Throwing Your Money Away: Why the Safest Investments Are the Riskiest

by: Investment U

Back in May of 2009, Bill Gross – Founder and Co-Chief Investment Officer of Pimco – forecast a “new normal” in the investment landscape characterized by slower growth in the developed economies, higher unemployment and orderly deleveraging. And many in the field took heed of these words.

Gross wrote in his investment outlook this past January that the new normal was evolving into a world of credit and zero-bound interest-rate risk.

Here’s what did happen:

  • Most developed economies have not deleveraged over the last four years.
  • Credit is still resilient because of Ben Bernanke’s belief in use of quantitative easing.

Gross went on to say that the Fed’s monetary policy may lead to the unraveling of financial markets if policy makers are unable to foster growth and inflation accelerates.

Until the future outlook becomes less murky, Pimco is advising investors to consider ways to hedge their bets, including U.S. Treasuries, long-term inflation-indexed U.S. debt, high-quality corporate debt, senior bank debt and municipal securities.

But Now There’s a “New World”

Now enter Larry Fink… No big deal, he’s just the Chief Executive Officer of the world’s largest asset management firm, worth about $3.5 trillion.

And he recently said savers need to become more aggressive investors as returns on bank accounts and Treasuries shrink and people grow older.

The traditional mix of putting 60% of assets in stocks and 40% in bonds is inadequate in a “new world” because of an aging population, a reduction in borrowing and risk-taking by individuals and governments, and the greater role of emerging economies.

“I’ve personally said many times I would be 100% in equities,” Fink, 59, said in a speech today to the Council on Foreign Relations in New York. “Most investors need a more-diversified portfolio, but virtually every investor has to find ways to achieve a better return than they’ll get in cash or government bonds for the foreseeable future.”

This is an attempt by BlackRock Inc. to assert their view of the pulse of current market and how investors should respond.

Embracing a Bold New World

More investors are coming off the sidelines and investing in the stock market, Abby Joseph Cohen told CNBC this Wednesday. And these were her reasons why:

  • There have been better U.S. economic numbers, and it’s been an upward trend.
  • There is a growing sense that there’s cash out there finally ready to hit the markets.
  • There is the belief that many institutional investors are either coming back in or at least preparing themselves to come back into the U.S. equity market.

She said stocks are undervalued. Using one particular metric, she said stocks on the Standard & Poor’s 500 appear to have priced in a 7% decline in corporate profits for each of the next five years.

“That’s possible but it’s not likely,” she said, “but it gives you a sense of how nervous investors have been, and the sort of opportunities in equities if, in fact, the recession is over and profit growth continues.”

Losing Purchasing Power

Who’s right and who’s wrong? I don’t think there’s an entirely right answer. I think it all comes down to risk tolerance – what you’re comfortable with. But the equity market, at the moment, is the only way you’re going to make money.

I will tell you this: An obsession with safety will actually cause you to lose purchasing power.

Interest rates on savings accounts are below 0.3% and one year CDs are well below 1% on average. Rates have been pushed so low that even the 10-year Treasuries only yield 2%. In other words, if you buy a 10-year Treasury bond and hold it to maturity, you will only earn 2% per year.

Inflation was at 2.9% for this past February … Something to keep in mind.