GOLF’S DREADED WATER HAZARD HAS A LESSON FOR INVESTORS

Fear of Risk Can Put Investment Plans Under Water

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.

Fear drives investors into cash

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.

CASH INCREASES DURING MARKET PULLBACKS

But safety may come at a cost

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.

MONEY MARKET ACCOUNTS’ AVERAGE YIELD BEFORE AND AFTER INFLATION

January 1, 2000 – December 31, 2018

These charts are for illustrative purposes only and do not reflect the performance of any Franklin Templeton fund.

Investor Behaviour

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