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 this article
- What Asset Is Risk-Free?
- No Such Thing as No Risk
- Putting It Into Perspective
- Spending & Emergencies
- Tempering Volatility
- Cash Benefits
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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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