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yield, notwithstanding short-term uncertainty. At the dawn of 2017, we face uncertainty, but US equities and high yield are expensive, and valuations no longer provide much margin of safety and protection from the downside. Similarly, other asset classes such as fixed income provide negligible returns but come with downside risk, e.g., if the incoming Trump administration’s fiscal policy is more stimulative than we expect or if the Federal Reserve raises interest rates at a more rapid pace than we expect. As we prepared our one- and five-year annualized expected returns for this Outlook and finalized our investment recommendations for 2017, we were struck by two observations. First, the general recommendations and volatility warnings in our Outlook publications over the last several years have been similar, have been directionally correct and have generally added value to our clients’ portfolios. We have continuously recommended that clients stay invested in their strategic US equity allocation. We have also recommended maintaining some tactical tilts such as an allocation to high yield. Yet we have warned clients to be prepared for bouts of volatility. Last year, our exact message to clients with respect to volatility was that “markets will be volatile, so an asset class that performs well in the first half of the year may perform particularly poorly in the latter part of the year; however, investors—unlike traders—should not try to time such short-term moves.” It is very important that clients heed this warning—not just for 2017 but for their entire investing lives. Exhibit 20 illustrates the point. We have compared the performance of some of the best- performing asset classes and sectors for the year with the performance of those assets at their worst The general recommendations and volatility warnings in our Outlook publications over the last several years have been similar, have been directionally correct and have generally added value to our clients’ portfolios. Exhibit 20: Returns in 2016 Some of the best-performing assets in 2016 experienced significant declines before recovering. Total Return (%) 50 @ Return Through Year-End 2016 @ Return Through 2016 Low (2/11/16) 12.0 -10 10.3 191 7 S&P 500 Total Return Index Bloomberg Barclays High Yield Energy Total Return Index S&P Banks Select Industry Total Return Index Data through December 31, 2016. Source: Investment Strategy Group, Bloomberg. point of the year. Energy high yield provides an excellent example. On February 11, 2016, the US energy high yield sector (as measured by the Bloomberg Barclays High Yield Energy Total Return Index) was down 19.1% year to date—one of the worst-performing sub-asset classes at that time. Similarly, the US bank sector (as measured by the S&P Banks Select Industry Total Return Index) was down 21.7% over the same period. We had in place tactical tilts in both sectors. As oil prices recovered, high yield energy securities rallied, with the benchmark index ending the year up 37.4%—a wild swing of 56 percentage points from low to high. US banks also rallied initially in response to prospects of higher interest rates and later in anticipation of less regulation under a Trump administration. The bank sector index rallied to end the year 31.3% higher than at the start—an equally wild swing of 53 percentage points from low to high. We have to be realistic: we cannot anticipate such market swings on a consistent basis. Therefore, it is imperative that clients maintain a long investment horizon, be tactical when investment opportunities present themselves—usually at times of extreme stress in the financial markets—and otherwise stay invested in the appropriate strategic asset allocation. Our second observation was that our five-year annualized return forecasts Outlook | Investment Strategy Group 21 HOUSE_OVERSIGHT_014554