A New Road Ahead? – Recency bias leads people to believe that tomorrow will be like yesterday. However, the pendulum appears to be swinging away from the macroeconomic trends of the last 40 years. For investors, rising inflation and interest rates have hammered investment returns this year; 60/40 portfolios (60% stocks and 40% bonds) have seen their worst returns in the past 100 years. The pandemic has exposed vulnerabilities in economic supply chains, especially those linked to adversaries such as China and Russia. It looks like the good old days of cheap capital, cheap labor, cheap imports, and cheap energy may be over. The shift from globalization and efficiency to localization and resiliency will likely require a different investment strategy for the road ahead. What are the options? Same as ever—there are only two.
Equity – Money is given to a third party for a promise to share in the future profits of a business. Examples include common stocks and income-producing real estate.
Debt – Money is given to a third party for a promise to get it back, plus interest. Examples include bank loans, certificates of deposit, Treasury and Agency bills and notes, preferred stocks, mortgages, and various bonds.
That’s it—only two. And the business of Wall Street is basically three things: securitizing, leveraging, and facilitating trade in each of the two above. As a result, in the U.S alone we have thousands of individual securities, thousands of mutual and exchange-traded funds, hundreds of closed-end funds, and untold numbers of related derivatives such as futures and options.
“Know what you own.” – Peter Lynch
The investment objective for most people is usually income and/or growth. But having these words in a fund’s name is no guarantee of a happy outcome. It’s important to review the fund’s fact sheet and understand the types of assets held, the quality of those assets, how the portfolio is allocated, and if leverage is involved. And remember—past performance is no guarantee of future results. Wall Street offers plenty of options to get from A to B. When shopping these vehicles, it’s best to know what’s under the hood.
Copyright © 2022 - Any opinions are those of James Aldendifer and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of the strategy selected. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.
