In our review of financial news and investing publications, the term safe asset often arises. Personal finance experts point to myriad categories, from government bonds to shiny metals, as a safe place to put your money—presumably, where you want to be when the stock market gets bumpy. But safe assets don’t exist, in Fisher Investments’ estimation. All carry some sort of risk we think investors must weigh against potential returns.
Despite the seemingly obvious connotation, there is no consensus definition of what constitutes safe. Interpretations range from an asset you can sell at any time and get your money back to something whose value will remain stable regardless of market conditions. The list of allegedly safe assets is just as long and diverse, ranging from the most creditworthy countries’ government bonds (e.g., US Treasurys) and dividend-paying stocks to gold and cash.
However, none of these is truly safe, in Fisher Investments’ view. Take a stable asset—i.e., one that doesn’t experience much short-term volatility and produces a cash-like return—like a short-term US Treasury bond. Holding Treasurys may provide a sense of comfort since their short-term fluctuations are small, especially relative to stocks. But less volatility isn’t the same as riskless, in our view. For example, Treasurys face interest rate risk. (Interest rates and bond prices move inversely, so if the former rises, the latter falls.) Should interest rates rise and you have to sell your bond holdings, you may end up realizing losses. On the flipside, if you hold a bond to maturity, you may not be able to find a similar yield if interest rates are low—subjecting you to reinvestment risk. This is worth considering in low interest rate environments like today’s. Consider: At the start of the year, a 10-year Treasury yielded 0.93%, much lower than its 3.36% yield a decade ago.[1] If you can’t get the yield you want, you may have to adjust your bond holdings and move them further out on either the maturity or the default risk spectrum—introducing new variables to address.
Another underappreciated risk, according to Fisher Investments analysts: inflation. If your bond isn’t indexed to inflation (e.g., a Treasury Inflation-Protected Security), rising prices across the economy may take a big bite out of your purchasing power over time. The recent rise in inflation due largely to pandemic-related factors notwithstanding, annual inflation has averaged 2.9% historically—and we think accounting for this erosion of your portfolio’s value is worthwhile.[2] Otherwise, you may be left in a tricky situation, such as having less money than you planned for future expenses.
Other purportedly safe assets carry risks, too. Though many see dividend stocks as safe because they make a regular cash payment, they are still stocks and subject to short-term volatility. Moreover, dividends aren’t assured, and companies that pay them don’t possess special protections. During the 2008 – 2009 Financial Crisis, many high dividend-yielding stocks (particularly Financials, a typical dividend-paying sector) eliminated their payment—and in a few cases, some firms failed, wiping out stockholders. More recently, many companies cut or suspended their dividends as they sought to build cash reserves to weather the pandemic-driven downturn. Dividend stocks also tend to be in value-oriented sectors—e.g., the aforementioned Financials, Energy, REITs and Utilities. Stocking up on dividend payers may end up reducing your portfolio’s diversification—another type of risk. A portfolio overexposed to some sectors and underexposed to others may lag the broader market depending on what is in favor at the time.
What about gold? The precious metal’s reputation as a safe asset stems largely from its historical and cultural significance, as society has considered it valuable since at least ancient Egypt. But strip away that gilt and reality isn’t as shiny: Gold is a commodity, subject to big sentiment swings and long boom and bust periods. Fisher Investments’ analysis shows it is actually more volatile than stocks. Over rolling five-year periods, gold’s standard deviation (a measure of volatility representing the degree of fluctuations in historical returns) is 10.9%, higher than US stocks’ 7.5%.[3] Investors holding gold subject their portfolios to much more year-to-year variability, which seems to cut against many interpretations of safe. As for cash, the ultimate safety blanket doesn’t carry much risk of loss, but it also offers little-to-no-growth. Moreover, the aforementioned inflation risk will inevitably erode cash’s buying power.
In our experience, investors seeking safety are concerned primarily with the risk of loss. While understandable, the risk of loss is inherent in investing, regardless of the asset you choose. In our view, just as investors must deal with different kinds of risks, they must also grapple with varying degrees of the risk of loss. We think it is critical for investors to recognize this so they can set their expectations accordingly. Internalizing this investing axiom can also help protect against shady actors offering allegedly “risk-free” investments they say will provide high returns. Those are a fantasy, in Fisher Investments’ view, and investors would do well to see such claims as a cautionary tale.
Rather than seek a mythical asset that never loses value, Fisher Investments suggests investors refocus on the reason why they are investing. In our experience, next to no one literally invests to avoid losses. So what is the goal or purpose for your assets? What role does this money play in your life? We think investors must consider whether those assets are likely to help you reach those goals over time—or not.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
[1] Source: US Department of the Treasury, as of 8/10/2021. US 10-year yield on 1/4/2021 and 1/3/2011.
[2] Source: Global Financial Data, as of 3/9/2021. US CPI, 1926 – 2020.
[3] Source: Global Financial Data, as of 8/12/2021.