Returning to Risk (Part 3)

Is anything risk-free?

Practically-speaking, sure. Insured bank deposits and short-term Treasury obligations have little to no credit risk, and their maturities are so short that if interest rates rise, they’ll have very little price volatility. At least in the short term.

But over the long-term, their real value can erode. Right now the Fed has rates near zero, while inflation is running around 1 ½ percent. A 10% loss in value isn’t a lot, but it isn’t nothing, either. But that’s just the US. Some countries have done much worse:

(Source: Dimson, Marsh, & Staunton 2013 Yearbook)

France, Japan, Italy, and Germany had negative 3% real returns from “risk-free” notes over the past century. That’s more than a 90% decline in purchasing power. For investors in these countries, short-term risk-free investments could create long-term problems.

Not many expect inflation in the US to get out of control in the US or Europe right now, but few expected the devastation of World War I shortly before the lights went out across Europe. So it doesn’t pay to be complacent. Nothing is really risk-free. Senior claims on the cash-flow of the world’s largest economy can still lose purchasing power if inflation gets out of hand. Financial repression takes a toll.

Ironically, the safest investments in the short-run can be some of the riskiest in the long-run. “It can’t happen here,” or “It’s different this time” are still some of the most dangerous words ever spoken.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2017-07-17T12:34:18+00:00 May 14th, 2014|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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