Investment Advisor Chapel Hill Raleigh NC

Beware the Allure of a “Safe” Investment Strategy

In Asset Allocation, Bonds, Investments, The Economy by Chip Hymiller

Will the European Union ever get it together and decide on a plan to save the Euro? Or will the debt-laden nations (specifically Greece, Spain, Portugal and Italy) abandon their attempts at austerity causing further stress on an already weak banking system?

Given the magnitude of the problems in Europe and the uncertainty that exists globally, it is extremely difficult to maintain a long term investment focus.  After all, many of the news headlines lead us to believe that on one day a financial collapse is imminent, but on the next day it’s smooth sailing ahead.

It seems that given the unusual risks with investing in stocks right now, that prudent investors should hide in the “safety” of bonds or cash.

However, are bonds and cash truly safe investments right now?

The answer to this question depends on your definition of safety.  Is a safe investment one that has low day to day price fluctuations (volatility) or is it an investment that protects your long term purchasing power?

With 10 year treasury bonds yielding 1.6% and inflation averaging about 3.0%, an investment in 10 year treasuries will generate “real,”  inflation adjusted, returns in the neighborhood of negative 1.4% annualized for the next 10 years.  That doesn’t sound like a safe investment to me!

Meanwhile, although stocks do exhibit day-to-day price swings, there have historically been very few 10 year periods in which stocks have not generated positive inflation adjusted returns.

With valuations at historically reasonable levels and dividend yields in the 2% range, it serves to reason that stock returns will best bond returns for the next 10 years.

While it is impossible to predict what will happen in the next 6 months, we do expect continued market volatility.  Especially as debt negotiations in Europe, elections in the US and details of a  slow-growth economy continue to materialize.

Understandably it may be difficult to feel safe in an investment strategy that includes an allocation to stocks.  However, it is our hope that you will stay focused on the long term and recognize that the allure of a “safer” investment strategy can be much riskier than it seems on the surface.