Three Thoughts

Following are three summaries of items that interested me over the last week or so.

First, I am an ardent follower of the think tank and investment advisory firm Research Affiliates and I found their recent comments and analysis very interesting.  Following are the thoughts put forth by Vitali Kalesnik, PhD, Director of Research, Europe, of that firm where he expresses a cautious view of multiple recession indicators that he believes are currently present:

o   Higher interest rates

o   The prolonged Russia-Ukraine war, where sanctions are pushing energy prices higher and increased military spending will constrain other fiscal stimulus

o   Increased public infrastructure spending on renewables and, likely, nuclear power, further diverting governments away from other fiscal stimulus.

Secondly, Research Affiliates recently updated their Asset Allocation Interactive model and it suggests risk/return profiles for the major asset classes over the next 10-year horizon (see the chart below).  As shown, it indicates that investments in International Developed markets (EAFE), Emerging Markets , U.S. Small Cap and Europe are likely the highest returning AND highest risk asset classes.  U.S. Large Cap equities are forecast to underperform those asset classes, but still exhibit high risk.  The lower return (and lower risk) assets include broad U.S. Core bonds and U.S. high yield bonds.  So, no surprises here but interesting to see a model supporting a popular consensus and historical view.

And thirdly, you have all heard it from me many times to hold tight since no one can time the market, no one rings a bell when it is time to get back in, and based on history, long-term investors will be rewarded for sitting tight.  Echoing this thesis is a recent post from Fidelity investments titled, “Three Reasons to Stay Invested Right Now” with these thoughts:

1.      Market volatility is normal and stocks have historically recovered even from major downturns and delivered long term gains

2.      The best returns often happen when everything feels the worst

3.      Holding cash may also be risky due to inflation

In this environment it is best to ensure that your portfolio has some inflation protection built-in, that your bond exposure is appropriate, and your tolerance for risk is matched with your investment strategy.  At Dattilio & Ash we consider all these thoughts for all client accounts.