It is no wonder that investors are spooked. When portfolios drop by 40%, the temptation is to "flee to safety." The financial media stokes your fear with negative news, affirming the widely held belief that it really is different this time.
How "safe" is the flight to the safety of Treasury Bills and other "risk free" investments?
Not very, according to a very informative video from David Booth, the CEO of Dimensional Fund Advisors. [Full disclosure: As a Registered Investment Advisor Representative, I recommend Dimensional Funds to my clients].
The historical return of Treasury Bills is 4% a year. When you take inflation into consideration (at a historical rate of 3% a year) and taxes, the real return is zero or even negative.
Stocks have historical returns of 6% a year, but stocks involve risk. Many investors today believe this risk is unacceptable. But should it be?
Not if you consider the risk of inflation eroding your ability to maintain your standard of living.
Mr. Booth calculated the worst ten year overlapping "real" returns for a portfolio of 100% stocks. It was a loss of 39.6%, for the period ending February, 2009.
Here's the shocker: For the ten year period ending February, 1951, the comparable loss for a portfolio of 100% Treasury Bills was a loss of 42.1%!
The best outcome was for a portfolio consisting of 40% stocks and 60% bonds. This portfolio had a loss of 16.3%
Here's the bottom line: "Risk free" Treasury Bills may be riskier than a mix of stocks and bonds for investors who want to preserve their living standards.
Before you join in the stampede to "flee to safety," you should know that your flight might be risky.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.
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