The price of safety

21Jun12

Last month’s jarring decline in the stock market may only prolong investor anxiety. Investors have pulled money out of U.S. stock mutual funds for 12 months straight – a net total of $178 billion.

Many continue to ditch stocks and shift their money elsewhere. But “playing it safe” comes at a cost. Over the long run, fleeing to cash or buying Treasurys maybe even more dangerous in an era of low interest rates and low returns. It can do permanent damage to your money’s buying power and your retirement prospects.

Even with periodic plunges, the stock market provides the most realistic chance for your savings to beat inflation over the long term. The quest for safety also can cause you to lock in big losses. After the market hit bottom in March 2009, the Standard & Poor’s 500 index rose 50 percent in about six months. Many investors weren’t in the market during that run.

“It’s easy to jump off the train, but it’s difficult to get back on when it’s moving,” says Jim McCool, head of institutional services at Charles Schwab.
Besides, so-called safe havens aren’t all that safe anymore:

CASH Although it can provide a sense of security, cash doesn’t hold its value well. The average yield on a money-market account is just .46 percent. Even the best-paying online savings accounts pay 1 percent or less. And “high-yield” checking accounts offer less than that.

CD’S Certiificates of deposit also pay poorly. The highest rates available are 1.15 percent last week and remains at a meager 1.62 percent as the result of the stampede into safety.

Treasuries The yield on the benchmark 10-year U.S. treasury note fell to a record-low 1.44 percent last week and remains at a meager 1.62 percent as the result of the stampede into safety.

GOLD It is far too speculative to be used wisely as protection against a falling stock market. Gold fell $46 to settle at $1588 an ounce Thursday, after Fed Chariman Bernanke didn’t give any signals that the central bank would take immediate action to stimulate the economy.

Sources: Bankrate.com; BlackRock.com, Dave Carpenter; J. Paschke -AP (Oregonian, Friday, June 8th)

Learn more about Ron Sloy.

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