NCPA - National Center for Policy Analysis

Is the Mattress or the Stock Market a Better Place for Your Money?

March 29, 2011

Would an investor have been better off if he had steadily contributed to an equity fund from December 2008 through December 2010, despite the ups and downs of the stock market?  Comparing returns from some of the alternatives that were available indicates he would have been better off staying in the market, says Pamela Villarreal, a senior policy analyst with the National Center for Policy Analysis.

Suppose that an individual had transferred her accumulated contributions from December 2008 to November 2010 from a bond index fund to a stock index fund, then made an additional $100 contribution in December 2010. 

  • As of December 31, 2010, the total $2,400 principal contribution would be valued at about $2,588.
  • The effective annual rate of return would be 7.14 percent.

Suppose that a saver who had moved money into a bond index fund in December 2008 shifted her accumulated bond fund money into a stock index fund in March 2009 and made regular contributions to the fund starting in April 2009. 

  • As of December 31, 2010, the total $2,400 principal contribution would be valued at about $3,157, for a rate of return of 25.3 percent.
  • Thus, those who contributed sooner during the market upswing experienced greater percentage gains than those who remained in money markets or bond funds.

Everybody has their own comfort level when it comes to investment risk.  But selling and shifting money out of an asset when it is priced low is a sure way to lock in a loss.  It is a normal reaction to a sometimes jittery market, but it can cost a saver thousands, says Villarreal.

Source: Pamela Villarreal, "Mattress Investing Revisited," National Center for Policy Analysis, March 29, 2011.

For text:

http://www.ncpa.org/pub/ba742   

 

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