Remain calm and carry on: why stocks and stress don’t mix

The popular press is generating a lot of recession-related articles lately and with stocks starting the New Year on a weak note, it’s no wonder investors feel a little nervous. Year-to-date, U.S. large cap stocks are down about 10% while most international markets are down even more. Commodities continue to slide and global economic growth has been revised lower. This is certainly not a confidence-inspiring picture, but here’s why keeping calm and carrying on is the best course of action.

First, I want to illustrate why stocks and stress don’t mix. Let’s say that stocks are down 10% year-to-date, the global growth outlook is muddy at best, and you’re seeing a lot of articles suggesting that the US is headed for a recession. Assuming the above facts and a meaningfully-sized investment portfolio, most humans are likely to feel anxiety, stress, and maybe some fear. Is the market going to fall further? Are we heading for a recession?

Having read enough about neuroscience to be dangerous, I know that when we’re feeling anxiety, stress, and fear, the more evolved part of our brain – our neocortex – is usually off-line and the more primitive part of our brain – our limbic system or brain stem (a.k.a. lizard brain) – is typically running the show. When our lizard brain is calling the shots we often make poor, fear-based decisions because we can’t see the big picture. Our brain shuts down and we become reactive instead of proactive. In these instances our capacity to think higher-level thoughts is greatly reduced.

Speaking of the big picture, did you know that from 1926 – 2015, stocks have delivered average annualized returns of 10%? Notice that includes the two largest US market declines, the Great Depression, and the Great Recession. Not bad. When we get triggered by stress, facts like these can get overlooked and we could make decisions we’ll come to regret. Here’s a schematic of how that might look:

graph 1

You can see how our thoughts and emotions affect our behavior which then reinforces the above pattern or one like it. Unfortunately, the outcome stinks and so I’d like to propose an alternative – – one that leads to a much happier, healthier outcome.

In the alternative pattern, the same triggering event happens, only this time you’re aware of the stress and anxiety it triggers. The fact that you’re aware of the stress and anxiety is huge! It means you’re not identifying with the emotions and thus your rational-thinking, neocortex brain is still online. You now have choices. Given the old pattern, one strategy would be to call your advisor and get some reassurance that the sky isn’t falling. Another option is to simply turn off the TV or the computer and take some deep breathes. Maybe take a walk around the block or engage in an activity you enjoy. The point is to interrupt the old pattern. The more you can do this, the more your awareness grows, and in turn, the more options you have.

Following through with this example you can see that giving yourself a break from the triggering event and getting some perspective allows you to stay calm, and thus make better decisions. Just like the first illustration, when repeated, this one will also reinforce itself. And the outcome is much better.

graph 3

So now that you’re hopefully in a calm, peaceful state, we can talk about the current environment. Yes, stocks have gotten off to a shaky start but the US economy remains on stable footing. Jobs growth is strong, oil prices are low, consumer debt is in-check, and wage growth is finally starting to rise. It’s true that US manufacturing is contracting but it only accounts for about 12% of GDP. Meanwhile, US services sectors, which account for 88% of GDP, remain in expansion mode.

Stocks have been spooked by falling commodity prices, slowing growth in China, and fears of deflation. But most leading indicators remain strong and every recession since the 1970’s has been preceded by a spike in oil, not a decline. Finally, and speaking of perspective, there will always be some risk of recession simply because contractions are a natural and a healthy part of any business cycle. Without them we can spiral out-of-control into bubble-like environments. I for one intend to stay calm and carry on. Nothing else seems to help anyway.

Carrie A. Tallman, CFA
Director of Research

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2015 IRA Contribution Rules

The deadline to make IRA contributions for tax year 2015 is April, 15 2016. The maximum contribution is $5,500 per individual ($6,500 if age 50 or over) or 100 percent of earned income, whichever is less.

There are income limits which determine whether you can deduct your Traditional IRA contribution or if you qualify to make a Roth contribution. The following table gives the phase-out range for the most common circumstances.

Do you qualify to deduct your Traditional IRA contribution?
If your income is less than the beginning of the phase-out range, you qualify. If your income is over the phase-out range, you do not. If your income falls inside the range, you partially qualify.

