Looking to 2011: What's Your Investment Strategy
02/01/2011 - Most economists agree that the threat of a so-called double-dip recession has passed, but there are still serious concerns facing the U.S. economy in 2011. It's a situation that can make any investor wonder where they should put their money in the new year. In bonds? Stocks? Under the mattress?
Not surprisingly, the answer depends on your individual circumstances. But no matter your situation, a good first step in mapping out an investment strategy is to assess your risk tolerance from various angles. Particularly for conservative investors, a good understanding of lesser-known investment risks—such as inflation risk—can assist in making informed investment decisions in the new year.
Getting to know your risk tolerance
If you're like many investors, your perspective on risk has changed over the last few years. Prior to December, 2007—when the recession officially began—we were accustomed to a stock market that generally moved in a positive direction. Risk was therefore a nebulous concept—how could you get an accurate gauge on your risk tolerance if you'd never experienced a real loss before? We need no longer wonder. The recession offered a painful reminder of the true meaning of risk—the more you take on, the more exposed you are to potential losses.
Indeed, it is possible to lose money by keeping your money in the stock market. But it's also important to keep in mind the risks involved in pulling out at the wrong time. Still licking their wounds, many jittery investors pulled all their assets out of the stock market just as it hit bottom two years ago. In the time since, while they've remained on the sidelines, equity markets have bounced back significantly—in some cases representing a missed opportunity to recuperate much of what was lost.
If you're among those who sat out the stock market's climb, you may have stuffed your cash into "safe" investments like U.S. Treasury bonds. Treasuries are an attractive investment for conservative investors because of the protection they offer from the U.S. Government. But it's worth noting that despite having rallied significantly over the past two years, Treasury yields are now at historic lows, and there is a potential for them to underperform inflation. If the uptick in inflation that many economists are predicting comes true, it is possible that investors could, in essence, lose money while invested in Treasuries.
Opportunities for yield
So what is the conservative investor to do? For those not willing to venture back into stocks just yet, it may make sense to dial up their risk tolerance beyond low-yielding Treasuries and into bonds that offer higher yields. The search for yield doesn't have to be a giant leap. Investors can find opportunity in the middle of the quality spectrum. Certain investment-grade corporate bonds and higher-quality, high-yield bonds offer greater yields than Treasuries, with better compensation for inflation risk.
Stay diversified and get help
After a big market rally, it can be tempting to chase performance by buying the stocks and bonds that have risen the fastest. Unfortunately, many investors make the move when it's already too late. It's just one more reason why choosing individual securities can be so challenging.
If you're planning your investment strategy for 2011, it could serve you well to rely on a professional portfolio manager with a large research staff to help ensure you are getting paid for the risks you take. A financial advisor can also help you ensure you have a diversified portfolio, with the right mix of stocks, bonds and cash for your risk tolerance. Make it your New Year's resolution to speak with a financial advisor about your investment goals so you can create a plan that is appropriate for you.
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