Did You Miss Out On Your Share of $200 Billion?

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Wall Street 200 BillionYou'll never have the chance to lose a whole $200 billion, but the odds are fairly good that, over the past several years, you lost your personal share of $200 billion in potential investment gains.

In fact, most people lose quite a lot of money over their lifetimes -- much of it needlessly -- thanks to a host of avoidable blunders in how they manage their financial lives.

To get back to that $200 billion figure, for example, a recent Bloomberg article claimed that overall, Americans lost out on about that much by pulling money out of the stock market after being the financial crisis that began in 2008. The article offered some alarming statistics, such as:
  • "The percentage of households owning stock mutual funds has also fallen, dropping every year since 2008 to 46.4 percent in 2011, the second-lowest since 1997, according to the latest ICI annual mutual fund survey."
  • During the market's rally since 2008, the percentage of retirement money invested in stocks fell half a percent, when it typically rises significantly during rallies.
To be clear, people have been socking away money for retirement -- but they've been favoring bonds and other non-stock investments, even in our current environment of ultra-low interest rates. That's problematic, since over long periods, stocks have tended to outperform bonds and other alternatives.

Fear and Greed
Two emotions that often get in our way, financially, are fear and greed. Obviously, greed can lead us to do such things as spend too much on lottery tickets, even though we're aware of our microscopically small chance of winning. It can lead us to invest in high-flying stocks, too, hoping with crossed fingers that they'll keep soaring even though we may know little about them. It's easy to see how money gets lost due to greed.

But a lot of money is lost due to fear as well. Fear is what's keeping many people away from the stock market now, which in 2008 reminded us how cruel it can be, and which has reminded us frequently since then that it can be highly volatile. Consider this: The S&P 500's all-time high occurred in October 2007, when it hit 1,576. It's true that we're still below that high, a little more than five years later. Some might see that as a reason to stay out of stocks, but think again.

Timing Matters
Remember that the stock market (and each individual stock within it) doesn't move in a straight line. The S&P 500 fell from that all-time high to about 840 a year later and all the way down near 670 a little after that. That's a very harsh drop. But the fact that we closed the first week of 2013 at 1466 shows that big drops can be overcome. Those who stayed invested in the market have made up almost all of their loss and can hope for continued appreciation.

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It's easy to point to market highs and lows and calculate how much someone may have lost, or gained, but that's not how most investing works. Few people invest all of their money at the market's high and then sell at its low -- or vice versa. Most of us add to our investments over time, as money becomes available to do so.

If you'd been adding to investments in the S&P 500 over time, the dollars you invested when it was near 670 would have more than doubled by now, and the dollars you added last year would have grown, too. (The S&P 500 rose about 13 percent in 2012, its best performance since 2009.)

What to Do
It's natural to be alarmed by big market drops, and it's smart to be cautious, too. But don't be extreme in your financial management, being too greedy or too fearful. Many financial advisors agree that it's best to have a diversified portfolio of stocks and bonds. It's also understood that the younger you are, the more risk you can take on, and thus you can have a bigger percentage of your nest egg in stocks, as they have strong growth potential.

For best results, learn more. Regularly read up on investing and money, so that your knowledge and perspective deepen. You'll be less likely to make costly mistakes that way.

Selena Maranjian is a longtime Motley Fool contributor. You can follow her on Twitter.
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