How can you lower your portfolio’s risk in a world of rolling government-debt crises? Start by taking a deep breath. Then, see if you need to do some tinkering—but not too much.
With Europe in turmoil, investors are so eager for a “safe haven” that this week they were willing to accept a return of only 0.01% a month to hold Treasury bills. Such yields on short-term Treasurys are barely a sliver above their all-time lows, even as Uncle Sam’s own debts may be teetering on the brink of default.
Christophe Vorlet
Fears are rampant that the U.S. may lose its triple-A credit rating, that the economy will stay stagnant, that inflation will eventually surge and that the dollar will wither. Lately, U.S. Treasurys and the dollar have rallied mainly because other nations are in even more of a mess.
Amid such uncertainty, you can’t reduce one set of risks without raising others. If, for instance, you buy gold, you lower the risk that a collapsing dollar will crush your wealth. But you incur other hazards by paying all-time-high prices for an asset that generates no investment income, lacks intrinsic value and has a weak record of combating inflation. Other hedges carry other risks and trade-offs.
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