2017 came and went without nary a whimper. None of the big concerns at the end of the previous year happened or at least global capital markets did not seem to be disturbed by much of anything.

Stocks went up in a straight line, bonds did ok, volatility was super low and at the end of the year exuberant expectations were in full bloom as everybody and their aunt became fixated on Bitcoin

The global economy keeps doing well and memories of the 2008 Financial Crisis are receding.

Consumer sentiment remains upbeat. Maybe some drama out of Washington but generally smooth sailing.

Being an investor is wonderful when markets are calm and 401K statements show gains month after month. Everybody is an investment genius.

We forget how painful it is when markets experience stress and things get a bit crazy.

Similarly we tend to forget how lucky we are at times such as in 2017 when capital markets deliver bountiful gains.

Clearly, we would all love smooth capital markets forever, but …

The close friend of return is always uncertainty. The two are inseparable even though they may not always be in direct contact

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What is uncertainty in the capital markets?

There are as many ways of defining uncertainty as there are opinions as to who the greatest quarterback in history is (we all know it is Tom Brady, right).

My favorite way to visualize uncertainty is as a bell-shaped distribution of potential outcomes — the good and the bad with a lot happening in the middle.

We fear the left tail where things go terribly wrong, we accept the middle of the distribution as textbook risk/return, and we think that our own brilliance (just joking, of course) has led us to the right tail of the distribution.

In 2017 equities, in particular, had a monster year with the S&P 500 up over 25% and many international markets up even more. The year turned out much better than expected. What do I expect for this coming year?

My baseline capital market scenario for 2018 is fairly benign — some people would call it boring. A quick review is in order.

• I expect equities to again do better than bonds
• I also expect international assets to outperform domestic strategies
• My most likely scenario for this year is for continued growth, subdued inflation and no major equity or bond market meltdowns

In my judgement there is about an 80% probability that such a Goldilocks scenario plays out in 2018.

On the downside I expect the low volatility of last year to once again revert back to risk on/off.

I expect to see more large jumps in market prices caused by low probability events lurking in the left hand side of the distribution. The press calls these events Black Swans.

On the other end of the uncertainty distribution you have what I call Green Swans — events, low in probability that when they happen are wildly positive for investors.

What could cause a Black Swan in 2018?

• An inflation spike caused by a sustained rally in commodity prices

Inflation in the US is currently running a bit above 2% and market participants do not expect to see any major revisions over the next two decades (see the Philadelphia Federal Reserve estimate of inflationary expectations).

Forecast complacency has set in and inflation risks are to the upside. An overcrowded trade as traders would say

The immediate effect of an upward spike in inflation would be a rise in bond yields. Equities would probably take a short-term hit but the primary casualties would be found in the fixed income market.

What could cause a sustained surge in commodity prices? One, could be a supply disruption say in the oil market. Oil is once again showing signs of strength.

Another could be a resurgence of global growth and continued demand for commodities such as iron ore and copper.

Third, a depreciating US dollar leading to a ramp up in commodity price inflation.

• A spike in capital market turmoil caused by a Geo-Political Blowup

The blowup could be anywhere in the world but most political commentators point to North Korea and Iran as the most likely centers of conflict.

Another possibility is a cyberattack endangering public infrastructure facilities especially if it is sovereign sponsored. Third, Jihadi terrorism on a large scale and on high profile targets. And last, the outcome of the Special Counsel investigation into Russian meddling.

All of these events have blowup potential.

Global economic growth would also, no doubt, loose some of its new found momentum.

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• An avalanche of bond defaults in the apparel and retail industries in the US and/or a debt bomb crisis in China

It is no secret that the US apparel and retail sectors are going through massive consolidation driven in part by the shift to online shopping. It is widely acknowledged that the US retail market is over-built.

The number of apparel and retail companies expected to disappear is higher today than in 2008 during the Financial Crisis. Read here for a list of apparel and retailers at risk.

According to the Institute of International Finance global debt hit a record last year at $233 trillion. Debt levels as a percentage of global GDP are higher today compared to 2007. Figuring prominently in the debt discussion is China.