Modified Adjusted Gross Income Phase-Out Range

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single, participates in an employer-sponsored retirement plan: $61,000 – $71,000 $61,000 – $71,000
Married filing jointly, participates in an employer-sponsored retirement plan: $98,000 – $118,000 $98,000 – $118,000
Married filing jointly, your spouse participates in an employer-sponsored retirement plan, but you do not: $183,000 – $193,000 $184,000 – $194,000

Do you qualify to contribute to a Roth IRA for 2015?

Modified Adjusted Gross Income Phase-Out Range – Roth

Tax Filing Status For 2015 Contributions For 2016 Contributions
Single: $116,000-$131,000 $117,000-$132,000
Married, filing jointly: $183,000-$193,000 $184,000-$194,000

If your filing status differs from those listed above, please contact your advisor and he or she can help you determine whether you qualify.

Harli Palme, CFA, CFP®
Partner

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Market Update Through 12/31/2015

Total Return

Index

12 months YTD QTD

Dec

Stocks
Russell 3000 0.48% 0.48% 6.27% -2.05%
S&P 500 1.38% 1.38% 7.04% -1.58%
DJ Industrial Average 0.21% 0.21% 7.70% -1.52%
Nasdaq Composite 6.96% 6.96% 8.71% -1.92%
Russell 2000 -4.41% -4.41% 3.59% -5.02%
MSCI EAFE Index -0.81% -0.81% 4.71% -1.35%
MSCI Emerging Markets -14.92% -14.92% 0.66% -2.23%
Bonds
Barclays US Aggregate 0.55% 0.55% -0.57% -0.32%
Barclays Intermediate US Gov/Credit 1.13% 1.13% -0.73% -0.35%
Barclays Municipal 3.64% 3.64% 1.66% 0.77%

Commodity/Currency

Current Level Prior QTR Level TTM High

TTM Low

Crude Oil

$37.04

$45.09 $65.61

$33.77

Natural Gas

$2.34

$2.52 $3.57

$1.81

Gold

$1,060.20

$1,115.20 $1,305.70

$1,045.40

Euro

$1.0863

$1.1163 $1.1835

$1.0522

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High-Yield Turbulence

You may have read some scary headlines on high-yield bonds recently.  We’d like to take a moment to update you on the situation and provide our perspective.  First a little background.  High-yield bonds are debt securities issued by companies with credit ratings below investment-grade.  These bonds are commonly called “junk bonds” because of the weaker balance sheets and growth prospects of the companies that issue them.  As a result of increased default risk, investors typically demand higher interest rates on these types of bonds to compensate for the additional risk they take on.  When things are going well, high-yield or junk bonds can deliver above-average interest payments and price appreciation.  When things are not going well, investors can experience sharp price declines and some companies may even default on bond payments.  In a nut shell, higher reward comes with higher risk.

Many advisors, including Parsec, include a modest amount of high-yield bonds in client portfolios.  Junk bonds are considered an asset class and can improve the diversification of a portfolio because they have lower correlations to regular bonds and even stocks.  This means when regular bonds are flat or down, high-yield bonds could actually rise.  The same goes for stocks – high-yield bonds and equities do not always move in the same direction, which confers some diversification benefits.

In addition to diversification benefits, junk bonds have historically delivered healthy returns.  The group tends to do well in the early years of an economic expansion when tight credit starts to loosen and company balance sheets improve.  On the flip side, high-yield bond performance becomes more volatile as an economic expansion starts to slow down and the spread between higher-quality bonds and junk bonds widen.  This indicates investors once again require more return to hold these higher-risk assets.

Earlier this year, interest rate spreads – the difference between high quality bond interest rates and low quality or “junk” interest rates – started to widen as energy company profits came under pressure and debt default rates ticked higher.  Since May 2015 through mid-December, high-yield bond prices have fallen over 12%*.  However, on a total return basis, the group is down about 8% as higher coupon payments were a partial offset.  While debt default rates on speculative-grade companies are below the 20-year average of 4.3%, at around 2.8%, they’ve jumped from 1.4% a year ago due to falling commodity prices that negatively affect profits**.

As high-yield returns tumbled over the summer, many investors ran for the exits.  Unfortunately, diminished bond liquidity following the 2008-2009 financial crisis made redeeming shares difficult for some.  Regulations that strengthened the banking and financial systems via higher capital requirements and reduced leverage have had the unintended side-effects of raising costs for banks and primary dealers to hold fixed income inventory.  With lower inventory levels, these critical market makers are less able to provide liquidity in the debt markets.  This was highlighted recently when investment firm Third Avenue froze investor redemptions in its high-yield fund (which is not a Parsec holding) due to liquidity constraints.  The Third Avenue fund was heavily invested in some of the lowest-ranked credit bonds, which exacerbated the management team’s ability to find willing buyers.  In the end, Third Avenue chose to freeze investor redemptions for one month.

