After the 'flash crash' and world debt crisis, is it time to risk proof portfolios?
Amid the world debt crisis and 'flash crash,' it pays to learn about 'limit orders' and bond risks.
Just when it seemed as if American investors were getting comfortable again, with the economy in recovery mode, they've gotten a couple of sharp reminders that investing still carries big risks.Skip to next paragraph
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Then, on May 6, came the freak "flash crash" in the United States, with some stocks losing more than half their value and then gaining most of it back – all in about 20 minutes. Even some mainstream exchange-traded funds (ETFs) were caught up in the mysterious plunge.
As if all that's not enough, the price of gold has been hitting record highs. That's typically a flight-to-safety move – or a sign that inflation is on the way in traditional currencies like the euro and the dollar.
What's going on here? Is it time to take some steps to safeguard your nest egg?
"There's no question that inflation is a big risk" as governments and central banks continue to prop up economies from Greece to the US, says Peng Chen, president of Ibbotson Associates, a Chicago firm that researches asset allocation.
Despite the worrisome signs, he and other financial experts don't advise heading for the hills in a flight from risk right now. For one thing, millions of people with retirement accounts have already done that – moving money out of stocks into bonds and cash. After a year of recovery in share prices, they were just starting to migrate back into stock mutual funds when the latest turmoil flared up.
But it's a good time for investors to give their game plans a reality check – in areas including stocks, bonds, and alternatives.
"One thing's for sure: Over time bonds are going to be safer and stocks are going to be more risky. Bonds will outperform cash. Stocks will [probably] outperform bonds," Mr. Chen says.
He says investors should rely on diversification among those core asset classes, and on a long-term view that takes some volatility in stride. Even "safe" bonds could be hurt by inflation worries, he adds.