by Kelly Brothers on April 04, 2012
For the typical investor, diversification has never been more important. But, diversification is not just stocks and bonds, not just domestic and international, not just developed and developing markets…it is also dollar and non-dollar assets.
The Fed uses terms like “Quantitative Easing,” “Operation Twist,” and “Loose Monetary” policy; but what it means is they are printing money like crazy! Eventually, if the practice continues it is inevitable the dollar as a currency will suffer. So…a prudent investor will make sure he/she has some exposure to assets that will do well if the dollar suffers (oil, gold, real estate, assets priced in other currencies).
Let’s talk bonds. The average investor hears “bonds” and thinks “safe.” Not so fast. The bond market has been on a 30-year bull run as characterized by rising prices and declining yields, but eventually the tide will turn. If you buy a 10-year Treasury today for 2.15% and hold it for 10 years, I have no doubt you will get 2.15% a year and your principal back at the end. But if that interest rate jumps to 4%, and you need to sell that bond, you will lose money on that investment. If someone could buy a 10-year Treasury at 4%, how much would you need to discount your 2.15% bond to get someone to buy it?
Bottom Line: If you think you are avoiding all risk by putting your money into “safe” government bonds or cash, think again. History tells us that eventually we will see rates move up again and that eventually we will see inflation creep into our economy. When that happens, everyone will realize true “risk-averse” investing demands a level of diversification.
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