The Third Avenue situation is unusual, but does it reflect deeper issues for the high yield space?  Our view is that current U.S. economic expansion is maturing, which suggests higher credit spreads and potentially more volatility (including downside risk) for the group.  At the same time, falling commodity prices and a strong dollar are headwinds for high-yield.  That said, U.S. jobs growth remains robust, the housing market continues to advance, and consumers are the healthiest they’ve been since before the Great Recession.  The recent Federal Reserve interest rate hike echoes our sentiments that the U.S. economy is on healthy footing.

While high-yield may see more downside, we believe investors are becoming more discerning after years of indiscriminate investing across high and low-risk asset classes alike.  This is a good thing.  It means that fundamentals, and not accommodative monetary policy, will once again drive asset returns.  Although high-yield bonds may face more headwinds in the near-term, our focus on higher-quality, higher-liquidity, high-yield debt should help us better weather a difficult environment.

Despite potential high-yield headwinds, we continue to recommend that clients remain fully invested.  This is based on our experience that market timing is a losing game, as asset class leadership can change sharply, and often without warning.  The historical record has shown that through various market cycles, both stocks and bonds have out-paced inflation over the long-term.  As a result, we recommend investors stick with their high-yield holdings.

*The BofA Merrill Lynch US High Yield Index

**S&P 500 data

Carrie A.  Tallman, CFA

Director of Research

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Holiday Retail Trends & Your Budget

In the midst of this holiday season, is your budget holding together? In this blog, we’ll look at the latest holiday spending stats, the most recent trends in giving, and offer a few tips to help you maintain a financially-stress free holiday season. While money is most definitively not the reason for the season, examining current holiday spending trends gives us some insight into the health of the U.S. consumer and might even inspire reflection on our own holiday spending habits.

According to the National Retail Federation (NRF), total U.S. holiday spending will rise about 2% in 2015 compared to 2014. NRF estimates that the average American will spend about $1,017 in holiday-related items this year versus $1,000 in 2014. No surprise that the bulk of spending, or 72% of budgets, is expected to go towards gift-giving. Family still comes first in this category as consumers plan to spend four-times as much on relatives than on friends. Spending on food comes in at a distant second, eating up 12% of the average American’s holiday budget, but arguably a very important piece of the pie. Other must-haves like decorations, cards, and flowers account for the remaining 16% of most Amercians’ holiday spending.

While holiday spending isn’t surging by any means, it’s up significantly from the depths of the Great Recession when the average American spent only $682 in November and December. For the last several years wage growth has been relatively lackluster while consumer debt has inched lower and savings rates have grown. This suggests consumers learned a valuable, if not painful lesson during the financial crisis: moderation. Lower debt levels and more savings are both net positives for economic growth and asset appreciation. These trends, coupled with signs that wage growth is finally starting to improve, suggests healthier consumers in the years ahead. Given that household consumption accounts for 70% of U.S. gross domestic product or GDP, we may be in for more holiday cheer for years ahead.

Now that we’ve covered some stats, let’s talk about gifts! What do family members want from Santa this year? A poll by the National Retail Federation found that our female relatives rank gift cards as their top gift item, followed by clothing/accessories, books, CDs, and DVDs. While men also named gift cards as number one choice, more of them wanted consumer electronics or computer-related products than women. Looking to give something a little more personal than a gift card? Check out Amazon’s most gifted list (www.amazon.com/gp/most-gifted) for a bevy of ideas by category. Some of the world’s largest online retailer’s best-selling gifts this year include the LEGO Minecraft Playset, the “Inside Out” movie DVD, Amazon’s tablet “fire”, and Adele’s latest CD, among others.

Have a twenty-something in the family mix? A survey from Eventbrite suggests that Millennials prefer experiences over things. In which case you might consider a gift card to the spa or tickets to a play or ball game for the young professionals in your clan.

All this gift-giving talk, while fun to think about, can really strain a budget if not carefully considered. While we’re more than half-way through the holiday season, it’s not too late to reassess your spending plan and even start strategizing for next year. If you’re feeling some financially-related holiday strain, now is the perfect time to stop and take inventory. What was your original holiday budget? Did you have one? And how much have you spent on holiday-related items so far?

