Change is rarely easy. Oftentimes it’s unwelcome. But usually, even when it’s unpleasant at first, change has the ability to teach a lesson or two that eventually leads towards positivity.  And then theoretically, we take these lessons, apply them to our lives, and live happily ever after.

Okay, okay, I know this reads more like a fairy tale than an investment piece; however, that last bit about change teaching positive lessons is true.

In this article I’ll be discussing a positive lesson that I learned (or, more accurately, was reminded of) during the market’s major shift towards volatility: the importance of an income stream as a calming force; or, an anchor even, amidst stormy seas.

I admit that there are going to be few original thoughts in this piece.  I always strive to be creative, engaging, and somewhat inspirational when I write; however, sometimes I think it’s best to be reminded of the important things that we already know. It’s easy to lose track of our principles, especially when emotions get involved.  It’s when we stray from the path that we’ve spent so much time developing that we tend to make mistakes.

As portfolio managers, we’ve all likely heard about the importance of staying rational in the face of fear and greed, as conservative investors, we’ve all likely spent a lot of time focusing on value instead of the market momentum, and as dividend growth investors, we’ve been told, countless times, to focus on a reliably increasing income stream rather than the speculative undulations of the value of our holdings, especially in the short-term.

Granted, it’s been easy to forget these things in recent months. 2017 was a year of historically low volatility with an upward bias that made capital gains relatively easy to come by. These high returns lead to complacency and possibly even exuberance in certain areas of the market. This was especially the case in several areas of the market that DGI investors typically cover.

Historical valuations have been somewhat disregarded in favor of reliable yields for awhile now with interest rates hovering near all-time lows. The conversation around interest rates began to change its tune late last year as tax reform became a reality, but that talk, which should have been paramount amongst investors, whether you own dividend paying stocks or not, was overshadowed by the exuberance in the crypto markets. Speculators were making millions in this relatively new and little understood asset class and I think this confidence spilled over into the equity market. Needless to say, it seemed like we were living with a market where investors could do no wrong.

This cheery overflow of sentiment followed the market into the new year, which lead to one of the best Januarys of all-time. Obviously investors couldn’t have expected January’s 5% returns to continue; on an annualized basis. However, complacency was rampant with heavy retail inflows into the market during December and January. Investors who’d been sitting on the sidelines throughout the strong bull market during the last couple of years were finally putting their cash to use.

Oftentimes, large retail inflows are used as contrarian indicators, because whether we like to hear it or not, many times retail investors are considered to be “dumb money”. I don’t think its fair to paint the mom and pop investors with such a broad brush, but then again, it appears that retail inflows did signal a market top this go around, at least in the short-term. I don’t know if this bullish retail sentiment was factored into the algorithms that are responsible for for the vast majority of the trades on any given day or not, but regardless, a jobs report highlighting wage inflation (sparking fear of overall inflation), combined with the 10-year crossing a couple of “important” analyst/technical thresholds, led to record volatility.