The IMF recently issued a warning to the Chinese authorities about the rapid expansion of debt since the 2008 Financial Crisis. The rapid expansion in debt has funded lesser quality assets and poses stability risk for global growth according to the IMF.

Estimates by Professor Victor Shi at UC San Diego put Chinese total non-financial debt at 328 percent of GDP. Other estimates are even higher leading to an overall picture of rising liabilities and numerous de facto insolvencies.

The implications of a debt scare for investors are quite dire. Investors have had plenty of experience with debt crisis in recent years — Greece and Cyprus come to mind as Black Swan events that temporarily destabilized global capital markets.

A Chinese debt scare would no doubt be of great impact to investors. Emerging market debt spreads would certainly blow up.

What about the right hand tail of the uncertainty distribution — the Green Swans?

These are wildly positive events for investors that carry a low probability of happening.

What type of Green Swan events could we hope for that would lead capital markets to yet another year of phenomenal returns?

• A positive global growth surprise possibly brought on by the recently enacted US tax reform

The US is the largest economy in the world and still remains a significant engine of global growth. Could we be surprised by a spurt in US economic growth this year?

According to the Conference Board US real GDP is expected to growth 2.8% in 2018.

Could we see 4% growth? The President certainly hopes so. Not that likely. The last time that US GDP growth was above 4% was in 2000.

What could give us the upside scenario for growth? Maybe a jump in consumer spending (representing 2/3 of GDP) driven by real wage growth and lower taxes.

Another possibility is a surge in investment by US corporations driven by cash repatriations and recently enacted corporate incentives.

We view both scenarios as realistic but providing only a marginal boost to growth. Sorry, Mr. President!

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• A spurt in exuberant expectations driven by the cryptocurrency craze

Fear of missing out (FOMO) takes over repricing all investments remotely tied to the cryptocurrency craze along the way.

We saw a similar scenario play out in 1999 in the final stages of the Technology, Media and Telecom (TMT) bubble.

In those days TMT stocks were no longer priced according to traditional fundamentals but instead on the idea that laggard investors would buy into the craze and drive prices even higher.

Lots of investors succumbed to FOMO in the final stages of the TMT bubble

The recent price action of Bitcoin and most other cryptocurrencies has a similar feeling to the ending stages of the TMT bubble. It is almost as if Bitcoin and its cousins are being discussed along with the latest Powerball jackpot.

No doubt fortunes have been and will continue to be made in cryptocurrencies.

Blockchain technology which underlies the crypto offerings is here to stay, but I worry about the lack of investor education and the speed of price action in late 2017. Whatever happened to Peter Lynch’s “buy what you know” approach?

What could we see if exuberant expectations make a sustained comeback?

First, technology stocks would continue out-performing. Chip suppliers such as Nvidia and AMD would continue to see massive growth.

Companies adopting blockchain technologies would see their valuations increase disproportionally.

Animal spirits would be unleashed onto the capital markets making rampant speculation the order of the day. The primary beneficiaries would be equity investors with aggressive portfolios.

Conclusion:

History tells us that it is almost certain that after 8 years of an economic expansion and stock market recovery we should see an outlier type of event in 2018. What shape and form it will take (or Swan color) we don’t know.

Preparing for tail risk events is very expensive and under most scenarios not worth bothering with. Focus on the big picture instead. Predicting tail events is possible only in hindsight.

Black Swans create great distress for investors, but the opportunity cost of playing it too safe is especially high today given prevailing interest rates that fail to keep up with inflation.

The fear of missing out (FOMO) during Green Swan events is also a powerful investor emotion. Again playing it too safe can result in many lost opportunities for capturing significant market up moves.

Investing is all about weighting these probabilities and focusing on a small number of key fundamental drivers of risk and return.

Most to the action takes place in the middle of the distribution of potential outcomes.

How you structure your portfolio and navigate the uncertainties of capital markets is important to your long-term financial health.

Watch those tail events but don’t become paralyzed by fear or greed — these are after all low probability occurrences.

Have a realistic and well thought-out financial plan in place and if needed have an experienced Captain Sully-type as your captain.

Focus on the big picture and live your life!

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None of this shall constitute an investment recommendation. Consult your wealth manager if you need help. A version of this note first appeared in Financial Insight Strategists.

