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Don’t lose faith in stocks

By Judy Martel · Bankrate.com
Monday, November 26, 2012
Posted: 6 am ET

A majority of investors still believe equities will provide the best long-term returns for retirement, but their faith has been shaken since the Great Recession.

In a survey of 850 investors by Harris Interactive for T. Rowe Price, 61 percent say saving for retirement is their top priority and that equities are "very important" or "important" for getting them to their retirement goals. But only about half confess to having the same tolerance for risk that they had before the economic recession.

Fully three-fourths of fixed-income investors said they are not willing to take on additional risk for higher return. But they don't realize they are actually taking on risk, often much more than they realize.

"Many individual investors are whistling past the graveyard by avoiding equities and other risky assets that offer the potential for growing streams of income in favor of fixed-income, noninflation adjusted, interest-rate sensitive investments," says Bankrate's senior financial analyst Greg McBride, CFA.

"Inflation and interest rates pose a much bigger risk to fixed-income investors who have piled into what they believe are safe-haven investments," he adds. "Loss of purchasing power is just as damaging as a loss of principal, and fixed-income investors may likely encounter both in the years ahead."

Equities provide the potential for price appreciation and a growing stream of dividend income, but those benefits are being cast aside for the perceived safety of cash and government bonds, says McBride. Investors need to wake up to the fact that increased inflation, higher interest rates -- or both -- can harm their portfolio even more in the long run.

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