Trying to find “safe havens” for your money can be costly. Some investors try what worried investors always seem to do in times of stress—attempt to avoid risk by buying the safest assets.
For some, that has meant buying government bonds from the United States, Germany, Australia and the Netherlands—countries considered “safe havens.” This panic buying has pushed yields very low.
Is this rational? Probably not. Investors seem to be guaranteeing themselves a negative real return after inflation. The only way to earn a real return on such an investment would be to live through a depression with accompanying deflation.
Many investors are ignoring the market’s mechanisms for dealing with risk. The risks that investors are worried about today—unrest in the Middle East, financial troubles in Europe, slowing economies in the United States and China, high government spending—are already priced into the market.
What does that mean? It means that investors expect a higher return for putting their money into a risky investment. Investors are pricing stocks, for instance, at a price that anticipates higher returns sometime in the future.
As the public’s risk appetite revives, owners of riskier investments can be paid a very substantial return. We have seen this already occur over the past several years in the stock market. Seeking safety in what are perceived as the safest government bonds may provide a sense of safety for a time, but this also comes at the cost of foregoing attractive returns that may be available in the future.
Now that stock market returns once again look attractive, is this a good time to get back into the market? I would suggest that now is a good time to rebalance your stock holdings back down to a level that is consistent with your personal tolerance for risk. I don’t recommend exiting the stock market but rather reaping some of the rewards you have received over the past three years by rebalancing.
Learn more about this passively-engineered approach to investing here.
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