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Things Change

March 21, 2013

Last week, a friend asked me if I thought it was too late to invest in the stock market (since it recently had a very large run up.)  A few questions later and I found out that he never before invested in the market (with an exception for his 401k… which I will discuss in my next blog.)

 

He said he never invested because he was “afraid” of losing.  I know many people like that, and can definitely state that the stock market is not for everyone.  However, many people not in the market should be.  Things change and that includes attitudes toward risk and the realities of risk.  Here are some comments for consideration for those not investing in the stock market.

 

Safety of principal is important, but so is cash flow.  The “safe” investments of bank certificates of deposit and shorter term Treasury bonds are yielding interest payments that are below the inflation rate and about half of the yield on investments in funds duplicating the Dow Jones Industrial Average, S&P 500 Index and some other key indexes.  This is not how it has always been.  Things change.

change-roadsign

Today, the rates on safe investments won’t help many people attain their goals, but possibly investing in the stock market will.  What will happen is unknown, but when a careful plan is constructed for a long period, broad based stock investments cannot be ignored.  Fixed income has abandoned its role as a safe investment with their record low yields.  Stock market volatility is scary, but the trend line is up with the underlying qualities strong.  Stock funds represent collective investments in individual businesses; overall valuations are not excessive, earnings appear sustainable, dividend payouts are reasonable based on profits and recent history has shown the continuation of dividends regardless of stock prices.  Things change.

 

Things change.  Changes in the last twenty-five years are too numerous to mention.  Life styles, family values, business, technology and science.  Things change.  So should investing ideas formulated twenty-five years ago.

2 Comments leave one →
  1. Robert Nagler permalink
    March 22, 2013 1:52 pm

    The problem is not when you buy it is when you sell stocks

  2. March 28, 2013 7:12 pm

    Additional reading on the topic. This is copied from the Fidelity.com website. It is subject to the copyrights shown after the source..

    Don’t let a fear of stocks cost you in retirement
    BY Walter Updegrave,
    Money Magazine
    ™ and © 2013 Cable News Network and Time Inc. and/or their affiliated companies. All Rights Reserved.
    Money Magazine — 03/08/13
    I don’t trust the stock market, so I have all my savings in money-market accounts. I plan to work another 10 years before I retire, however, so where can I invest to earn a higher return without too much risk?

    — David H., Winona, Minn.

    You’re not alone in your wariness about stocks. Even as most investors cheered when the Dow Jones Industrial Average (.DJI) climbed into record territory this week, some reacted with trepidation.

    Where the optimists saw the Dow’s ascendance to new highs as affirmation of an improving economy that would propel stock prices even higher, skeptics feared that, among other things, the effects of sequester budget cuts might knock stocks from their new perch.

    The truth, of course, is that neither I nor anyone else knows whether stock prices have a lot farther to run or will take a dive. But I do know this: If you are investing for the long-term — and you are since you have 10 more years of work ahead of you, plus maybe another 30 or so in retirement — avoiding stocks completely can be a costly move.

    If you had invested $10,000 in money-market funds 20 years ago, for example, you would have just under $19,000 today. Had you put the same $10,000 in bonds, you’d have almost $31,700. And what if you’d invested that ten grand in stocks? You’d be sitting on a bit more than $51,000.

    Such superior performance isn’t guaranteed. And even when stocks deliver outsize long-term gains, those returns come with a white-knuckle ride. But the very fact that investors know stocks are more prone to gut-wrenching setbacks — such as the 50%-or-so declines that began in 2000 and 2007 — is exactly why they’re able to generate higher long-term returns than less volatile investments.

    So instead of engaging in an ultimately futile (and possibly dangerous) search for investments that purport to offer high gains with low risk, I suggest you try to ameliorate your feelings of distrust with an attitude that respects the risks in stocks but recognizes that it’s also possible to reap some of their lucrative returns while holding those risks to a tolerable level.

    The simplest and most effective way to do that is to invest a portion of your savings in stocks, but offset their inherent volatility by devoting the rest to bonds and cash.

    To arrive at the right mix, you first must have an accurate sense of your risk tolerance, or how much you can watch the value of your savings drop before you start selling investments in a panic. At the same time, though, you don’t want to take too cautious a stance, as the returns you earn may not be large enough to create a nest egg that will sustain you throughout retirement.

    To see how different blends of stocks, bonds and cash might perform over the long haul — and what sort of setbacks each mix might encounter in the short-term — you can check out Morningstar’s Asset Allocator tool.

    Once you’ve settled on a blend that seems right for you, you can then plug that mix, along with such information as the amount you have saved and how much you’re putting away on a regular basis, into a retirement calculator. That will show the probability that your saving and investing will allow you to achieve an acceptable standard of living in retirement.

    If the chances are uncomfortably low, you can see how making various adjustments — saving more, investing differently, postponing retirement — might improve them.

    Or you can continue to skip stocks altogether. In that case, though, don’t be surprised if you have to ratchet up your savings to a prodigious rate to have any hope of maintaining a decent standard of living after you retire.

    ——————————————————————————–

    ™ and © 2013 Cable News Network and Time Inc. and/or their affiliated companies. All Rights Reserved.

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