The market turmoil of 2008 has caused panicked investors to flee to safety, from stocks and mutual funds to risk-free investments like Treasuries and savings accounts. However, a risk-free portfolio might carry a high price. With their low returns and limited growth potential, some fixed-income investments may leave investors with little return after inflation. Further, by dumping stocks and investing solely in fixed income, investors are not only losing out to inflation, but they are also missing out on an eventual market recovery and growth. Although Treasuries at times provided investors with a safe haven from market volatility, they didn’t provide much protection against inflation over the time period analyzed. The image illustrates the current rates for fixed-income instruments with varying maturities, as well as the average inflation rate over the last 10 years. The yields for intermediate- and short-term instruments examined are currently below the average inflation.
Locking investments in Treasuries’ current yields might not provide a long-term real return, especially with expectations of a high inflationary environment on the horizon. Too much allocation to conservative investments can cause investors to forfeit long-term growth. An allocation to equity and longer-term bonds could position portfolios to capitalize on an eventual rebound.
Average inflation is annual, from 2004 to 2013. Current yields are for the month of April 2014. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest.