The Role of Risk-Free Assets in Your Long-Term Portfolio

What is a risk-free asset, and what role should it play in your portfolio?

That’s one of the first questions many investors ask when struggling with the asset allocation question.

In today’s market environment, the sudden and steep drop in the stock market as well as anxiety over the future of the banking industry and the financial health of long-term bond issuers have all caused a massive rush to—and an exclusive focus on—“risk-free” assets.

Yet only two years ago, these assets appeared “boring” to many investors who—at that time—were focused on the long-term return and current income attributes of the major asset classes (stocks, bonds and cash).

But neither of those perspectives produces a useful guideline. Instead, the role these assets play in your portfolio should be based on a perspective that encompasses both long-term and short-term considerations.

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