Central bankers have created a dangerous environment for the average Mom and Pop investor to create, protect and grow their savings. I’m concerned that many families are taking on more risk than they realize. Most investors are tilted heavily in one of three directions:
1. Too much cash. Fear of loss is a powerful motivator. Every portfolio needs some cash but too much cash is risky because it is earning negative real yields due to inflation.
2. Too much in bonds. If a bond earns a higher yield it is because it is riskier. Bonds move inversely to interest rates and there is only one direction interest rates are going to go in the next five years.
3. Too much in stocks. Dividend yields on stocks are better than many investment grade bonds. But stocks are much more volatile than bonds. Even awesome stocks like McDonald’s and Coke and Altria.
The art of wealth management is designing the right recipe of these asset classes to manage risk appropriate to the emotional and long-term financial needs of our families.