Burton G. Malkiel wrote A Random Walk Down Wall Street and provided my industry with one of its most famed books on investing. My copy is torn, beaten and ready to be read again. Quotes from this text are common and I recently saw one in the AAII Journal dated March 2011 that provided the idea for this post.

I have wondered for several years now how risk should be defined in light of all the economic events of the past decade or so. Questions began to arise with the tech stock crash and corporate scandals such as Enron about how investors identify and choose risk for their portfolios. The recession only adds to the questions already stirring around in my mind. Is it accurate to view risk and risks associated with investment products the same way Burton Malkiel did in this book?

Let’s look at his commonly suggested assets, risks associated with owning and expected returns for 2010/2011:

Bank accounts / No risk / 0-1%
Treasury Inflation Protected Securities (TIPS) / Low risk / 2%+
Investment Grade Corporate Bonds / Moderate risk / 5-7%
Blue-chip Stocks / Moderate-High risk / 7-9%
Real Estate Investment Trusts (REITS) / Moderate-High risk / 7-9%
Small Company Stocks / Substantial risk / 8-9%
Emerging Market Stocks / Very High risk / 8-11%

When you think about the aforementioned economic events and their impact on these asset classes, it is easy to see why they are ranked the way they are. It is also easy to argue for why these rankings should be rewritten. It’s a conundrum that each client needs to work through and one in which I strive to help with daily. If you need guidance, call.

Until next week,

Susan R. Linkous
“Susan On Money”

Note: Investing involves risk including loss of principal.