Forecast came true

Investors are finally starting to steer clear of risk
13 february 2015

And that’s a good thing, as all sorts of exotic securities have flooded the market

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Investors had taken on more risk to get better returns as yields evaporated.

It was the big topic of discussion among investors and financial pros at the World MoneyShow in Orlando, Fla., last week, where I moderated two panels and appeared on another: Where do we get yield without taking on too much risk?

The attendees, many of whom were retirees or near-retirees, are in a classic bind. Safer instruments, which used to pay decent rates, now yield almost nothing.

In the 20 years ending in 2013, one-year CDs paid on average 4.09%, according to jumbocdinvestments.com. Now, the best rate I could find on Bankrate.com was 1.3%.

Ten-year Treasuries yield around 2%. But if you went further afield, you could earn 0.36% on German bunds or 1.55% on Spanish 10-years. Such a deal.

So investors have taken on more risk to get that precious extra return.

That’s why over the past five years ending Dec. 31, they’ve pulled some $39.3 billion from ultra-safe government-only funds and ETFs, and poured $900 billion into diverse fixed-income instruments that include corporate bond funds (both investment-grade and high-yield), emerging-market debt, preferred-stock, and bank-loan funds and ETFs.

Fortunately, that trend appears to be reversing now.

“They’re chasing yield and, by doing that, they’re adding risk to their bond portfolio,” said Francis Kinniry, a principal at Vanguard Investment Strategy Group.

They’ve added risk to their stock portfolios, too, snapping up richly valued dividend-paying stocks, real estate investment trusts (REITs), master limited partnerships (MLPs), what have you.

The chief culprits, of course, are the Federal Reserve and other central banks.

To resuscitate the moribund economy after the financial crisis, the Fed cut short-term rates to near-zero and went through three rounds and $3 trillion worth of bond buying, which it dubbed quantitative easing.

Its actions helped spur a bull market that has seen the S&P 500 Index triple since March 2009. That rewarded people who stuck with stocks, but it also punished small savers and retirees who should reduce their stock market exposure as they age.

The Fed, the Bank of England, the Bank of Japan and now the European Central Bank have said to investors: “Come on in. The water’s fine.”

Reluctantly at first but more enthusiastically later, investors have jumped in, buying what they considered the lowest-risk, dividend-paying stocks and other high-yielding equity and fixed-income instruments.

http://www.marketwatch.com/story/investors-are-finally-start...

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