It is not uncommon for a client to say something like this, “Investment X has gained a lot lately. Why don’t we invest more in it?” Or, “Why do we keep holding money market funds and short-term bonds when the yield is so low?” The answer to these questions is related to the experience written about in an Associated Press release published on Monday.
From the story we learn that many clients, looking for higher yields have committed funds to higher risk investments. From the story:
…For years, brokers have been luring savers like Robinson into drilling partnerships with the promise of fat payouts. With yields on safer investments like government bonds so puny, it wasn’t a hard sell. But now this once hot business, a big source of fees for brokers and banks, is coming to a messy end.
In the past year, investors have lost $20 billion in publicly traded drilling partnerships, or $8 of every $10 they had invested, according to a report prepared by FactSet for The Associated Press. That figure does not include losses from $37 billion of bonds sold by the partnerships in the five years since 2010, many down by half in last 12 months, or losses from bets on private partnerships that don’t trade publicly and are difficult to track…
For a time the publicly traded drilling partnerships mentioned in the article did provide good returns to investors. The problem is not so much that any particular investment is (always) bad, but that future returns are uncertain, just like the ubiquitous disclaimer says.¹
Broad, efficient diversification among multiple investments and investment classes including low-yielding cash and short-term bonds is a useful tool for reducing portfolio risk, which is to say reducing the likelihood of significant loss. And reducing loss is a good thing.
The full AP story can be viewed here. I think it is worth the reading time.
¹ Past performance is no guarantee of future results.