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A Return to the Age of Conservative Investing?

by Lindsay

While investors' quest for alpha, and subsequent interest in alternative investments, has been widely chronicled, there is another opposing force that will likely drive innovation in product development over the next several years: concerns about inflation and longevity risk pushing investors toward more conservative long-term investment strategies.

As reported by the Bureau of Labor Statistics last week, the Consumer Price Index rose at an astounding 7.9% seasonally-adjusted annual rate (SAAR) in 2Q08, and a 5.0% unadjusted rate for the 12 months ended June 2008.

The typical investor response to rising inflation, more aggressive investing, has also become a dangerous proposition, at least in the short term, as the Dow Jones Industrial Average has continued to bounce around over the past year, peaking at 14,279 in October 2007 and then plummeting to 10,731 just last week.

As reported by Ignites, several firms are taking a cue from the DB space and developing target date funds that use the principles of liability-driven investing (LDI). Essentially, these funds place greater emphasis on protecting investors against longevity, inflation, and currency risk to protect retirement income -- often at the expense of higher potential returns.

Is this trend enough to shift firms' focus from chasing alpha by developing the most obscure alternative investment vehicles to touting their safest, most-likely-to-protect-your-initial-investment funds? Will we all eventually go back to investing in utilities, like our grandparents did? It's hard to believe, but we might be going down that road...