Question

Question:

Rob Arnott, chairman of investment firm Research Affiliates, suggests young people start investing their 401(k)s in a conservative mix of one-third stocks, one-third bonds and one-third inflation hedges, such as Treasury inflation-protected securities.

Briefly explain whether you agree that adding inflation hedges into a mix of stock and bond can make the whole portfolio become less risky.

Answer 1

Rob Arnoth when suggesting the young people to invest 4001(k)s ina conservative stock mix is a good idea when the person is a beginer in this feild.

Conservative Portfolio: The goal is to protect the principal value. A conservative portfolio is for those investors with a short time horizon, and a low level of risk tolerance. Ideal for people in retirement or close to retiring.

• 70%-75% Fixed Income Securities
• 15%-20% Equities
• 5%-15% Cash and Equivalents

An inflation hedge is an investment that is considered to provide protection against the decreased purchasing power of a currency that results from the loss of its value due to rising prices (inflation). It typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Alternatively, the hedge could involve taking a higher position in assets, which may decrease in value less rapidly than the value of the currency.

As we know that the stocks fall in the risk category and the bonds provide the fixed income prospects simultaniously adding the inflation hedges to the mix of will reduce the portfolios risk.