By Tim Parker
If you don't do anything, you can't lose money. That might be true
with slot machines, horse racing and the lottery, but it's not true with
investing. Skilled investors know that the price of doing nothing or
not enough can result in losses; not the lost value of stocks or mutual
funds, but other losses not plainly visible to the eye of a new
investor. Here's what you need to know about how these losses can affect
Beware of Inflation
you have a few decades behind you, you probably remember the days of
being a kid, where you could hop on your bike with a quarter, take it to
a local store and buy a piece of candy. As you got older, you remember
buying gasoline for less than a dollar per gallon.
Your money had more buying power back in those days,
but today a quarter has to be combined with other quarters to have much
buying power and a gallon of gas is close to $4. For an investor, inflation is fundamentally important;
just as inflation has contributed to changes in the price of gas over
the years, it can have a surprising affect on your investments, if
you're not prepared for it.
Don't Hold Cash
onto cash for long periods of time, waiting for the market to bottom,
reduces the value of your money. You might be able to earn 1% from a
savings account right now but if the current rate of inflation is 2.3%,
inflation is causing an annual loss of 1.3%.
Holding cash for
short periods of time is a wise investment choice, but over the long
term you're silently losing purchasing power, and purchasing power is
the only reason we hold currency. How do you combat inflation? Put that
money to work but only in investments that earn a rate of return higher
than the rate of inflation.
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