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Question:


Should I invest cautiously in 2012?
-Football44


Answer:


You should always invest cautiously, as in carefully. That means being well diversified among assets whose price movements are minimally correlated and limiting exposure to anything that can have big price swings if you’re getting on in years and may need access to your capital sooner rather than later. That said, there are times when investing cautiously in the sense that you probably mean – loading up on assets considered havens during turbulent economic and market conditions, such as Treasury bonds and cash – is the wrong move. Sometimes the quest for safety can leave investors exposed to even more risk than if they had not tried so hard to avoid it.
 
This could be one of those times. Ten-year Treasury bonds are yielding about 2 percent a year, an interest rate that factors in almost no inflation for the next decade. That may happen, of course, but with so much money being printed to shore up the economy and financial system, it seems like a tall order. If yields back up to 3 percent – still a very low rate by historical standards – Treasury prices would plunge. So much for a safe investment. By contrast, stocks are cheaper than their multi-decade average valuation, so they offer growth potential, and many blue chips have higher dividend yields than Treasury issues pay. A good rule of thumb is that when an investment definitely looks safe, it probably isn’t.
-Conrad de Aenlle



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