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When safety becomes dangerous

If you’re seeking capital preservation and liquidity, money market investments may be for you. If you need growth in a rising interest/inflation rate environment, short-term bonds may be the answer.

These benefits aside though, if you want a reasonable return on your investments, you must assume some market risk, get out there and diversify your portfolio. For some investors that’s easier said than done. With stock markets, interest rates and inflation all prone to fluctuation, bunkering down in “safe” investments might seem like an attractive option. But, diversification remains the best way to increase future income, cover rising costs, and hit your long-term financial targets. That means making sure your portfolio includes assets and higher yielding investments from each of the three categories (cash, fixed income and equity).

There’s risk involved when your portfolio lacks diversification and fixates on one category, like fixed income. The returns from this category are very low, so much so that they are usually below cost of living increases. On top of that, the income you receive from them is almost always fully taxable when earned.

The combined impact of lost growth opportunities and taxes on your investment income can cause you to fall short of your long-term financial goals. Two other factors that can compromise the future growth of “safe” investments are interest rates and inflation. With inflation levels rising and with even the expectation of a rise having the ability to drive down bond prices, conservative investors are wondering if their fixed-income investments will be able to keep up.

Interest rates remain at historic lows, so income earned on “safe” investments will continue to be low. Even bond prices (that have enjoyed steady growth for a few decades) have little opportunity for further appreciation. The key for all investors is to have a well-balanced portfolio.

What’s risky for one investor may be too risky for another, but diversification is something in which all investors can take comfort.

Diversification can combine the stable, yet lower long-term growth potential of fixed-income investments and offset them with equity investments so you can successfully reach your long-term financial goals. Are you playing it too safe? Talk to a Consultant today!

Date reviewed: July 28, 2014

© Investors Group Inc. 2014 (08/2014)

Written and published by Investors Group as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an Investors Group Consultant.