'Safe' investments faltered in 2013
NEW YORK — Being safe left some investors sorry in 2013.
That's because some financial assets that are considered safe and steady lost money.
After three decades of steady gains, bonds had a bad year. Prices for Treasurys and other kinds of bonds slumped as the U.S. economy improved, investors' nerves steadied and the Federal Reserve prepared to pull back on its huge bond-buying program.
From 1981 through 2012, demand for Treasurys rose and their yields, which move in the opposite direction, fell. The yield on the 10-year Treasury note bottomed at a record low of 1.39 percent in July of 2012, when the European debt crisis intensified and people rushed to buy U.S. government debt securities.
The U.S. economy now appears to be gaining steam and the Fed, the biggest buyer of Treasurys, plans to start reducing its purchases in January. The yield on the 10-year Treasury note climbed from 1.76 percent to as high as 3.04 percent in 2013 as investors sold bonds in anticipation of the Fed's pullback.
Gold was another investment that went from haven to headache. The price of gold gained steadily for more than a decade, driven by concerns about the health of the U.S. economy and rising inflation. The metal plunged in 2013 as the U.S. maintained its recovery and inflation was nowhere in sight.
Gold had its worst slump in more than 30 years. The price of gold rose every year from 2001 to 2012 as investors looked for an alternative to the U.S. dollar and protection against inflation.
Gold may still come back into favor with investors, says George Gero, a precious metals analyst at RBC Wealth Management. Rising tensions between China and Japan over islands in the East China Sea, or escalating conflicts in the Middle East could unsettle financial markets 2014 and ensure that gold stays in investment portfolios.
Gold "will retain its haven status next year," says Gero. After all, "you do hold insurance on your car, hoping you'll never have to use it." Keeping money in a bank account was another safety-first strategy that worked when the stock market was plunging in 2008, but not since then. With the Standard and Poor's 500 index soaring 29.6 percent in 2013 — or 31.9 percent including dividends — returns from a savings account looked meager.
Investors moved into cash as the stock market collapsed in 2008. Unfortunately, many have stayed there, even as savings rates stagnate while the Fed keeps its benchmark short-term borrowing rate close to zero.
That means that inflation is eroding the value of the money.
"That's obviously a big problem," says Chris Haverland, an asset allocation strategist for Wells Fargo Private Bank.
In the 12 months through November, consumer prices have risen 1.2 percent, more than the best rates currently offered on savings and money market accounts or CDs.
Even if long-term bond rates rise when the Fed starts easing back on its stimulus, the short-term rates off which most saving accounts are based are going to stay close to zero for at least another year, says Haverland.
Cash may still be the safest option for investors, but investors may also be missing out on better opportunities elsewhere.