Bill Gross, a famed investor known as the ‘Bond King’, issued a warning on Tuesday:
financial markets are getting riskier due to central banks’ ‘easy money’ policies. If he’s correct, markets could be in for a very rough ride;
What Does This Mean?
Gross’ concern is that central banks have made money too readily available for investors by buying vast amounts of government bonds and other types of investments (typically considered ‘safe’ investments). When central banks buy these investments, those that sell them often shift the proceeds into riskier investments that offer higher returns, like stocks or certain types of real estate. Gross thinks that the prices of those riskier investments have been inflated beyond their real value, and that it’s going to be very painful for many investors when reality hits.
Why Should I Care?
The bigger picture: Support from central banks is (very slowly) being removed – which may heighten the risk.
The US Federal Reserve stopped buying more government bonds a few years ago and has begun increasing its target interest rate. This creates a headwind for many types of investments because it becomes more expensive to borrow money and reinvest it. And there are signs that the European Central Bank might slow down its purchases of bonds and other investments later this year. As this support for the economy reverses, there’s a higher risk that the value of many investments will begin to fall.
For you personally: Timing the market is incredibly difficult.
Gross has been warning of this risk for years, but it hasn’t yet come to fruition (which doesn’t mean it won’t). In the meantime, stocks and other investments have risen significantly in price, meaning over-cautious investors have missed out. Over the long term it’s usually more beneficial for most investors to own a balanced, diverse portfolio that fits their appetite for risk than to try and predict market crashes (or rallies, for that matter). For a private initial meeting with me, don’t hesitate to get in touch.