Investing is never easy, and building a balanced portfolio is one of life’s most difficult endeavors.
The current investment climate does not make this process any easier. Despite all the complications, we individual investors really have three fundamental choices when it comes to storing and growing our financial wealth.
We can invest in stocks. Stocks have always represented the highest potential return and the highest potential risk for investors and for this discussion we will consider investing in stocks as our most fundamental choice.
Secondly, we can invest in bonds. It seems everyone hates bonds, and this has been true for for my whole investing career going back 20 years. This being said, bonds are on the tail end of a 30-plus year bull market. So while everyone hates bonds, someone has been gobbling them up for decade after decade after decade. Bonds have always represented safety and low returns, and for the most part have remained true to this reputation.
Then we have cash (bank deposits and money markets). I think the only thing investors dislike more than bonds is cash, and after years of zero interest rates I don’t know anyone very excited by their CD rates.
The tough part is two of the three above choices are currently caught in a cycle that has effectively removed them as attractive, if not viable, intermediate term tools for achieving our financial goals.
The age-old solution to managing the risk associated with investing in stocks has been using bonds to achieve portfolio balance. Bonds are considered as a haven for safe money.
On May 2, however, the bond market began a slide resulting in a continuing bear market in this asset class. While the most violent part of the decline may be over, historical perspective and logic easily conclude further declines are likely in the cards. So if our safe haven choice is down 10 percent in the past four months, what do we do now?
Well isn’t the stock market going gangbusters? This seems easy enough, let’s dump those annoying bonds (no one liked them anyway) and get some more stocks. Just look at those performance numbers. This one is a no-brainer.
Has anyone actually ever seen a “no-brainer” when it comes to money? Me neither, and this situation definitely does not qualify.
Yes, bonds present some very real risks right now, but when deciding how to address this risk it is important to remain aware of your overall risk management strategy. Taking money out of bonds to increase exposure to stocks is perilous and needs to be considered carefully.
This leaves us with our third choice, cash. Well, Marc, who in the world wants cash? It doesn’t make us any money. That’s true, and probably not going to change soon.
One last question: Would you rather make nothing on your money, or lose your money? Hmm, a “no-brainer” after all.