Scared to wade back into stock market? 3 steps for investors
— -- Make no mistake about it: The news for investors is really rotten this quarter. The average stock fund fell 9.1% the past three months.
And it gets worse: A $10,000 investment in the average stock fund has lost $3,789 the past 12 months. You could have had more fun using your money to light the barbecue.
But sooner or later, you're going to have to tiptoe back into the stock market. You can't afford not to, given today's savings rates. If you're terrified, we'll give you three ways to tiptoe back into stocks.
Compared with a 9.1% loss, a money market mutual fund or bank CD looks pretty tempting. But here's the problem: Savings rates are so low that you can't afford to park your money on the sidelines. The average money fund, for example, yields 0.23%, according to iMoneyNet, which tracks the funds. At that rate, you'll double your money in a bit more than 300 years.
How about a bank CD? The average one-year bank CD yields 2.3%. You'll double your money in 31 years at that rate. But even that won't mean much: Inflation and taxes will eat your earnings down to a nub.
So if you have a long-term investment outlook — 10 years or more — then you'll probably earn more in stocks and bonds than you will in money market funds or bank CDs. Ironically, given the losses you may have taken in the past five years, the stock market is probably your best bet at getting even.
Market experts often talk about "reversion to the mean," which means that periods of good or bad performance generally drift back to average. In the 1990s, for example, some analysts warned that ultra-high stock returns would revert to the mean — meaning that, sooner or later, a long period of bad performance would follow, bringing the long-term average back to normal. And that's pretty much what happened.
The stock market's 10-year performance is the worst since the Great Depression, says Ibbotson Associates, a Chicago research group. If there is a reversion to the mean, the next long-term move could be up.
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