Playing Defense When Investments Get Pricey

Stocks are at record highs. The multi-decade bull market for bonds is likely over. But these days, even playing defense requires treading carefully. What's a cautious, long-term investor to do? Sitting in cash or super-short-term investments may seem like a way to protect your money, but it's actually a money-losing proposition. That's because inflation is slowly eroding away the value of your investment even if your portfolio balance isn't changing.

The good news is there are plenty of ways to tilt a portfolio toward stock and bond investments that offer inflation protection as well as some cushion should financial markets once again get bumpy. There are funds focused on stocks with growing dividends whose payouts can soften declines in stock prices. Corporate-bond funds offer some refuge from losses that are sure to hit whenever the Federal Reserve raises interest rates. But with so many investors keeping one foot on the brake, the current environment requires keeping in mind two basic rules of investing. First, price matters. Even safe investments can be risky if you overpay for them. And second, diversification works. But take time to understand how each investment performs in times of stress.

Source: Wall Street Journal

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