In order to relieve money stress, the best and only place to start is by honestly looking at your current situation. The key is not to use your predicament as an opportunity to criticize yourself, but as a starting point for improvement in the years ahead. By intentionally setting a limit on the amount you’ll spend on decorations, gifts, food, etc… you’re less likely to overspend and more likely to avoid feeling financially overwhelmed during the most wonderful time of the year. If you’re already over-budget and swimming in financial strain, don’t sweat it! What’s done is done. The best thing you can do is use this as a learning experience for next year and beyond.

With that in mind, I find that planning ahead is often the best way to navigate any budget. Once you’ve determined a comfortable amount that won’t strain your finances – and you can do this as early as January – you’ll have an entire year to purchase thoughtful gifts for family and friends, on your terms. You can take advantage of sales throughout the year or simply be open to discovering the perfect gift for that special someone. By planning ahead and giving yourself plenty of time to find just the right gift, you’ll have more time to enjoy being with family when the holidays finally arrive. Instead of rushing around the mall at the last minute or spending a fortune on over-night shipping, you can relish the charm of the season and enjoy time spent with loved ones.

Good luck! Wishing you a happy and financially healthy holiday season!

Carrie A. Tallman, CFA
Director of Research

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Five Gas Saving Travel Tips for the Holidays

It’s that time of year again- entertaining, eating too much, and lots of travel.  Marshall Doney, AAA president and CEO, stated in a recent press release that over 46 million Americans will journey 50 miles or more from their home this Thanksgiving.  The chart below shows that gas prices are actually in our favor for traveling this Thanksgiving.

Here are five easy ways to save on fuel prices – not just for the holidays, but all the time!

2012-2015_Avg-Gas-Prices-11-23-15

    1. Drive the more fuel efficient car.  Many people jump to taking the family car with the most leg room and luggage space.  Perhaps take this opportunity to assess your packing and squeeze into the smaller more fuel efficient car.
    2. Lighten the load.  Take an inventory of what’s in your car.  By having a heavier car you use more fuel.  Take off the roof rack that you don’t plan on using this winter and empty out the trunk, leaving only the necessities.
    3. Get a tune up.  Consider getting your car serviced before taking off this holiday season.  The better shape your car is in, the more fuel you will save.
    4. Go back to driver’s ed.  Take this time to remember the basics of driving.  Accelerate slowly, eliminate aggressive braking and speeding.  All of these things lead to increased fuel cost.
    5. Find cheaper gas prices.  GasBuddy is my favorite app for this purpose.  You can use this to find the cheapest prices on your route.

Every penny counts when trying to stick to a budget to meet your long-term goals!

Ashley Gragtmans, CFP®
Financial Advisor

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The Power of Spending Choices

While it’s still well ahead of the official holiday season, a recent email got me thinking about what really drives my spending habits. My sister messaged our family a week ago asking if we were planning to buy presents for the kids this Christmas. I love my nieces and nephews but they are eight in number with at least one more on the way. Buying each one of them a birthday present reflective of their unique personalities is a delight, but as their numbers have grown, holiday shopping has become a little less joyful (‘tis the season) and definitely more stressful.

After the email arrived I knew immediately what I wanted to do – not buy Christmas presents. Only it wasn’t so easy to type those words back. So I waited. Everyone else had responded in the affirmative, but I held back. I felt torn between what I thought I should do and what I knew I wanted to do: enjoy the holiday season with family, minus the gift-giving.

After a little inner conflict and a healthy dose of anxiety, I realized that my desire to not offend, to maintain a magnanimous image, and to avoid the dreaded Scrooge moniker, prevented me from telling my financial truth. I saw that it wasn’t the criticism or praise from others that I was trying to avoid or earn; it was my own inner critic that I was trying to please.

With this newfound awareness, I discovered that not only does this happen at the holidays, but throughout the year! My misguided sense of propriety often influences my spending habits, in a way that is not always aligned with what I really value. Instead, when I notice and promptly ignore my inner critic’s arbitrary rules and demands, it frees me up to spend in a way that’s more aligned with what I really value — like retirement and that future trip to Paris I’ve been planning.

