CHICAGO (AP) — Investors remain anxious to find safety even as the stock market moves back toward positive territory for the year.
They’re on pace to yank more than $20 billion out of stock funds this month, the fourth time in the last five months, scarred by the volatility over everything from the sluggish economy to Europe’s debt crisis to the threat of another global recession.
Despite the recent market uptick, there’s still plenty to worry about.
Fears remain that the Greek government may fail to pay its massive debts, which would wreak widespread financial havoc. Federal Reserve Chairman Ben Bernanke hasn’t backed off from his statement early this month that the economic recovery “is close to faltering.” And investors aren’t fully convinced that the selloff that pushed the Standard & Poor’s 500 index down 14 percent in the third quarter has run its course.
All the added uncertainty fuels any temptation to abandon stocks, as many already have done.
But “playing it safe” comes at a cost. Over the long run, fleeing to cash or buying Treasurys may be even more dangerous in this era of low interest rates as well as low returns. It can do permanent damage to your money’s buying power and your retirement prospects.
That’s the message financial advisers have been hammering home to clients who want to abandon the stock market, fearing a repeat of the 2008 meltdown or who are simply fed up with all the plunges.
Disillusioned investors, too, risk chasing an illusion of safety. So-called safe havens aren’t all that safe anymore.
“This is what I say to clients: ‘There is no safety’,” says Femi Shote, an investment adviser with Asset Harvest Group in McLean, Va. “What I preach is resilience, not safety.”
Hints of improvement in the latest corporate results hold out hope for investors, while highlighting the risk of being on the sidelines. Joseph LaVorgna, chief U.S. economist at Deutsche Bank, says the stock market is “pretty cheap” after all the selling and could come back quickly.
“All this volatility doesn’t engender a lot of confidence,” LaVorgna says. “But some good news can quickly restore it. If it looks like the economy is still growing and there’s some resolution in Europe, we could have the tonic for a powerful rally.”
Whether that occurs soon or not, here’s a look at the numbers confirms the meager payoffs of playing it safe.
— Cash: Although it can provide a sense of security, cash doesn’t hold its value well over time. The average yield on a money-market account is just 0.54 percent, according to Bankrate.com. Even the best-paying online savings accounts pay 1 percent or less. As recently as the summer of 2008, just before the financial crisis hit full-force, you could earn 5 percent on such accounts.
Certificates of deposit also pay poorly. The highest rates available are 1.15 percent on a one-year CD and 2.2 percent on a five-year CD.
— U.S. Treasury notes: The safety of bonds is less rewarding than it used to be. The yield on the benchmark 10-year Treasury fell to a record-low 1.71 percent last month and remains near 2 percent.
— Gold: It is far too speculative to be used wisely as protection against a falling stock market. But gold has been embraced by investors worried about rising U.S. debt, the possibility of inflation and a spreading European debt crisis. More and more piled in as the price nearly tripled in four years, reaching a record $1,891.90 on Aug. 22.
Since then, it has tumbled all the way back near $1,600.