Investors evaluating traditional investments discover a rather stark alternative.
In the early 16th century Thomas Hobson operated a popular livery stable in Cambridge adjacent to St. Catharine’s college. Hobson’s fleet of horses served the needs of area post boys (who rented horses to deliver mail) and the college’s students and staff. Hobson’s expansive stable gave the appearance of a wide selection from which the renter could choose a dependable, well-rested ride.
Thomas Hobson’s notoriety 400 years later is not thanks merely to notable tender of his animals however. Instead, Hobson is remembered for the unusual manner in which he offered the services of his horses. To avoid having the strongest horses hired repeatedly Hobson required prospective riders to select the horse held in the nearest stall. The term “Hobson’s choice” thus refers to only the perception of optionality. The only “choice” this shrewd businessman offered to customers was to simply “take it or leave it.”
Investors today find themselves in a similar quandary. They are presented with what appears to be a dizzying array of investment vehicles designed to cater to every strategy imaginable. While traditional investment planning may preach diversification with an allocation to the three major asset classes of cash, bonds and stocks, investors quickly recognize that current money market returns are nearly non-existent and many bonds offer only paltry yields. By design, Fed Chairman Bernanke’s policies to lower interest rates have nearly succeeded in providing investors in search of real (after-inflation) returns within traditional investments really no choice at all.
Pre and early retirees in particular find themselves reevaluating the same investments that burned them in 2008, often times deviating wildly from traditional asset allocation models in the search for current yield and the prospect of higher returns.
The prudent investor is keenly aware that “Bernake’s Choice” may sow the seeds of market distortion. As greed has firmly supplanted fear as the dominate investor emotion in 2013, investors should be especially mindful of risk and comfortable with their portfolio allocation in the event central bank alchemy produces an undesired result. In addition, it appears only appropriate that investors should actively diversify beyond mainstream stocks and bonds in adopting a strategy better suited for uncertain times.
— This information is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Investing involves risk including loss of principal.