What if Risk-Free Returns Slowly Go Away?

Sep 16

I read all the way through this Ben Carlson post, What if Risk-Free Returns Slowly Go Away?, but it wasn't until the very end that really caught my attention.  "Maybe savers have been unduly punished in this recovery. But is it also possible that savers in the past were too richly rewarded for keeping their money in unproductive savings accounts? Should investors expect to earn a decent risk-free rate of return on their assets?"

Throughout this low interest rate environment that the Fed has created I too have been on record that this policy has been unfairly punishing savers.  But this article has forced me to look through another lens and potentially see something that I hadn't thought about previously.  I think that another idea that ties into this discussion would center around how much and what type of risk an individual investor is willing to take?   
Investors shouldn't necessarily be "fairly" compensated for their unwillingness to not deploy their capital.  However this does not mean that holding cash is necessarily bad either.  Having cash on hand in my view is a critical aspect in managing a balanced portfolio.  I tell people all of the time that we are never all in or all out of the equity markets.  There is a balance that we try to achieve depending upon what the markets are telling us.  If we feel that prices are high there is no need to add additional capital to a portfolio.  The prudent step becomes taking capital off of the table in order for better opportunities at another point in time.  At that point we have to be willing to accept the rate of return that the market is willing to pay for taking on less risk.  Even though having less risk is in the best interest of the client and investor.

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