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Afraid of the market means emotions are ruling your investment sense

By Dian Vujovich

No matter how you slice it, investing is risky business. Always has been. Always will be. That’s the nature of the beast. And for the past few years, in fact for most of this now 12-year old century, our markets have been volatile. That’s one of two very important facts to remember.


The second is: If you can’t accept that reality and market volatility scares you, forget about traditional investing. Why participate in a game that’s tough enough to make money in when you’re thinking logically but pretty much assures losing money when emotions are ruling your investment choices?


Earlier this week I received an email from Lipper about where money flows had gone during the month of May.


It pointed out that investors had put a net $19.9 billion and $1.0 billion into bond funds and money market funds; that for the first month in six $3.0 billion had been pulled out of stock & mixed-asset funds; and that at the end of May bond ETFs had seen their largest monthly net flow on record of $8.5 billion.


I look at a volatile stock market as one that can offer investing opportunities—and more of them when that volatility is on the downside rather than when the bulls are running things. As for the world of fixed-income, when interest rates on money market funds and bond funds are under are around 1 percent or less, I don’t  see the appeal.


So, I asked my friend Don Cassidy Don Cassidy, president of the Retirement Investing Institute in Denver, why he thought investors were still pouring billions into bond funds and bond ETFs given the current interest rate environment.


Here’s what he wrote back in an email response:


“People are still scared by stocks, having been hosed twice in a decade or so. Some have also been forced to sell equity funds to live on given the employment situation.


I guess they are once again chasing recent performance (bonds/funds have done better than stocks) and feel safer in bonds.   They THINK there is no other available place to make money.


That is because they are vastly undereducated in such bond-type and income-based alternatives as REITs, MLPs, preferred stocks, and income closed-end funds. (Another way to get income is writing options, but that is WAY beyond the knowledge/confidence level of the vast majority of investors.)


Most 401k plans do not include such options and probably will never do so.


I think people are seriously underestimating the risk in bond funds. Would you lend money for 10 years to a relative at 1.5% (govt. bond rate)? I would not, and I trust  my family. After inflation and taxes it is a highly likely loss.


But people see stocks (scary) and money funds (0.01% unacceptable) as the only other choices.


Bond funds in particular are risky, since their yields are reduced by about 0.7% for expenses, and a bond fund (other than the rare term trusts) never matures, so you will still be long bonds 10 or 20-years from now.


ETFs at least offer lower expense ratios and immediate, low-cost entry/exit.”


For more information about retirement investing visit the Retirement Investing Institute at: r-i-i.org.

To read more articles, please visit the column archive.

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