I bit the bullet and told my sisters that I would no longer buy Christmas presents for the kids. It turns out that none of my family criticized me for my decision. This non-reaction was even more proof that my own thoughts and fears – not other people – were behind my financial misalignment.

While some people may not react as well as my family did, when we stop worrying about other peoples’ reactions to our spending choices, they will have less of an impact. We’ll see them for what they are – simply other peoples’ reactions. In the meantime, giving ourselves a break, internally, frees up a lot more clarity to spend in alignment with what feels right. And I can’t think of a better holiday gift!

Carrie A. Tallman, CFA
Director of Research

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NPR Report on Excessive Fees

Investors have a strong desire to be good stewards of their retirement funds. This often includes seeking out professionals for financial advice.  For the retirement plan sponsor, the Department of Labor (DOL) is helping by creating fee disclosure rules and requirements.  A few years ago, the DOL mandated fee disclosure rule (404(a)5) in an effort to ensure plan sponsors are able to determine if the fees for services rendered are “reasonable.”

NPR ran a story this morning about excessive 401k fees.  See link here.  If I could add to this article, I would suggest plan sponsors review their plan fees and services at least every couple of years, if not more often through a fee benchmarking process.  The generated report should give plan sponsors a general idea of how their plan compares to others of similar size.  Benchmarking has other benefits as well.  Not only will this help to uncover fees and what services are being provided, but also some service providers are willing to re-price their services to lower fees.

While many thought the disclosure rules were a bright spot in a dark corner, we feel that further disclosure and transparency is warranted in this industry.  Since not all advisors are the same, we are thankful that the DOL has re-proposed a Fiduciary Rule which seeks to make anyone giving investment advice to 401k/retirement plans (and also IRAs) to act in the account holder’s best interest.  For RIAs like Parsec, it is business as usual.  However, broker-dealers may have a bit more difficulty with this rule, as they operate under something called a suitability standard.  While not to debate the virtues of the fiduciary standard versus the suitability standard, we do feel that greater disclosure is a good thing and will ultimately drive costs down even further.

Neal Nolan, CFP®
Director of ERISA, Financial Advisor

Neal

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Time for an Economic Sabbath?

After feeling somewhat exasperated while watching a reputable financial news program last week, an idea occurred to me: we need to re-introduce the Sabbath. Not in the religious sense of the word, but as a general day of rest from financial or economic progress. The notion struck me after hearing a reporter express dismay over a softer-than-expected read on some monthly economic data point. While I realize the media is paid based on viewer ratings and that doom-and-gloom stories attracts more attention than upbeat forecasts, it would still be nice to acknowledge what’s going right every now and then. And I think it would also be beneficial.

As everyone knows, our market system is based on capitalism. Lesser known is that we’re in a period of what’s called “growth capitalism.” But this hasn’t always been the case. Merchants only started tracking growth metrics during the Industrial Revolution, according to the book, “The Economics of Good and Evil.” Capitalism, as defined by my Google search, is an economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.   Notice that there’s no mention of the word “growth”. Now, I’m all in favor of growth, but with purpose and ideally, some periods of rest. Because growing all the time without set-backs, pauses, and most importantly, reflection, is unsustainable at best and dangerous at worst.

Dangerous because if growth must be achieved at all costs, debt often results as an unintended consequence. When nations and even individuals feel the need to grow for the sake of growth, they often go to extreme measures, often taking out more debt to meet unrealistic targets. For nations who have an independent Treasury, they are able to manufacture more paper money and at least temporarily out-run mounting debt levels. Individuals aren’t so fortunate – or are we? Knowing we can’t manufacture our own currency out of thin air, most individuals curb spending and debt issuance and work to live within their means. We ideally accumulate rainy-day savings funds for when growth naturally slows down or declines, i.e. a job loss or unexpected expense comes up.

But back to a financial or economic Sabbath. It seems in our modern-day society where growth is the undisputed law of the land we frequently fail to appreciate what is going right. We’re so afraid of not hitting the mark that we neglect to notice job growth is on the rise, unemployment is pretty darn low, and the housing market is on the mend. Sure there are plenty of problems that need attention, but acknowledging and even appreciating our relatively healthy economy in no way negates the problems. I would argue that focusing on what’s working and improving actually gives us more energy and capacity to better work with prevailing problems.

