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That dreaded ‘ker-plunk’ gets in our heads and can lead some golfers to play it a little too safe. It’s the same way with investing. Too much caution can keep you from achieving long-term gains.
This is the latest in Franklin Templeton’s series, “Behavioural Finance for Everyday Investors”, where we describe common investment barriers – so you can overcome them.
Losing hurts. A lot. In fact, we’re wired to experience the pain of losses twice as powerfully as the joy of gains. Consequently, we’re motivated to avoid losses at almost any cost. That’s why so many investors retreat to the perceived safety of cash or cash equivalents when the market dips.
The blue line in the chart below shows the average yield of money market accounts since 2000. As of December 31, 2018, it’s hovering at 0.8%. Not great, but safe. At least it looks that way until we account for inflation, which is represented by the green line.
Some investors may be surprised to learn that by holding onto their cash, they’re actually slowly eroding their purchasing power. If you’re not at least meeting inflation, you’re falling behind.
These charts are for illustrative purposes only and do not reflect the performance of any Franklin Templeton fund.
Sources: Canadian investors moving to cash during market pullbacks: Strategic Insight Inc.; Canadian Money Market Fund Yields: Morningstar Research Inc.; Canadian Inflation Rate: Statistics Canada.
Investments entail risks, the value of investments can go down as well as up and investors should be aware they might not get back the full value invested.