QOTD: Overpaying for Protection

When I hear from retirees with portfolios that are completely out of stocks and laden with low-yielding “safe” treasurys, I’m often reminded of the cartoon I saw as a kid where the homeowner brings in a lion to catch a mouse.

Jerry Webman, Chief Economist at Oppenheimer Funds puts it better than I can when discussing the over-emphasis on safety and liquidity these days:

“You wouldn’t take out a $1 million insurance policy on a $500,000 house, and for similar reasons, investors shouldn’t overdo the amount of liquidity they hold in their portfolio…While holding extra cash or high quality bonds may be prudent when there’s a clear risk of heightened volatility, such assets won’t help build wealth over the longer term. Remember the cost of holding the extra liquidity is the negative real yield (current yield on 10-year Treasury is 1.62% with the consumer price index up 2.2% over the past year) that cash and government bonds currently offer.”

Yup. Peace of mind today, wealth destruction over time.


For Bonds in 2013, Unhappy Returns: Fixed Income Analysts (Advisor One)

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