If you want to see how twisted the investment world is right now, consider that many investors — both individuals and institutions — are accepting reward-free risk.
Normally, the search is for risk-free reward — return investors can get without putting their money in harm’s way.
The difference: People are willing to settle for nothing on their cash, so long as they can be confident they will get their money back.
In the U.S., with the 10-year Treasury at record lows, a Treasury buyer facing inflation of 2% going forward is virtually guaranteed of losing purchasing power over the next decade.
The ultra-safe havens are even worse, with the average retail money-market fund yielding 0.06%. At that rate of return, it would be 1,200 years before an investment made today doubles in value. Even if you go for the top-yielding issues in the country, you will goose your return to about 0.1%; congratulations, your money now doubles in 720 years.
In fact, a lot of the traditional advice for savers has been tossed on its ear, simply because the results of such best practices are so disappointing. Shopping for a better money-market fund yields extra pennies, and going up the risk scale to online savings accounts or ultra-short bond funds or longer-term certificates of deposits only brings extra nickels.
Without big money at stake — tens of thousands of dollars for individual investors — it’s not surprising that so many people are finding the payoff for going up the risk spectrum isn’t worth it. Thus, they settle for a reward-free approach to risk.
When some investors are pursuing a better income stream through dividend-paying stocks, they have to be willing to accept market risk. It’s not like you can trade low bond yields for higher stock returns and not climb the risk ladder.
The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
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