Jeff Tjornehoj on "Business for Breakfast" 1060 KRCN Tuesday, August 15, 2006 - The Danger of Playing It Safe
Q: Jeff, your subject this week sounds odd - what do you think is sodangerous about safety?A: I have a sense - based on money flows data and media coverage - that investors are shying away from equities. In addition, people can just walk down to their local bank and plunk down their nest egg into a safe, secureCD that pays 5%. Now, 5% didn't sound like much a few years ago, but itsounds extremely appealing when the stock market gyrates and people feelpoorer because they're paying $3/gallon for gas.
Q: And you're right - 5% is a kind of mental trigger. Money markets get a lot more attention when they cross that threshold.
A: Yes. People hold more cash at or above 5%, and they tend to get rid of it when it sinks below that return.
Q: So, what's the problem with that?
A: Let's look at the 5% fixation many investors have. I checked ourdatabase for over the past seven years to see how many funds (with twoyears or more of history) had a minimum 5% return over any 12-month period- equity funds, bond funds, money market funds, everything. What I found was that funds investing overseas tended significantly to meetthat mark better than others. Global and international small- and mid-capfunds had the best chance. Real estate funds also did well. Even still,only 20% of real estate funds made that hurdle - it wasn't a foregoneconclusion that "safe" equities such as those could reliably beat a CD. "Safe" equity choices usually also include large-caps, utilities, andbalanced or mixed-asset classifications.
Q: But doesn't that suggest investors were making good decisions?
A: At first. But I then went back to see which funds over the same periodhad an average return of 10% or more. Nearly all of them were equity funds,and the worst categories for making that return were the "safe" ones, suchas large-cap core or balanced funds or even utilities. The chance ofgetting a 10% earner in those types was only one in four or worse. Only 1in 14 large-cap core funds made it.
Q: And investors don't have a great history of getting even that.
A: So true. If the past seven years have left us with anything worthremembering, it's that playing it safe keeps us on the sidelines when thebig plays eventually turn up.
#
To read more "Business for Breakfast" interviews, please visit the archive.
