Investing Fears

Don’t let fears hold you back from investing

Provided by RBC Wealth Management and The Neuman Wealth Management Group

For the past few years, many investors have fled the stock market. But their flight may have been ill advised — and you could benefit from their experience.

Just how significant has the equities exodus been? Consider this: U.S. equity mutual funds experienced net cash outflows of more than $500 billion from the beginning of 2007 through April 2012, according to the Investment Company Institute.

However, those investors who left the market may have had second thoughts, at least over the past few years. Why? Because the Dow Jones Industrial Average gained almost exactly 100 percent from March of 2009 until early August 2012.

Still people’s fears about investing in stocks may be understandable. Over the past 12 years, we have seen two major bear markets, along with plenty of volatility. And today, investors are nervous about the Eurozone debt crisis, the sluggish U.S. economy and the possibility of the “fiscal cliff” that might occur if spending cuts and tax increases simultaneously go into effect in early 2013.

Those investors who are avoiding stocks are either “sitting” on cash or cash equivalents, such as money market accounts, or have invested heavily in bonds. Of course, there’s nothing intrinsically “wrong” with either cash or bonds — they can be valuable parts of your portfolio. But an over-concentration of each can be problematic. If you’re too heavily invested in cash instruments, you risk losing purchasing power over time, because cash vehicles may not even keep up with inflation. And if interest rates increase in the near future, as is widely predicted, the value of your existing bonds may decline, as interest rates and bond prices are inversely related.

In any case, the current market environment provides you with at least two reasons to stay invested in equities:   

• Greater rewards than “safer” investments — When you invest in stocks, you’re not just looking for a rise in price in absolute terms — you also want your investment to pay off relative to other, less risky choices. One common measure for this comparison is called the “equity risk premium,” which is essentially the expected return of stocks above “risk-free” investments, such as one-month Treasury securities. And right now, with Treasury yields so low, this equity risk premium is quite high, compared to its historical average.

• Potential “downside” protection — Because so much selling has already occurred over the past few years, the potential for a sudden, enormous round of sell-offs — a key driver of market downturns — most likely has been greatly reduced. (Keep in mind, though, that when it comes to stocks, there are no guarantees, and no limits as to how far they can fall — or rise.)

So don’t let yourself be “scared off” equities. They should be an essential part of a diversified investment mix that reflects your own risk tolerance, time horizon and long-term goals. 

This article is provided by Eric St. Martin, a Senior Financial Associate at RBC Wealth Management in Stillwater, MN, and was prepared by or in cooperation with RBC Wealth Management.  The information included in this article is not intended to be used as the primary basis for making investment decisions nor should it be construed as a recommendation to buy or sell any specific security. RBC Wealth Management does not endorse this organization or publication. Consult your investment professional for additional information and guidance. RBC Wealth Management does not provide tax or legal advice.

RBC Wealth Management, a division of RBC Capital Markets LLC, Member NYSE/FINRA/SIPC