This article was updated on March 24, 2017.
#1: Uncertainty Is a Sure Thing. Keep Calm and Carry On.
When it comes to shock and awe, 2016 delivered. The United Kingdom’s decision to leave the European Union, the election of Donald Trump as president of the United States, turmoil in China’s markets, challenges to globalization — clearly, the world remains an uncertain place.
Swift and dramatic change can inspire powerful emotions and lead to very human, but ultimately destructive, investment decisions. For investors confronted with confusion and uncertainty, the natural temptation is to retreat. “Keep calm and carry on” may be good advice, but for many investors it can be hard to follow.
History offers hope. Time after time, the market has demonstrated its ability to climb a “wall of worry.” Ever since the market’s low in 2009 in the wake of the financial crisis, the S&P has demonstrated its strength in the face of issues ranging from the “flash crash” to political turmoil at home and abroad.
Many of the events depicted on this chart have been costly. The market, however, has not only survived, but thrived. For more than a century, the U.S. market has endured wars, recessions, assassinations, scandals and natural disasters. And each time it has come back.
Through it all, the market has demonstrated remarkable strength and resiliency in the face of challenges. Investors should follow suit.
What does the rest of the year hold for investors?
Learn what Capital Group economists and portfolio managers think in our 2017 Midyear Outlook.
#2: Diversification Still Matters, So Keep Your Balance.
In the 2008-2009 bear market, diversification didn’t matter. The Great Recession took a toll on nearly every asset class and portfolio. But in the 2000-2002 downturn, diversification worked. If you hadn’t piled into tech, you were spared a lot of pain when the dot-com bubble burst.
The debate over investment diversification is likely to go on and on, but today a strategic allocation in stocks and bonds around the world remains a hallmark of a portfolio that can help investors fulfill their objectives in the long run.
Investors are likely to be faced with situations in 2017 that might tempt them to deviate from their long-term strategy. For example, the United States’ economy looks likely to continue setting the pace for global growth, while Europe’s economy continues to struggle. That might make some investors question the value of investing abroad.
But today’s environment requires a global perspective. Investors should consider having exposure to stock and bonds from around the world. Ideally, the resulting portfolio will have the potential to benefit from the extraordinary changes in the world’s capital markets that present long-term investment opportunities.
While it is true that rising interest rates can hurt bond prices in the near term, bonds should continue to play an important role in a diversified portfolio. Bonds can mitigate volatility, preserve capital and supply the investor with either current income or a relatively certain amount at some point in the future.
It’s also important to remember that over the long term, higher rates can be beneficial for fixed income investors. As bonds are sold or reach maturity, the proceeds can be reinvested in bonds with a higher coupon, which can help offset the impact of price declines.
“If you’re a long-term investor, you have to remember that you are constantly reinvesting bond coupons, bond maturities,” says Capital Group portfolio manager Wesley Phoa. “If rates are trending higher, you’re reinvesting them at higher rates, and so the returns that you end up getting don’t look as bad as you might have expected.”
#3: Income is Scarce. Casting a Wide Net Can Pay Dividends.
There are nearly 50 million people over 65 in the United States, and many of them have one thing in common: They want their dividends. Millions of retiring baby boomers need income, but they may have to search far and wide for yield.
Historically, dividends have always played a significant role in driving equity returns and helping investors meet their financial goals. Dividend income is especially important during retirement. This chart shows that at a time when an increasing number of people are approaching retirement age, the dividend yield of the S&P 500, and the yield on Treasuries, are both at relatively low levels.
To be sure, strong demand for dividend income has driven valuations for many traditional dividend payers in the U.S. — such as utilities and consumer staples — high above long-term averages.
For investors willing to look beyond U.S. borders, there are a significant number of companies in both developed and emerging international markets with high dividend yields, some greater than 3%. In fact, since 2001, dividends have accounted for more than half of average annual total returns in developed international markets.
Global bonds can also play a role in portfolios. An extraordinary expansion in global capital flows has dramatically increased the selection of fixed income opportunities. A global bond strategy can allow investors to participate in these expanding opportunities.
The evolution of dividend-paying securities abroad, just as millions of investors are shifting from accumulating wealth to entering the retirement income phase, provides another reason for including international equities and bonds in a well-diversified portfolio.
#4: Relax, It’s Not All Doom and Gloom.
Take a deep breath. Relax. In an age when doom and gloom seem to be all we read about or see on television, it just might be possible that things aren’t as bad as they seem. In fact, things may just be getting better — and not for the few, but for the many.
In the United States, for example, disposable personal income reached nearly $14 trillion in 2016, or nearly 40% more than in 2007. Household credit card debt dropped to $665 billion in 2015, down from $865 billion in 2009.
This chart shows the remarkable decline in poverty around the world. Indeed, the global standard of living is rising at a remarkable rate, with millions of people moving into the middle class. Many of them are reaching for a better life, a powerful force that could have significant ramifications for the global economy and companies around the world.
Thanks to innovation, education and a strong entrepreneurial spirit in most of the world, the future actually looks bright. From cars that can drive themselves to breakthrough drugs that could lead to victory in the war against cancer, we may be on the cusp of a dramatically different and better future.
During a time when pessimism can sometimes seem overwhelming, Capital Group portfolio manager Carl Kawaja has a refreshing theory about life and the world: things get better.
“I think that the world, broadly, gets better,” Carl says. “I think people become wealthier. I think health care becomes better. I think education improves. I think we know a lot more about the world.”
#5: Life Happens. Control What You Can With a Long-Range Plan.
Don’t get too high or too low. Try to maintain an even keel. Fight fear with facts.
All of those can be hard to do when the world’s markets and global economy are going through times that can be both exhilarating and frightening. The evidence shows that euphoric investors tend to buy high, and fearful investors sell low.
The Capital Group, home of American Funds, conducted a proprietary survey of investors in 2016 and found that those who work with a financial advisor are more likely to stay on track toward their long-term goals while also feeling better and more confident about achieving them. They are also more likely to invest a larger percentage of their income, and invest regularly.
Advisors can help investors overcome uncertainty and fear by keeping them committed to a consistent investing plan that has the potential to fulfill their investment objectives. An advisor can help investors stay focused on the big picture. When the market drops, for example, an advisor can put things in perspective and keep people from jumping out of investments that are aligned with their goals. Navigating toward your desired destination can be easier when you have someone you can turn to for direction.