Earning returns on investment means some level of risk is needed
Published in the Feb. 19 – March 4, 2014 issue of Morgan Hill Life
By Dan Newquist
Dan Newquist
We often hear from investors who are concerned about investing in the market. They credit the news of the day, high unemployment, political uncertainty, slow economic growth, global economic issues and stocks reaching record highs as reasons they aren’t comfortable buying stocks or other investments. The confusion and discomfort created by all the noise can lead some to never invest at all.
The wait-and-see investor is looking for the right time, but for some reason that time never comes. The challenge is the wait-and-see investor deflects opportunity by thinking, figuring and worrying and thus becomes paralyzed.
Emotion is powerful. Risk equates to uncertainty and fear. The balance between risk and return is personal for every investor. If you want return, you have to assume some level of risk. There is no question investors have been inundated with challenging headlines the past five years, but that doesn’t mean we should be frozen into inaction.
It is popular opinion to think that waiting won’t cost you anything, when in fact it does. Let’s look at three costs of waiting to invest:
Opportunity cost:
Waiting to enter the market after uncertainty clears — and I offer that uncertainty pretty much always exists — usually means we end up buying at higher prices.
In the hysteria of the Great Recession, investors pulled their money out of the markets and fled to cash in 2008 and 2009. Some investors made their way back to the market, however a great deal of cash still remains on the sidelines. Now, think back to 2010. The U.S. recession just ended and the government couldn’t get its house in order. Then came the European credit crisis and the debt ceiling debate and so on. The disturbing news just kept coming, yet during that time, the market advanced as stock prices appreciated. In fact, if an investor invested into the S&P 500 Index at the beginning of 2010, they would have been up 70 percent by the end of November 2013 according to Morningstar.
Income Cost:
In addition to missing out on price appreciation, investors who wait risk missing out on dividend and interest income. As of mid-December 2013, the dividend yield on the S&P 500 was 2.03 percent according to State Street. That 2.03 percent is what “invested” investors earned while waiting for price appreciation. By comparison, keeping money in a savings account yields close to 0 percent.
Lost Purchasing Power:
The longer we stay in low-yielding, near-zero, interest rate accounts, the more our purchasing power declines, in other words, inflation. Looking at inflation from January 2010 to the most recent report ending October 2013, what we could have purchased for $100 in 2010 now costs $108 according to St. Louis Fed. Our money lost about 2 percent in purchasing power per year over that time.
There are strategies that can help wait-and-see investors get invested, and a financial advisor can walk you through how to do it.
This column is for educational purposes only and is not intended as tax, legal or investment advice.
Dan Newquist, CFP®, AIF® is a Principal Investment Advisor Representative with RNP Advisory Services, Inc, a registered investment advisor in Morgan Hill and can be reached at (408) 779-0699 or [email protected]. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
