Monday, January 12, 2015

Did you lose out by playing it safe? How to lose money by playing it safe

One of the most common measuring sticks of the investment world is the often mentioned and frequently quoted Dow Jones Industrial Average. As you may have noted, it ended 2014 just under 17,900 after having broken the 18,000 mark.

Six years ago, in January 2009, the DJIA was just over 9,000. In other words, it was up roughly 100 percent. Yes, it dipped down to 6,000 along the way before bouncing back. And the uncertainty probably caused a lot of people to lose sleep during that stretch.

Nonetheless, as we kick off a new year, most investors who are equity investors are significantly better off today than they were at this point in 2009.

Of course, nobody knows what the future will bring and, as I always like to point out, historical performance is no assurance of what the future will bring.

So, while some equity investors saw their portfolios more than double, others may not have fared as well. But everyone had the opportunity for gains that were at least respectable.

The bottom line is that equity investors who had an iron stomach and stuck with the investment world’s ups and downs are likely to be further ahead than they were six years ago.

There were plenty of skittish investors back then. Many panicked in March of 2009 when the Dow was in a free fall. Several said goodbye to the market, cashed in their chips and parked their dollars in a bank or credit union.

In other words they were on the sidelines and missed out on a pretty amazing run up. On top of that, the financial world rubbed a little salt in their wounds. That’s because in addition to missing out on the run up, they also earned extremely low interest while their dollars were sitting on the sidelines in a bank or credit union savings account.

I feel badly for these people. In all likelihood they let their fear and emotions drive their investments. As a result they’ve made little headway since 2009.

I’m a firm believer in setting aside funds for emergencies and other short term needs. But having your investment portfolio perform barely above flat line is a recipe for problems in the years ahead.

With gasoline prices falling, they’re just a stone’s throw away from their January 2009 levels. However, with the exception of gasoline, just about every thing else costs significantly more than it did in 2009. College tuition and health care are just two areas that have seen skyrocketing costs.

We live, today, in a world of financial uncertainty. It can be gut wrenching to invest in the markets, but being on the sidelines can also be dangerous.

Nobody knows what the world will look like six years down the road. But the likelihood is high that the costs of goods and services will continue to escalate. A static dollar cannot keep pace with the increasing costs of goods and services.

I don’t believe in extremes. Investing entirely in equities carries too much market risk. At the other end of the spectrum, depositing everything into cash makes you vulnerable to rising costs. Most investors would be best served to have a diversified well-balanced portfolio and to avoid the emotions of fear and greed.

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