"Risk means more things can happen than will happen." — Peter Bernstein

Global stocks have delivered strong returns this year despite a volatile news cycle. The MSCI All Country World Index is up roughly 13% through September 30, including a 1.7% gain in the third quarter. Performance has been uneven. Strong returns were broad through the first half, but market leadership narrowed in the third quarter, with a smaller group of stocks driving a larger share of returns.

Bonds tell a different story. The 10-year Treasury yield rose from about 4.5% to about 5.3% during the third quarter, contributing to a decline of nearly 3% in the Bloomberg U.S. Aggregate Bond Index year to date. Behind that move was a reversal in interest-rate expectations. Going into 2026, markets expected the Fed to cut rates. Since then, rising energy prices and more persistent inflation have shifted expectations toward tightening, and in September the Fed raised rates for the first time since 2023.

The higher energy prices stem from the conflict in Iran and have added to inflationary pressures, though higher interest rates cannot reopen shipping routes or increase the supply of oil. Other forces are at work as well. The U.S. fiscal deficit and growing Treasury issuance have also played a role in rising yields.

That gap between expectations and outcomes stands out in a year full of confident forecasts. The same holds for the technology drawing investor attention today. Artificial intelligence, or AI, is built in part around making predictions, whether in language, computer code, or biological research. For investors, though, the risk in the headlines is not always the risk that determines returns.

A look back at 1999 offers some perspective. As the year 2000 approached, many older computer systems stored years using only two digits, interpreting "00" as 1900 rather than 2000. Some worried that banks would fail, planes would be grounded, and the power would go out. A major magazine put the question on its cover in January 1999: "The End of the World!?!"

The tone is familiar today. This September, a former AI researcher warned publicly that the technology could pose a severe danger to humanity, and others have raised similar concerns. At the same time, companies continue to commit substantial capital to AI infrastructure, with data center construction reaching a record pace this summer.

What happened next in 1999 is the part worth remembering. Billions of dollars were spent rewriting computer code. January 1, 2000, arrived, and almost nothing went wrong with our computer systems. The systems held, in part because of the preparation that followed the warnings. It was like a smoke detector that never went off. The market impacts we saw in 2000 came from somewhere else. Investors had poured money into internet companies at prices those businesses could not support, and within months that market had turned. The concern about technology wasn't foolish, but the risk that mattered was the price paid for it.

That distinction matters now. Two questions are being asked together, though they are separate: whether AI safety concerns are being handled responsibly, and whether the companies making these investments will earn enough to justify them. We watch both, recognizing that the answer to one does not necessarily tell us anything about the other. The drivers today also differ from 1999, when prices climbed while profits lagged. Earnings have been growing alongside prices this time, which is why we try not to lean on the comparison harder than it deserves.

Bonds deserve a similar long view. Rising yields have pressured prices this year, but they have also increased the income available to investors going forward. In 2020, the yield on a 10-year Treasury was below 1%, leaving little income and no cushion against rising rates. Today, yields are substantially higher, and that interest can help offset price declines before total returns turn negative. Will that show up in every quarter? No. But over longer periods, the benefits of holding bonds in a diversified portfolio have improved.

The broader point is about preparation. The people who prepared for Y2K were not wrong because the feared catastrophe never arrived. The mistake would have been to conclude that because one risk did not materialize, preparation itself was unnecessary.

Investing presents the same challenge. We can become convinced that a recession is coming and hold too much cash. We can become convinced that AI will transform every industry and pay too much for the companies expected to benefit. Or we can decide that bonds no longer serve a purpose just as their prospective returns improve. In each case, the problem is not the forecast, but rather the confidence with which we act on it. More things can happen than will happen. Our process is to build diversified portfolios that do not depend on any one outcome, so our clients can remain invested through whatever comes next.

Nobody thanks a smoke detector for a quiet night. That is the nature of preparation.

Investing involves risks, including possible loss of principal. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass.

Investment Advisory Services are provided through True Link Financial Advisors, LLC, (the “Adviser”) an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”) and wholly-owned subsidiary of True Link Financial, Inc. (“True Link Financial” and, together with the Adviser, “True Link”) Registration with the SEC does not imply a certain level of skill or training nor does it constitute an endorsement of the advisory firm by the SEC. The performance of investments will vary day to day in response to many factors. Asset allocation strategies are subject to the volatility of the financial markets, including without limitation that of the underlying investment options’ asset class. An investment is subject to a high degree of risk, including the risk of loss of an investor’s entire investment, and diversification does not ensure a profit or guarantee against a loss. Nothing contained herein is considered an offer to sell or a solicitation of any offer to buy any securities.

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