Is It Time to Be a Risk Taker?
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Risk taker yes. According to how much your stomach will take. May I say risk carefully.
Bonds by their nature, are defensive. And inflation bonds—with payouts varying with the rise or fall of consumer prices—are defensive defenses.
So in that bygone go-go era—when the biggest question was “What dot-com will I retire on?”—who needed portfolio insurance?
When many folks feel defensive—after the world just avoided another financial meltdown in Europe there is no easy solution of the myriad of long term challenges facing the global economy. It’s growing to be five years before we get back to normal.
Gloomy just because of the obvious global fiscal problems. Technological advances—while adding to corporate productivity—have amped up the angst people feel as they see their jobs become more demanding.
Technology is changing the business climate so fast that it makes an already antsy populace even more unnerved. That can zap whatever political nerve there is to push for tough economics fixes.
Technological transformation changed the geometry of the playing field. Careers are now like a lottery ticket. You’re got a one-in-a-million change of winning, but the payoff for the lucky will be big.
One top of all these economic hurdles lies bubbling inflation, the aftereffect of government aid tossed at the struggling business climate. While certain slices of the economy could use inflation—the ailing housing market is a prime example—it’s hard for government policymakers to control where stimulus-driven inflation will pop up.
The money may not flow into weak sectors, rather to the stronger ones. If the inflation is in grains and food prices but doesn’t boost wages, then you’ll get serious frustration and discontent.
Outlook led back to our discussion of years back. At the time, we were talking about the U.S. government’s rollout of inflation-protection bonds—a version for the venerable U.S. Savings Bonds.
That year, inflation ran at 1.1 percent—the lowest rate in a quarter-century. The economy was cooking and stocks were atop every investor’s mind. That kind of indifference to safety forced the Treasury to offer a bond paying 3.4 percentage points above the inflation rate—guaranteed, mind you—for 30 years sounds good.
Initially, I-bonds were mocked by others. In hindsight, they proved to be an investing home run, with no risk involved.
Today with elevated fears for investment security and inflation protection—those same Savings Bonds are sold with a yield formula that’s the inflation rate plus ZERO. And the tradable type of inflation bond sells in financial markets with a premium running BELOW ZERO. (So the yield would be below inflation!)
You don’t want to be completely a trend follower nor be completely a contrarian against what every logical bone in your body says. You have to be judicious. Any basic analysis would have told you that in 1998 if you were taking no risk that 3 or 4 percentage points (above inflation) was great return correct? Yes.
So, conversely, should we think today’s fearful market that seemingly overpays for defensive assets offers profit potential to those who are adventurous?
It speaks to this being a good time to take risk. But I’d be very cautious. There’s a lot of deadwood. I’d be selective about risk opportunities.
You have to decide how much risk you want to take. Your family, your age, your children’s education and all other related issues to be taken into consideration.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)