If you want to see just how twisted the fear factor is in the investment world right now, consider that many investors – both individuals and institutions – are accepting “reward-free risk.”
Normally, the search is for “risk-free reward,” the idea that there is some return investors can get without putting their money in harm’s way.
The difference is simple: People are willing to settle for nothing on their cash, so long as they can be confident they will actually get their money back.
The headline case right now is in Germany, where investors in intermediate government notes are getting a negative yield, meaning they are actually paying the German government to hold (and ultimately return) their cash.
It’s not much better in the domestic market, however, not with the 10-year Treasury at record lows, so that a buyer right now – looking at inflation of 2 percent going forward – is virtually guaranteed of losing purchasing power in Treasuries over the next decade.
It’s even worse in the ultra-safe havens, with the average retail money-market fund yielding 0.06 percent. At that rate of return, it would be 1,200 years before an investment made today doubles in value. Even if you take the standard investment advice and go for the top-yielding issues in the country, you will only goose your return to about 0.1 percent; congratulations, your money now doubles in 720 years.
Still, EPFR Global, which tracks the flow of money into various fund asset classes, noted this week that with disappointing U.S. economic data and continued troubles in the Eurozone, flows into domestic money-market funds “jumped to a 25-week high” during the week ended May 30. U.S. bond funds took in over $1.5 billion for the 24th week in a row, and gold funds recorded their biggest weekly inflow since January; Europe and emerging markets funds continued long streaks of outflows.
Pete Crane of Crane Data, which tracks interest rates and money-fund yields, says that the search for a safe haven is reminiscent of the dark ages, times when people “paid banks or kings to hold their money. Earning interest is a modern phenomenon, and it doesn’t feel like it’s such a big deal right now to a lot of people who simply want to make sure they will get their money back.”
In fact, a lot of the traditional advice for savers has been tossed on its ear, simply because the results of the best practices are so small. Shopping for a “better money-market fund” yields extra pennies, but going up the risk scale to online savings accounts or ultra-short bond funds or longer-term certificates of deposits only brings in extra nickels.
If there’s not really big money at stake – tens of thousands of dollars for individual investors – it’s not surprising that so many people are finding the payoff for going up the risk spectrum to not be worth the chance. Thus, they settle for a reward-free approach to risk.
When some investors are pursuing a better income stream through dividend-paying stocks, they have to be willing to accept market risk in order to do that. It’s not like you can trade off low bond yields for higher stock returns and not climb the risk ladder, even if the payout feels safe and consistent.
Putting money to work – even if that is generating yield through buying dividend-paying stocks – requires accepting market risks. If instead they want to put their cash in the proverbial mattress – because putting it in a real mattress would be fraught with its own dangers, and uncomfortable to boot – the only real decision is how fast they will need to fish their cash back out.
Think about it like finding a parking space for a precious car, where you want to store it away for years. You can safeguard it from the elements and run the engine and do the maintenance, or you can stick it in a barn and leave it exposed to the elements.
If you are waiting for a future day to dust off the car and drive it down the road – rather than waiting through some repairs — how you store it matters.
The same goes for your money.
“If yield is overrated – if getting a little more of it really won’t add up to much money – then convenience would be your primary consideration,” said Crane. “You can put your money in an online savings account or in CDs to get extra yield, but if you think that when the time comes that you need that money you will need it right away – that on the day when you decide it is time to buy stocks again you want to move ‘right now’ – then accept that keeping your money liquid, and not declining, might be an investment objective in these times.
“If your investment objective is something different than that for your safest money,” he added, “you have no choice but to move up the risk ladder, and maybe way up if your need is for your cash to generate a high income.”
Chuck Jaffe is senior columnist for MarketWatch. Reach him at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.