Q: You emphasize the importance of time horizon in evaluating a portfolio. And that has implications for how much of the portfolio goes into safe, less-volatile investments. I would like to know what investments qualify as safe and less volatile.
A: The classic safe, less-volatile investments are high-quality short-term, fixed-income creditworthy savings products. For example, all U.S. Treasury securities are creditworthy. But Treasury prices fluctuate a lot on longer-term Treasury notes and bonds, depending on the interest rate environment. Adding volatility into the equation will keep your investments in the shorter end of the blue chip fixed-income market.
Among the best-known safe and stable investments are federally insured savings accounts, federally backed certificates of deposit and U.S. Treasury bills. (Treasury bills are short-term debt obligations of the federal government. T-bills mature in one year or less.) I would include money market mutual funds in this list only if the fund invests almost exclusively in short-term U.S. Treasuries. U.S. savings bonds — both the Series EE and the I-bond — also are extremely safe.
The price for financial safety on savings is a minimal interest rate, and that’s putting it mildly. It’s frustrating to get paid minuscule rates on our hard-earned savings. You can do a little bit better by searching for an online savings account and shopping around for certificates of deposit that offer slightly better terms. Nevertheless, the higher rates you might find are usually incremental improvements at best. By the way, if the interest rate is much higher than what you can get elsewhere on a similar product, it’s a clear signal that the investment is much riskier than the marketing brochure may say. Steer clear of such too-good-to-be-true investments.
Equities offer an instructive contrast. I like equities, especially the stocks of companies with solid balance sheets. Stocks offer investors the opportunity to earn a higher return on their money. But stock values are volatile, crashing at times, such as the 57 percent drop from the market’s peak in late 2007 through March 2009 and rising 166 percent since then. The concern is that the value of the savings in higher-risk, higher-potential investments will fall right around the time you need the money. Short-term, cash-like investments pay little, but guarantee the value of your principal and offer easy access to money when you need it.
Wall Street calls investments like these “cash.” It’s usually seen as a hedge against troubled times, your emergency money, an anchor to a diversified portfolio. Cash is the money you draw on to meet expenses, from paying the college tuition bill to meeting monthly expenses during retirement. What I want to emphasize is that cash also represents opportunity. In “Reminiscences of a Stock Operator,’’ journalist and author Edwin Lefevre pens a wonderful and thinly veiled biography of the great early-20th-century speculator, Jesse Livermore. In imparting investment wisdom learned over the years, the Livermore character notes: “After spending years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!”
Cash is definitely a boring investment. But cash is also the fodder that turns the prospect of an opportunity into a realistic investment.