After the stock meltdown last year, many people associate stocks with high risk, commodities with high risk, whereas cash and government bonds as low risk.

While, in general, cash and bonds are lower risk, they do have risks in themselves. This is the same as a house, which everyone thought was a surefire investment. As we have seen, house values can go down as well.

The risk with stocks is clear. If the economy or company has trouble, the stock price can go down. Some stocks go to zero, even supposedly blue chip companies like GM. One way to reduce this risk is to hold a wide variety of stocks, i.e. diversification. But even last year, if you had a wide variety of stocks, your portfolio was still down around 40%. Yikes!

Thus, people who want less risk think cash is king. In general, this is the case. But remember, cash doesn’t really earn much and it has the potential to be decimated in one way- inflation. While inflation hasn’t been an issue in recent years, it was in the late 70’s and early 80’s. Some believe inflation may prop up again now due to the massive government deficits and money printing by the Fed.

The only way to reduce risk across your entire portfolio is to hold a mix of cash, bonds, stocks, and gold (and other commodities). The percent of which depends on you. During a deflation (like we had in the fall), the cash and government bonds will hold their value, while stocks and many commodities will plummet. During inflation, cash and bonds will get killed while stocks and especially commodities do well. During ‘normal times,’ cash and bonds will hold their value, but stocks will perform the best.

Too bad it just doesn’t seem we will be in normal times anytime soon!