the traders

I’m not a trader, I’m an investor. But without traders, investors would be nowhere. And without markets that work, investment advisors would be utterly lost. 
Every week, millions of dollars come into the firm that we must deploy on behalf of our clients – in stocks, bonds, ETFs and mutual funds. I think it is taken for granted at advisory firms like mine that there is a mechanism being worked on consta…

focus ‘pon your soul

No reason for anyone to be out here getting carried away about the opinions of others. We all get a chance to look smart and to look stupid. It’s just that some of us have a ratio problem – way too much of the latter relative to the former.
It’s okay to point out when someone is in error or saying things that may be detrimental to the reader. But to get triggered? To spend all day focusing on how wrong e…

Trust the Process

I love this story about how the Philadelphia Sixers got serious about analytics a few years ago and have now become one of the great turnaround stories of the era – they won ten games in the 2015-2016 season and now, just two years later, they’ve racked up 52 wins in the regular season and landed the three seed for the East.
Rather than just throwing a statistics kid right out of college into the mix, the Sixe…

At cycle turn, Fed can follow two possible paths

In mid-December, we discussed how a new cyclical phase was likely during 2018, one that would provide fresh trading themes with persistence enough to enable profitable momentum-oriented expressions. A prerequisite to that new phase, was a cyclical turning point replete with friction and confusion, one characterized by correlation breakdowns and rising volatility. Sure enough, demonstrable ongoing market strife has been on full display during 2018 as investors contemplate irresolute forward policy paths and a markedly altered suite of investment opportunities relative to any other moment in the post-crisis era.

Much of this consternation emanates from the juxtaposition of a newfound real economy equilibrium that confronts forward policy paths with a remarkable dearth of historical precedent. With respect to the real economy equilibrium, readings of the output gap, borrowing costs relative to growth, and the forward path of real Fed Funds relative to labor force growth, all exhibit a real-economy state of affairs that is very close to what we would consider “normal.”

Moreover, U.S. growth tailwinds in coming quarters are powerful, as a result of massive deficit-financed fiscal stimulus now flowing into a closed output gap for the first time in near 50 years. With full employment at hand and a large fiscal impulse looming, wages will likely continue to move higher. That will combine with core inflation readings that are no longer anchored by past low year-over-year base effects, setting the stage for a series of looming inflation prints that are above the Fed’s stated 2% long-term inflation target.

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Two potential paths for Fed policy

Complicating this picture, is that for the first time in modern history, the Fed is concurrently removing accommodation in two ways, by increasing the price of money (Fed funds rate) and reducing the supply of money (balance sheet runoff). Accordingly, we see two potential paths for the Fed going forward, each with possible risks and strengths. The first path would closely resemble the so-called “dot-plot” path, where the Fed delivers the very rate hikes that are implied in its forecasts. Here, the Fed will hike six to eight times through 2019, all while continuing the balance sheet runoff, an attempt to follow the economic cyclical momentum. Afterward, the Fed would likely need to ease as the cyclical bounce fades and structural dis-inflationary forces kick back in. The trade-offs in this scenario are that market fears of inflation running too hot would be assuaged, alongside a higher risk of policy accident if the Fed becomes too aggressive in attempting to exorcise inflation before secular forces tame it organically.

The second path is the structural, long-run route, which more closely resembles what markets are currently pricing in. Here, the Fed hikes three more times in total over 2018-19 and ends balance sheet runoff now, in recognition that numerous fundamental indicators are already signaling that economic equilibrium has been achieved. This is a very safe route that reduces uncertainty around forward policy and affords flexibility to become more or less aggressive later as needed. The risk to this scenario is that financial markets may worry about a string of months where cyclical growth above potential could cause inflation to accelerate onerously.

Opportunities still glass half-full

As markets are parsing these dichotomous forward policy possibilities, long held macro correlations are breaking down while realized volatility at the bottom of the capital stack has spiked (the VIX is about 60% higher on average thus far in 2018 as it was last year). As a result, many formerly effective risk hedges no longer work in an environment where valuations are decidedly late cycle. So, considering a lack of discernible trading momentum, heightened volatility and a diminished ability to hedge, one might feel an overt pessimism toward today’s market opportunity set. Not us; we perceive a half-full glass.

To us, the story of 2018 is shaping up to be the renewed ability to get meaningful income into portfolios, without having to stretch to take risk. This is largely driven by recent Fed rate hikes combined with large short-dated Treasury issuance that is filling the system with attractive cash flow in our view. This front-end alternative is now creating a crowding-out effect for more risky assets by providing a tangible investment alternative with much less embedded risk. Specifically, nearly 70% of the total available income stream from outstanding U.S. Treasuries can be harnessed by owning nothing longer than a seven-year maturity. Similarly, within investment-grade credit (IG), employing the metric of the ratio of yield per unit of duration makes the front-end look profoundly more attractive than at any point post crisis. And in the emerging markets (EM), FX (foreign exchange) expressions now offer a similar yield as the EM-DM (developed market) yield spread, without any duration risk, on the back of recent stellar EM spread performance. Finally, with 2018’s realized volatility occurring at the bottom of the capital stack, we favor mortgages versus longer-dated IG or high yield assets. We are watching all of this play out real-time as fixed-income fund flows are broadly shunning sectors with embedded credit and/or duration risks, in favor of freshly attractive, and lower risk, high-carry assets.

Later this year, it is likely that the friction and uncertainly that is defining this cyclical turning point will give way to a more discernible and tradable trend. Until then, we will be positioned in attractive carry assets that offer the best risk/reward than at any time during the post-crisis era.

Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Global Fixed Income and is a regular contributor to The Blog. Russell Brownback, Managing Director, is an absolute return portfolio manager with a macro focus, and he contributed to this post.

Investing involves risks, including possible loss of principal. Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Learn more about how consistent investment performance and low fees are critical to achieving your fixed income goals in today’s environment.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries in the United States or elsewhere. All other marks are the property of their respective owners.



Try to hold off on deciding you can’t do something well until you’ve done at least five or six repetitions. You can be taught, you can read up on it, but you won’t know until you do it for yourself. More than once. More than twice.
Even if, on one attempt, you find yourself going backwards, or forgetting the lesson from a mistake during rep one or rep two.
Get the reps in. See what happens. All the peopl…

The Jeff Bezos Annual Letter to Shareholders

Tonight, during NBA playoffs commercials, I’ll be reading the Jeff Bezos annual letter to shareholders, which just came out an hour ago.
Jeff shocked Wall Street by finally revealing the number of Prime users Amazon has. It’s 100 million. There are 126 million total households in the United States. This is insane.
You can read the whole thing here.