One Year After Lehman Brothers' Bankruptcy: The Flight from Risk

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TIPS Winning Fans

Bodie contends that equities are just too risky for most individuals. Over the long term, stocks might tend to outperform other kinds of investments. But, depending on when you start investing and when you retire, stocks can be disastrous. While wealthy investors might be O.K., most individuals can't afford to absorb the big losses that can hit the stock market from time to time. "There's a notion that somehow if you have a long time horizon you're going to outperform everything with stocks," Bodie says. "If that were true, stocks wouldn't be risky."

Moreover, Bodie argues, stocks are sold as a hedge against inflation when there is no proof to this idea. Yes, over the very long term, equities have kept pace with inflation-just as they have outperformed other investment classes. But in periods of high inflation, stocks have done poorly, as in the 1970s.

As Hogan, who has co-written articles with Bodie, puts it: "There is a belief in our industry that stock investing will get you where you want to go. And it might. But it might not."

Bodie advocates investing in Treasury Inflation Protected Securities, or TIPS, federal government bonds that guarantee to cover inflation. As long as they are well-priced, he also favors annuities, which provide investors with a guaranteed income stream in retirement.

Bodie's ideas are gaining influence among investors and their financial advisers, Horan says. Others who help individuals plan for retirement are adopting risk-management approaches used by pension funds. If a pension fund is worried about having enough cash, it must invest conservatively. But "if you have a surplus, you can take more risk," explains Horan.

Return to Conservative Investing

While conservative investing styles have gained attention in the past year, it remains to be seen whether the flight from risk is permanent or temporary. Financial adviser Marnie Aznar says clients now recognize the importance of a large emergency fund invested in the safest way possible. Dead and gone, she says, is the idea that "this boom in the stock market is going to take care of everything for me."

However, Aznar, who advises mostly younger, high-income clients in Morris Plains, N.J., says equities should be a part of average Americans' portfolios. Most Americans aren't saving enough to retire any other way, she says. "Unfortunately, the savings rate is incredibly low," she says. To achieve retirement goals, "you need a combination of saving more and a higher rate of return [from stocks]."

Financial advisers say the proper level of risk in a portfolio is often a very personal and individual decision. If a client enjoys skydiving in his spare time, "inherently that person's risk tolerance may be higher than other people's," says Avani Ramnani, an adviser at Eisner Retirement Solutions. But Ramnani, who has always pursued a more conservative strategy, often warns clients against taking more risk than they can afford.

If Americans remain skeptical of equities and other risky strategies, they may need new investment products better suited to a risk-averse style. For example, advisers complain of the high fees and complicated structure of many annuities. Bodie would like to see the federal government sell longer-term TIPS.

But for many, a return to conservative investing is not a new approach. "I've always subscribed to the idea that you build wealth by controlling your expenses and debt, and not by trying to jump for investment returns," Boucher says.

Fleeing from risk might be the natural response to the collapse of Lehman Brothers and the bailout of many financial companies. But it also returns investors to some old-fashioned advice that has stood the test of time.

This is the first in a series of BusinessWeek stories examining the landscape for investors and Wall Street in the wake of the financial crisis.

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• Part 1: The Flight from Risk
• Part 2: TIPS Winning Fans