Slow and safe wins the race

Financial historians will eventually describe the past 30 years as a time when investors embraced epic levels of financial risk.

Stock mutual funds are now so popular that they outnumber stocks. Bond, real estate and other types of mutual funds also exploded in number. Many financial instruments — such as derivatives — are so complex that you need an advanced degree in mathematics to grasp how they function.

So in this Great Asset Mania, to sock away money in a cash-equivalent account seems an unlikely way to win the financial race.

But in truth, the tortoise really has outpaced the hare for the past dozen years.

Since 2000, the S&P 500 has registered two plunges of more than 50 percent and several of more than 10 percent, leaving this index slightly lower today than it was 12 years ago.

‘Buy-and-hold investors have little to show for the roller-coaster ups and downs, aside from a nauseous gut,’ says [the chairman of a capital firm].

ABC News, Aug. 2, 2012

It’s true that a Treasury-bill account yields next to nothing.  But at this financial juncture, the well-known saying of humorist  Will Rogers has never been more relevant: “I am more concerned  with the return of my money than the return on  my money.”

Robert Prechter says that embracing financial risk because interest rates are low can be a snare.

Because interest rates are ‘too low,’ investors claim that they have ‘no choice’ but to invest in something with more ‘upside potential.’ Ironically but obviously necessarily, the last major interest-rate cycle was perfectly aligned to convince people to do the wrong thing. Two decades ago, when rates were high, people insisted that stocks were not worth buying. Now that rates are low, they insist that cash is not worth holding. It’s a psychological trap keeping investors from doing the right thing: buying stocks at the bottom (when rates were high) and selling them at the top (when rates are low).

Conquer the Crash, second edition,
pp. 161-162

There is a flip side to decades of epic financial risk:

I’m convinced that by the end of this decade people are going to feel even more negative towards stocks than they did in the ’40s. They’ll tell their children and grandchildren not to touch the stock market.

Robert Prechter, June 2010 interview

Get ready for the market changes ahead and start investing independently.

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