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Most people stumble into retirement — what they are usually faced with is a loss of identity and purpose.

In a new book “Prescription for a Happy Retirement”, Dr. James Bash calls this the new PMS — Post Work Melancholy Syndrome. Whatever you call this state of mind, don’t let it happen to you.

What a lot of people need is a good shock to the system — retiring abroad just might do the trick.

Have you ever been in an environment where everything was unfamiliar and your senses were hyper-active? Retiring abroad will feel like that at first.

Things will smell different, look different, act different, taste different, sound different. Even you will start acting different and that is exactly the point.

You will sense that something is happening inside of you. That what you assumed to be true before may actually be less certain now.

A new perspective maybe. Or the awakening of something inside you that cries out for redefining life on your terms. Retiring abroad will test your hidden assumptions about the life you want to lead for the next 30 years or so.

10 million baby boomers retire every day in the US saying good-by to their old job routines. Some are prepared for what lies ahead. Most are not!

I am not just talking about finances. Up to this point, you have done what is expected. You have built a career, maybe raised a family, diligently paid your mortgage and stashed money away in your 401K. Life has probably thrown you more than your share of curve balls but you kind of followed the grander playbook.

Now the playbook is missing. Somebody ripped the pages out. Now what? You feel lost at sea.

That little voice in your head keeps going off. Do the right thing and you will spend your golden years enjoying 5 o’clock buffet line specials, endless rounds of golf (substitute shuffleboard if you wish) and lots and lots of TV watching. Wash, rinse, repeat for 30+ years?

Census data shows that More Americans Are Retiring Abroad. Maybe you will benefit from this trend as well. You could be shocked into living again.

Here are 5 reasons why retiring abroad could be the best decision for you:

#1. The pace of life is slower which ironically will make you think more about what you really want to do

Having more time to smell the roses or more likely a good cup of coffee. More time for conversation? Watching a sunset from your ocean front balcony? A mid-afternoon nap? How delightful.

Yes, I want a bit of that! Life in many countries just moves slower. If you have a type-A personality you will have to adjust at first and dial it down a bit, but think of all the free time you will have.

The word “manana” translates to tomorrow but what it really means is maybe tomorrow, maybe in a couple of days, maybe in the rainy season. Is life really that urgent?

A slower pace of life will give you more time to think. It will also allow you to reconnect with yourself, your significant other and the world at large.

#2. The cost of living is less and you will be able to afford to do a lot more fun activities

Who doesn’t like a sale? Especially when it is on everyday prices. A big part of the appeal of retiring abroad is about stretching your nest egg.

Surveys show that one of the biggest worries of people, as they retire from their full-time careers, is outliving their savings. Would it not be great if you could remove one more worry from your list? Imagine being able to live well on an income of half or even a third of what you were earning before.

Let’s take a quick look at cost of living numbers for countries in the Americas. Numbeo is an organization that compiles such data from actual consumers. From my own experience, the cost estimates seem to be in the ballpark — maybe not down to the penny but the actual rankings of the countries conform to my own intuition.

Source: Numbeo

What does the data say? Retiring in the Caribbean will cost more but you already knew that from taking those family vacations. The good news is that there are plenty of other places offering a more inexpensive lifestyle than at home.

For example, have you thought about moving to one of the most affordable places in the western hemisphere — Ecuador? The cost of living is about 40% cheaper than in the US.

While not as affordable, how about Costa Rica? With any luck you could find yourself surfing next to Tom Brady. If that is not enticing how about moving to Panama and salsa dancing to the tunes of Tito Puente? Both come at a 20%+ discount.

#3. Your brain will feel stretched again as you encounter many new things.

Not only will your surroundings be new and unfamiliar but you will most likely need to learn a new language. Spanish? Portuguese? Thai?

How about new customs? Finding that balance between the old and the new will keep you on your toes.

The change will bring a new step into your life — stretching again to make new friends, understand another culture, taste new foods and smells, a sense of adventure and maybe if you are lucky a bit of romance.

You could have unbelievable wildlife in your backyard — no, I am not talking about just the occasional spiders and critters eating away at any breadcrumbs.

