Turbulent economic conditions are a recurring theme here and abroad -- and it doesn’t look like these concerns will blow away anytime soon.
- Inflation Worries -- As I have described before, I think inflation is likely on its way because the Fed has been pumping new money into the economy, and the monetary base more than doubled from mid-2008 through November 2010.
- Government Debt – U.S. and global indebtedness continue to mount.
- Government Intervention -- Government interventionism in the economy is on the rise, which likely will result in higher business costs and less business efficiency.
Build a Sound Portfolio
So, yes, there are plenty of worries. But what’s an investor to do? Well, if you have a well-diversified, low-cost index fund portfolio, expertly built and properly adjusted to suit your investment time horizon and risk tolerance, simply stick with it. Nobody can predict the future, but the evidence suggests that the long-term returns of a well-diversified index fund portfolio are likely to be more closely related to the returns offered in the capital markets than to economic conditions.
The Proper Asset Allocation
If you’re not sure whether your portfolio is built to last, this may be an excellent time to seek the advice of a professional fee-only advisor, to ensure you’ve got an appropriate allocation among stocks and fixed income (bonds). And, yes, you want some of each. Even if bonds aren’t exciting, and even if they’re a little scary with inflation on the horizon, they are an important part of the portfolio. They serve to reduce portfolio volatility – because one need only look back a couple of years to see that stocks have both a downside and an upside.
I will give you one additional tip, though: Especially in inflationary times, shorter-term bonds have less risk than long-term bonds. Want to know more about it? I’ll continue the conversation on this subject next week.