No Safe Bets Left!
I just read a pretty interesting article in the WSJ. In the wake of the recent market dip it appears that our appetite for risk is waining. Now just as people are seeking more safe investments, fewer investments appear safe. On Tuesday very few asset classes were left unscathed. Here is the run down:
- all 30 stocks in the Dow Jones Industrial Average fell
- all but 2 of the stocks in the S&P 500 index fell
- the majority of world wide markets fell
- Emerging-market and junk bond prices fell
- price of gold fell
That is a pretty impressive list. So why is this happening? The article theorizes that it is likely due to the fact that with the large amounts of cash in the financial markets now, managers are having a hard time generating returns. In the quest for higher returns investors are investing in riskier assets, but are doing so under the assumption that a diversified portfolio is inherently less risky.
The problem with the large sums of money we have today is that we can drive up the price for what is thought to be uncorrelated assets when managers buy both of them in the name of diversity. By deliberately investing in assets that have shown little correlation in the past, we may be making those assets more correlated.
Technology today has made the dissemination of information to large numbers of people very easy. With this information, the more investors who share an opinion the more dangerous it is when that opinion is proved wrong.
The market drop on Tuesday was likely a little hiccup but it could be a harbinger of things to come. We all may need to look at our portfolios and see how diversified we really are.
What does it mean? To me, it means that we will likely keep most of our short term savings in secure assets like CD’s and savings accounts. It was tempting to place some money into an IRA for 2-3 years in search of better returns in hope of building a bigger down payment for a house but I am starting to rethink that strategy.
Let us all hope that March will be a better month than last.
