Searching for Safety (Part 4)

So is anything safe?

It’s not an easy question. Most people look at financial safety as security of principal—of being certain that the main body of your investment won’t go down. Bank deposits are safe; stock prices are not. With inflation running at 2% and short rates at zero, though, the real value of investors’ principal is being worn away, little by little. What used to be safe isn’t so any more.

Safety isn’t an on/off switch–it’s a continuum. By keeping rates so low for so long, the Fed has forced investors into more risky assets. It’s as if you’ve had a fixed dock on the shore of a reservoir, and the Fed has raised the water level so the most stable part of the dock is now under water. In order to stay above water, people have to go further out into the lake, where the water and weather are rougher.

By forcing folks out where asset prices are more volatile, the Fed has raised the stakes for millions of investors. In this game, the best source of stability is a diversified portfolio—allocating assets into various classes, keeping them at work in the economy. Such an approach isn’t simple and it may not be what people are used to, but it’s the best anyone can do in the conditions we find today.

Nothing is as safe as it used to be. Anyone who says otherwise is selling something.

Douglas R. Tengdin, CFA

Chief Investment Officer

Leave a Reply

Your email address will not be published. Required fields are marked *