Pretty soon you will be spending part of your day talking to your new found friends about that strange type of mushroom you found growing in your backyard or the colorful bird flying above your hammock. Could it have been a Toucan?

You could take up hobbies or activities that you either had long ago given up on or maybe never tried due to a lack of time. Bird watching anybody? Yoga? Maybe surfing if you are looking for a more vigorous workout.

According to the National Institute On Aging staying mentally engaged and continuing learning is vital for maintaining cognitive health. Retiring abroad just might do the trick!

#4. Your Health will improve as you simplify your life.

Life abroad tends to be simpler than back in the US. In fact many ex-pats refer to living abroad as something out of the 1950’s.

Healthcare is a big concern for many people moving abroad. People worry that you won’t be able to have access to the same quality of medicine as back at home.

For many retirees this is a real issue but thankfully health care in many parts of the world has improved dramatically. In a recent survey by Bestplacesintheworldtoretire.com 18% of retirees actually indicated that the quality of health care abroad was much better than at home with 30% stating that it was about the same.

People also worry about the cost of health care. Not a huge surprise there as for many of us healthcare is a large expense. Here the news gets really encouraging for anybody looking to retire abroad.

By most accounts, healthcare is a bargain abroad! Again based on surveys, 36% of retirees living abroad believe that their health care costs are less than a quarter of what it cost at home with a further 38% of respondents indicating that costs were between one quarter and half.

Many countries favored by ex-pats have nationalized health care systems available at very low monthly premiums. This option is great for taking care of the basics (health checkups, allergies, a broken toe) but there are often also private medical care options again at a fraction of the cost available in the US. Many of these facilities are staffed by personnel trained in the US and Europe and the equipment is often state of the art. Have you ever seen ads for medical tourism?

Beside health care cost and quality there is an additional benefit and it relates to something in your control. By that I mean what happens to you as you change your surroundings and adopt a simpler lifestyle.

Often you have no choice — things move slower abroad, the roads are narrower, there are fewer cars on the road, you are often closer to nature, people walk a lot more, and information overload is not as prevalent.

But the biggest change is often internal. Something changes in people when they retire abroad. Maybe it is by necessity as you get used to your new environment or that changing your habits is easier when you get a new lease on life.

Among retirees, surveys show that 43% of them believe that they now have a much healthier life style than at home. Another 31% think that they have a slightly healthier life style. For most people retiring abroad a less stressful life leads often to healthier living.

#5. It will give you a chance to reinvent yourself and that may be the biggest reason for taking a chance.

No, retirement abroad will not make you look like Gisele Bunchen or Tom Brady but it will give you the ability to re-define what you want out of the rest of your life.

There are four main reasons for this according to retirement expert Chuck Bolotin of BestPlacesInTheWorldToRetire.com. One is the shock from experiencing unfamiliar settings.

Maybe you never saw yourself as a nature lover but waking up every morning to a band of singing birds might trigger the Steve Irwin in you.

Another is simply being around new people. New friends, fresh conversations, different social norms? Throw in there a new language and I hope you get the point.

Yet another reason and one we alluded to before is the lower cost of living allows you to do more with your budget which, of course, has the side benefit of lowering your stress.

Maybe your budget will now allow for a couple of adventure trips a month. Imagine white water rafting the Reventazon River in Costa Rica or hiking Ecuador’s Chimborazo Mountain? Both would surely get your juices flowing!

Finally, being around people with a different perspective of life will force you to re-examine your beliefs. Not everybody views life the same way as your peers back home.

Some of your core principles will no doubt be re-enforced but you might end up seeing shades of color in areas of your life where once upon a time you only saw black and white.

Remember, living does not stop with the last paycheck. Retiring abroad could be the shock you need to restore your identity and purpose in life.

Try it and if it does not work for you come back. But whatever you do, re-inventing yourself is key to finding a life of adventure, new learning and meaning.

Retiring abroad will not cure all ills. Running away from problems will never work, but an open mind and a desire to lead life on your terms could yield a steady stream of dividends.

Retiring abroad is not for everyone, of course. But if you want that extra adrenalin rush and feel empowered again to lead a life of purpose at a discount price, retiring abroad might just do the trick

Thank you for reading!