Summer reflections on complacency, humility and diversification.

In the northern hemisphere, it’s that time of year when we head to the countryside, the mountains and the beaches. We let the batteries on our cellphones run down, we put our feet up and we leave the analysts’ reports on our desks. And then we use the long, languid evenings to lose ourselves, at last, in that copy of “War and Peace” that’s been weighing down the bookshelf since we left college.

It may be a cliché that “War and Peace” is considered the ultimate vacation read, but there’s a good reason for it.

It’s not only a great novel of epic sweep and arresting characterizations, but also a treasure trove of Leo Tolstoy’s meditations on the ways we think about and write history, and particularly the power, or powerlessness, of the individual amid the titanic forces of geopolitics.

In the modern world, vacation time is one of the few opportunities that we get to step back and consider the long-term perspective. Summer reading and summer travel are great ways to unwind. But occupying a different place or a different time for a couple of weeks can also nudge us out of our complacency. It can remind us of the value of humility and the perils of over-certainty when we look over the horizon.

As investors, humility tells us to be wary of portfolios built on apparent certainties. Humility tells us to diversify.

Unjustified Complacency

The S&P500 has now gone almost 270 days without a 5% correction. That breaks a 21-year old record. For the first time ever, the VIX Index has closed below 10 for the past seven sessions.

That feels like a complacency that may not be justified. When equity markets only seem to go up, investors can fall into the all-too-human trap of only wanting to own market risk.

But humility and a long-term perspective remind us that it is important to diversify and be ready for a potential change in market regime. Today’s complacency does not fit well with the shifting geopolitical sands beneath our feet, or the fact that we are probably seeing the end of an unprecedented regime of quantitative easing, the point of “peak QE”.

A year or two from now we could be in a profoundly different investing environment. Rates are likely to rise, but even if they don’t, it is likely that volatility will increase and market correlations will change. If, when and how we make this transition is a source of great uncertainty.

Be Prepared

If everything in your portfolio is in the green, that may be a sign that you are not as diversified as you think. That may reflect your conviction, which is fine. But be careful that it is not simply an unwitting concentration of risk. When you are properly diversified, there will more than likely be line items in the red; exposures that, deep down, you hate—but which humility tells you to maintain.

The market hates inflation-sensitive assets, but humility tells us they’ll be useful if rising prices make a surprise return. Humility reminds us to check that the uncorrelated, low-volatility alternative strategies in our allocations haven’t drifted too far underweight after lagging the more directional strategies for so many months because sooner or later conditions could change such that we really need them. It warns us that the negative correlation between equities and bonds that we are used to could dissolve very suddenly as the interest rate cycle turns.

As you take time away from your desk, remember to reflect upon how important it is to maintain a sense of humility and a long-term perspective if you want to be genuinely diversified. It’s not in Tolstoy, but there is a Latin adage that says if you wish for peace, you should prepare for war. Likewise, humility teaches us that if we wish for success, we must prepare for disappointment. Stay diversified—and make a date with a good book on the beach this summer.

Erik Knutzen, CFA, CAIA and Managing Director, is Co-Head of the Neuberger Berman Quantitative and Multi-Asset Class investment team and Multi-Asset Class Chief Investment Officer. Erik joined in 2014 and is responsible for leading the management of multi-asset portfolios, driving the asset allocation process on a firm-wide level, as well as engaging with clients on strategic partnerships and multi-asset class and quantitative solutions. To learn more, see Mr. Knutzen’s bio or visit

In Case You Missed It

  • Eurozone Consumer Price Index:  Unchanged in June month-over-month and +1.3% year-over-year
  • NAHB Housing Market Index:  -2 to 64 in June
  • U.S. Housing Starts:  +8.3% to SAAR of 1.22 million units in June
  • U.S. Building Permits:  +7.4% to SAAR of 1.25 million units in June

What to Watch For

  • Monday, 7/24:
    • U.S. Existing Home Sales
    • Eurozone Purchasing Manager Index
  • Tuesday, 7/25:
    • Case-Shiller Home Prices Index
    • U.S. Consumer Confidence
  • Wednesday, 7/26:
    • U.S. New Home Sales
    • Federal Open Market Committee Meeting
  • Thursday, 7/27:
    • U.S. Durable Goods Orders
  • Friday, 7/28:
    • U.S. 2Q GDP (First Estimate)

– Andrew White, Investment Strategy Group

Statistics on the Current State of the Market – as of July 21, 2017

Market Index WTD MTD YTD
S&P 500 Index 0.6% 2.1% 11.7%
Russell 1000 Index 0.6% 2.1% 11.5%
Russell 1000 Growth Index 0.9% 3.3% 17.7%
Russell 1000 Value Index 0.2% 0.9% 5.6%
Russell 2000 Index 0.5% 1.5% 6.6%
MSCI World Index 0.6% 2.3% 13.5%
MSCI EAFE Index 0.5% 2.4% 16.9%
MSCI Emerging Markets Index 1.3% 5.4% 25.0%
STOXX Europe 600 0.1% 2.5% 18.6%
FTSE 100 Index 1.0% 1.9% 6.7%
TOPIX 0.3% 1.1% 8.6%
CSI 300 Index 0.8% 2.5% 14.5%
Fixed Income & Currency      
Citigroup 2-Year Treasury Index 0.0% 0.1% 0.5%
Citigroup 10-Year Treasury Index 0.8% 0.7% 2.8%
Bloomberg Barclays Municipal Bond Index 0.7% 0.9% 4.5%
Bloomberg Barclays US Aggregate Bond Index 0.6% 0.6% 2.9%
Bloomberg Barclays Global Aggregate Index 1.3% 1.4% 5.9%
S&P/LSTA U.S. Leveraged Loan 100 Index 0.2% 0.5% 1.9%
BofA Merrill Lynch U.S. High Yield Index 0.6% 0.9% 5.9%
BofA Merrill Lynch Global High Yield Index 0.8% 1.2% 7.6%
JP Morgan EMBI Global Diversified Index 0.8% 0.9% 7.2%
JP Morgan GBI-EM Global Diversified Index 1.0% 2.1% 12.7%
U.S. Dollar per British Pounds -0.7% 0.0% 5.1%
U.S. Dollar per Euro 1.8% 2.2% 10.5%
U.S. Dollar per Japanese Yen 1.3% 1.1% 5.0%
Real & Alternative Assets      
Alerian MLP Index -1.9% 0.2% -2.4%
FTSE EPRA/NAREIT North America Index 0.8% 0.7% 2.5%
FTSE EPRA/NAREIT Global Index 1.3% 1.8% 9.2%
Bloomberg Commodity Index 0.4% 0.5% -4.8%
Gold (NYM $/ozt) Continuous Future 2.2% 1.0% 9.0%
Crude Oil (NYM $/bbl) Continuous Future -1.7% -0.6% -14.8%

Source: FactSet, Neuberger Berman.