Why Risk is Back in Fashion

Fed Chief Ben Bernanke's strategy for making risk fashionable is gaining traction. Affluent investors are jumping off the sidelines and home prices are getting a lift. We're not out of the woods by a long shot. But do you really want to fight the Fed?

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Kevin Lamarque / Reuters

In one respect, at least, Ben Bernanke may be getting his way.

When the Fed chief last month unleashed his latest round of stimulus, known as QE3, it was (among other things) a shot across the bow of investors who have been squirreling away assets in super-safe securities like short-term Treasuries, bank CDs, and money-market funds. These investments yield less than the rate of inflation, and with the third installment of his “quantitative easing” strategy, Bernanke all but guaranteed that things will stay that way until the economy is really moving again.

But the point of QE3 wasn’t just to keep rates down and encourage home buying. It was also intended to frustrate holders of conservative, low-yielding assets, pushing them to seek higher returns in riskier investments and thereby fund job-generating business activity — and it seems to be working.

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Frustrating savers shouldn’t be difficult. In fact, the job is largely done: In the second quarter, U.S. households earned $252 billion in interest payments, according to the Commerce Department. That’s down from an inflation-adjusted $355 billion in the fourth quarter of 2007. This is one result of falling yields and it is playing havoc with the finances of retirees.

The Bernanke push is partly what’s behind impressive gains in the stock market the past few months, and now it seems as if home prices are getting a welcome bounce as well. After years of playing it safe, at least some folks have tired of paltry returns and are gaining the confidence to stick their necks out a bit.

In a survey of affluent investors, Merrill Lynch recently found that far fewer describe themselves as conservative today. Just 30% say they are leaning toward low-risk investment options—down from 36% last year and 50% two years ago. The shift is most apparent among those with the longest time horizons. Among those 18 to 34 years old, 23% describe themselves as conservative, down from 52% two years ago.

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There’s more at work here than Bernanke getting his way, however. Caution fatigue is at least part of the explanation. Nearly half of those that Merrill polled say this environment is the new normal, and of those, nine in 10 said they believe they are prepared to navigate this new economy for as long a it persists. That suggests they feel they have adapted: Half say they have taken specific steps to regain control of their finances—and want to get on with their lives.

We’re not exactly off to the races yet. Mutual fund investors have been net sellers of stock funds and net buyers of bond funds for five years, and $2.6 trillion is sitting in money market mutual funds. There’s still plenty to worry about, including the Euro crisis, a slowdown in China, and anemic growth in the U.S.

But savers know that persistent low yields are worrisome in their own way, and perhaps the oldest adage on Wall Street is “don’t fight the Fed.” Bernanke’s push to make risk fashionable again may be gaining traction. You’re probably better off betting with him than against him.

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