Searching for Safety (Part 3)

How can investors figure out what’s safe and what’s not?

The process of investing in safe assets, seeing them appreciate, and moving out of these (formerly safe) assets can seem like a kind of dance—a two-step—where investors pile into a safe asset, watch it appreciate and start to come down, then pile into the next new thing, only to see the process continue: lather, rinse, repeat.

It started with the internet boom. Investors had no illusions that these were safe stocks, but when the entire market pulled back 50%, people started looking for safety. They thought they found it with real-estate. There seemed to be structural reasons why real-estate shouldn’t depreciate; after all, when prices fall, owners just take their homes off the market, limiting supply and raising prices. Or so the story went.

But the “safe” real estate market appreciated too far, too fast, and its pullback caused a credit crunch that’s still with us. Investors piled into safe Treasuries, which have appreciated and are now vulnerable. Searching for income, investors have moved on to dividend stocks. But dividends aren’t coupons. They aren’t contractual, and can be cut when needed.

A safe asset is one at a fair price. Or cheaper.

Douglas R. Tengdin, CFA

Chief Investment Officer

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