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The price of safety

By Sheyna Steiner ·
Friday, September 23, 2011
Posted: 11 am ET

When the stock market resembles nothing so much as a sinking ship, the urge to flee can be strong.

Indeed, in recent weeks, people have been making their egress from stocks. The Investment Company Institute, or ICI, reports that equity mutual funds lost $1.99 billion in the week ending September 14.

For nervous investors, there may be some good news lurking around the corner. According to the story, "Stocks fall but investor panic could soon abate," published on Thursday, a well-known proponent of timing the market predicts that a short-term bottom could come next week.

From the story:

The Standard & Poor’s 500 Index may drop as low as 1,076 before investor panic abates and stocks rally, according to Tom DeMark, the creator of indicators for identifying turning points in securities.

The benchmark index for U.S. equities may fall that far intraday as early as next week and then gain as much as 20 percent, DeMark said in a telephone interview from Phoenix today. The swings will push the VIX, as the Chicago Board Options Exchange Volatility Index is known, above the high of 48 it reached on Aug. 8, he said.

An eventual bottom and subsequent rally is cold comfort to the more skittish among us; particularly in light of this week's announcement from the Federal Reserve Open Market Committee admitting "there are significant downside risks to the economic outlook, including strains in global financial markets," in the statement following this week's interest rate meeting.

As equity funds have lost money, bond funds picked up the slack, gaining $3.85 billion in the most recent fund flow statistics from ICI. Not only that, bank deposits are at an all-time high and safe investments such as Treasury securities are breaking records -- the 10-year Treasury yield was 1.72 percent on Thursday.

Unfortunately, safety comes at a steep price. Though the official measure of inflation disregards the increase in food and energy prices, consumers are paying more at the gas pump and the grocery this year.

The effect of inflation on savings can be truly pernicious. When you account for the impact of inflation on expensive, low-yielding safe investments combined with the cost of jumping in and out of riskier investments such as mutual funds, the price of avoiding a short-term dip in account balance seems out of proportion.

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