April 1, 2011 6:15 am
RISMEDIA, April 1, 2011-During the most recent stock market reversal many equity investors panicked, selling stocks at the depth of the market and adopting investment strategies that they perceived would be safer and yield better returns than were available in a declining market by either investing in bonds and money market funds or simply holding on to their cash-so-called "mattress" investing.
The rationale behind mattress investing is that by holding cash rather than keeping it invested in declining equities, as many Depression-era families did by stuffing cash in their mattresses, the asset will retain greater value.
But did that strategy earn safer and higher returns? No, according to new research by National Center for Policy Analysis (NCPA) Senior Policy Analyst Pam Villarreal, which shows returns to equity funds outpaced any of the alternatives.
"Every investor has a comfort level when it comes to investment risk," says Villarreal. "But selling all stocks and holding the cash is a sure way to lock in a loss."
Indeed, Villarreal's research showed that equity funds outdistanced any of the alternatives, with the Dow Jones Industrial Average (DJIA) gaining more than 77 percent from March 2009 to January 2011. In March 2009 alone, the S&P 500 posted its largest 10-day gain since 1938, and in November 2010 the DJIA topped 10,000 for the first time since September 2008.
In fact, returns for consecutive $100 tax-deferred monthly 401(k) contributions from December 1, 2008 to December 31, 2010 vary significantly:
Contributions to a traditional savings account invested in money market funds would have yielded $21; an after-tax return of 0.71 percent
Contributions to a bond index fund would have yielded $140; a 5.39 percent return
But a contribution to an S&P index fund would have yielded $783; a return of nearly 26 percent
"Panic stock selling is a normal reaction by investors when markets turn jittery, but it can cost investors thousands of retirement dollars," Villarreal adds. "If investors do sell, even if it's to stash their cash under the mattress, the sooner they return to stocks, the more money they will have for retirement."
For more information visit www.ncpa.org.
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