Do you get rewarded for ‘risk’?

Treasuries (TLT), corporate bonds (LQD), and stocks (SPY) returns after 7 years (Source: Tom Brakke @researchpuzzler )

Pension plans take note: Above is a chart posted by Tom Brakke (Twitter handle: @researchpuzzler ) and his post is here (Hat Tip: Tejus Sawjiani). My point in posting his fascinating chart is that pension plans are forced into asset allocations that favour riskier asset classes but is this the right approach? We cling to a paradigm of greater risk giving you greater reward but if this supposition were true then why has the investment industry been quick in pushing low volatility products? Whether we like to acknowledge it or not, macro counts for a lot more than investment analysts believe. Value investing works when macro factors align not in spite of those factors. By the same token, the resurgence in equities after the financial crash of 2008 has been due to flow of funds aided and abetted by the reflationary policies of central banks. (I have written on my personal thoughts vis-a-vis Bernanke’s version of quantitative easing here.) Will the visible hand of central banking continue to reflate equity markets or will funds flow back to US treasuries and corporate bonds as the global economy faces the reality of overcapacity, low effective demand and household deleveraging?

Related posts: 2014: Equities Meltup and 2014: A Deflationist’s Perspective

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