Finally, instituting a financial or economic Sabbath, if even on an individual level, allows us to shift from a deficit mentality to one of “enough.” As I reflected on the financial news program that got me thinking about a Sabbath, I realized that having to always meet certain growth targets implies a belief that our current situation is not okay, i.e. a deficit mentality. And interestingly, this mentality is prevalent at a time when debt as a percent of GDP has never been higher. It seems we’re creating what we fear the most – a big ole’ deficit.

Fortunately, things aren’t as bad as the media would have us believe and it’s not too late to stop and smell the flowers. Individually taking stock of what is working and how much we do have (we live during the wealthiest period in the history of the world) can start to reverse our collective deficit mentality and maybe turn the tide towards sustainable, purpose-driven growth.

 

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Carrie A. Tallman, CFA
Director of Research

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What’s Up (or down) with Commodities?

While stocks have been front-and-center lately given sharp price swings, fewer media outlets are focusing on commodities despite the critical role they play in global markets. They too have experienced wild price swings, although mostly to the downside. Year-to-date, the widely held S&P GSCI (Goldman Sachs Commodity Index) has fallen 20% and declined 41% over the last twelve months. What’s driving these big declines and why do they matter to your portfolio?

Commodities are defined as a raw material or primary agricultural product that can be bought and sold. This includes everything from aluminum to zinc, but also oil, natural gas, coffee, beef, and corn, among others. A key differentiator between commodities and other assets are that commodities are valuable only as an input of the production process. They’re not a store of value or wealth, like a stock, bond, or work of art. Because of their utilitarian purpose (with a few exceptions like gold), commodity prices are closely linked to global supply and demand. Simply put, when demand is strong for a commodity and supply is tight, prices go up. Likewise, when demand is falling and/or supply is abundant, commodity prices tend to fall. This causes prices to be very cyclical and closely tied to the health of the overall economy. In an increasingly globalized world, that means all economies affect commodity prices to varying degrees.

While stocks have surged over the past six years, commodities have languished. The widely-held commodity index, the S&P GSCI, has fallen 35% from 2009 to 2014 while the S&P 500 Index rose 131%. As U.S. stocks benefited from improving economic growth at home, commodities never saw a similar bounce-back given their exposure to the broader global backdrop. Lackluster global demand and excess supply of many commodities weighed on commodity prices. The supply/demand imbalance has worsened recently as China, the world’s largest consumer of commodities, has seen economic conditions deteriorate and is curbing its appetite for input products. Likewise, it continues to produce too much supply and is dumping some commodities, like steel, onto global markets, further pressuring prices. It’s a vicious cycle, one that usually reverses when excess supply is finally worked-off and most investors have given up on the asset class.

As an investor, where does this leave you? Should you include commodities in your portfolio? Is now a good time to buy? According to Dr. Rouwenhorst, a leading expert on commodities, research suggests that commodities do outpace inflation over the long-term. And he’s looked at data going back to the 1800’s. At the same time, commodity prices tend to have low correlations with other asset classes like stocks and bonds; meaning that when stocks go down, commodities tend to go up. Thus, adding commodities to a portfolio can help improve your overall volatility and gives you a good chance of out-pacing inflation.   But…we’ve also learned that during massive global crises, like the one in 2008, commodities tend to move in lock-step with other asset classes. People panic and tend to sell everything. We’ve also seen substantial price declines in most commodities over the last six years, and if you’ve owned these assets you know your portfolio has suffered as a result. What to do?

During most periods, a small position in a diversified basket of commodities such as the S&P GSCI or the Dow Jones Commodity Index can help insulate investors from wild swings in traditional asset classes like stocks and bonds. And commodities can experience periods of strong price appreciation. However, it’s difficult to identify those periods and at the same time, avoid sharp declines like we’ve seen in recent years. If you have a long enough time horizon, of twenty years or more, a small allocation to commodities can make sense, but another option is to own high-quality stocks that derive their revenue from commodities. While these companies are also subject to the cyclical nature of commodities, they often have diversified revenue streams and strong balance sheets that can help provide some insulation during cyclical downturns.

Overall, commodities are important to understand in order to gauge the health of the global economy. Although they tend to be a volatile asset class, owning a small amount can provide diversification benefits in your portfolio. Another and perhaps less volatile option is to own high-quality blue chip companies that deal in commodities and have the resources to weather cyclical downturns. This approach also provides the diversification benefits associated with commodities but often with smaller price swings then owning a basket of commodities directly.

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