I freely admit fear is a motivating factor behind my financial decisions. High on my list of fears (worries, concerns) is inflation. For a variety of valid economic reasons, long-term bond returns are generally worse than equity returns in an inflationary environment. In other words, an uptick in inflation hurts bonds more than it hurts stocks.
Fear of market volatility steers me away from stocks, fear of inflation steers me away from (long-term) bonds. In the current interest rate environment, real rates of return on short-term Treasury debt are negative. High-quality corporate bonds are only paying a pittance. And as I have recently blogged, TIPS based on the CPI-U, are not looking so good either.
What options are left to the anxious investor? Some remaining choices are: foreign-debt ETFs (as a hedge against US and US dollar inflation), foreign-equity ETFs, and junk bonds. Perhaps, value stocks as well. Unfortunately each of these options comes with their own particular set of risks and worries.
The moral of this stories is there are few low-anxiety options for the investor who fears volatility, uncertainty, and inflation. Retirees looking to reinvest expiring bonds and CDs are finding few good investment options.
There remains on strategy to fall back on to help ease financial anxiety: diversification. Diversifying between equities, bonds, and cash. Diversifying between US and foreign equity. – Diversifying between large-cap and small-cap. Diversifying between long-term and short-term debt. Diversifying between high-quality and high-yield (junk) debt. And, yes, even diversifying between value and growth.
Still, I choose my fears. Inflation is number 1. Volatility is number 2. Fear of missing gains is number 3. Inflation concerns and dismal interest rates are motivating me to hold more equities (via low-cost equity ETFs) than I otherwise would.